Tax Court Judgment Case No. IT 12524
11 April 2013
Posted by: Herman van Dyk
By SAIT Technical
The Tax Court delivered its judgment in Case No. IT 12524 on 20 November
This appeal relates to the tax affairs of Mr A ("appellant”) as well a trust
which is affiliated to him.
The respondent is the Commissioner for SARS.
Mr A is an instrument technician and was employed by a labour broker
named D Entity in 1995. In terms of his agreement with D Entity, he provided
services as an instrumental technician for certain divisions and subsidiaries
of a client of D Entity in the mining industry. The appellant accordingly
worked for certain divisions of a number of affiliated companies ("the
In 1997, the appellant established a trust with a view to continuing to
provide his personal services as an instrument technician to The Companies. The
appellant did not provide any services to The Companies on behalf of D Entity,
with effect from the 1998 tax year.
The trust then received income from The Companies, and the appellant
testified that he was advised that he could claim expenses against such income.
The agreements on record provided that the remuneration payable by The
Companies to the trust was based upon the agreed hourly rate for the hours
worked by the appellant. The appellant was obliged to keep accurate time sheets
to record the number of hours and places worked, and the trust then issued
monthly invoices to The Companies for the services rendered by the appellant in
each particular month on the basis of the hours worked by the appellant.
The Companies were also obliged to reimburse the trust all travel and
accommodation expenses incurred for the purposes of the appellant’s services to
The Companies. Furthermore, the agreements on record provided that income tax
at the prescribed rate would be deducted from fees owing by The Companies from
time to time, unless a tax exemption certificate was issued.
The appellant did not receive a salary in respect of his services to The
Companies. However, he admitted in cross-examination in this respect that after
1997, the trust effectively received similar income from The Companies to that
previously received by him from D Entity for his services at The Companies. He
also testified that he was advised at the time that he could transfer income
from the bank account of the trust to his own bank account, from time to time. As
a matter of practice, he transferred virtually all income received by the trust
from The Companies to his own bank account.
During the tax years from 1998 to 2001, the trust claimed expenses on
its income tax returns as well as refunds of the employees’ tax deducted by The
The trust claimed as deductible expenses including rental for the
appellant’s house, medical expenses, school fees, and expenses for groceries,
gardening services and motor vehicle hire. As a result of these and other
expenses claimed by the trust, the trust did not show a profit in respect of
any of the years of assessment subject to this appeal.
During cross-examination the appellant could not explain and/or justify
a number of expenses claimed by the trust and he appeared to concede in
cross-examination that the expenses claimed by the trust could not be
substantiated as expenses in the production of income of the trust.
In the appellant’s personal income tax returns between 1998 and 2001, he
declared either no income or minimal income.
SARS (the respondent) directed
a request for factual information and documentary proof to the appellant in
February 2002. SARS initiated an audit after the trust had claimed a refund in
respect of the 2001, year of assessment. The said audit revealed inter alia
that the trust had claimed exorbitant expenses in relation to income resulting
in a declared loss in 2001. This loss was compounded by the declared losses
from previous years, which were carried forward to 2001.
A further audit
was initiated by the respondent in relation to the 1998, 1999, 2000 and 2001
The audit revealed
that the trust had claimed a refund for employees’ tax deducted by The
Companies and that the appellant had declared no or minimal income for the tax
period between 1998 and 2001. SARS assessed the appellant’s gross income as
1998: R129 614-00
1999: R191 168-75
2000: R206 766-00
2001: R 82 835-00
objected to these assessments which the respondent disallowed.
Issues to decide
1. Whether the
creation of the trust and the conclusion of the service agreements between the
trust and The Companies can be regarded as a scheme to avoid income tax by the
appellant as contemplated in section 103(1) of the Income Tax Act.
the remuneration paid to the trust constitutes taxable income in the hands of
the appellant on the basis of the relevant provisions of the Act relating to
3. Whether the
deductions claimed by the appellant are allowable in terms of section 11(a) of
the Act read with section 23 of the Act.
It was held that all
four elements of section 103 (1) of the Act are present in relation to the
series of transactions executed by the appellant and that he failed to
discharge the onus on him of establishing that one or more of the said elements
were not present. SARS was held to be entitled to invoke the provisions of the
section and therefore justifiably disallowed the appellant’s objection.
It was held that taking
substance over form, the true nature and substance of the income received from
The Companies was that such income was effectively the income of the appellant.
There was no evidence to suggest any genuine resolve on the part of the trust
to exist as a commercial entity and/or business, autonomously of the appellant.
Both the appellant
and respondent conceded that all the stated expenditure were not incurred in
the production of income. The respondent therefore justifiably disallowed the
The appeal was
dismissed with costs.
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