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TML Consultancy CC v CSARS (ITC 12860) [2012] ZATC 1 (22 June 2012)

30 June 2012   (1 Comments)
Posted by: Stiaan Klue
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The South Gauteng Tax Court heard the appeal of the taxpayer, TML Consultancy CC, based on the taxpayer's assertion that it meets all the requirements for classification as a small business corporation ('SBC') in terms of section 12E of the Income Tax Act 58 of 1962 ('the Act'). 

Section 12E(4) of the Act provides for a beneficial tax dispensation for small business corporations. Such corporations are entitled to be assessed for income tax purposes at preferential rates prescribed by the section. The definition of a SBC contains a list of requirements to be met in order for a corporate entity to qualify as such. Simultaneously, the definition contains certain inclusionary and exclusionary criteria.

This landmark case for small businesses reported on 22 June 2012 is the first reported court decision considering the definition of a small business corporation for the purposes of section 12E. The Tax Court also interpreted specific words in the context of section 12E: "management", "consulting", "broking".


The taxpayer is a close corporation registered in terms of the Close Corporations Act 69 of 1984. It was incorporated in 1995 and has one member, who is also the public officer of the company. It carries on the business in key account trade marketing, which consists of negotiating the listing and sales of mainly food products, manufactured or imported by its principals, most notably supermarkets and departmental stores, with major retail corporates such as Checkers, Makro, Game. The taxpayer’s business also entails the provision of promotional activities relating to the products of its clients and all related and ancillary activities including, but not limited to:

- advising clients on such issues as pricing, price increases, promotional prices, cycle deals, annual incentives and terms;

- placement of clients’ products which involves listings, merchandising, displays, range audits and new store opening negotiations;

- promotions of clients’ products, involving promotional packaging, bulk buys, promotional calendars, preparing trade sponsorships and in-store demonstrations;

- assisting with consumer complaints and providing feedback on consumer demands and requests;

- attending bi-monthly sales meetings with sales staff of clients, holding area meetings, providing support and assistance to sales representatives and sales management staff of clients, making product presentations, promotions scheduling and conducting training and fieldwork with representatives of clients.

During the years under consideration by the Tax Court, it was established that nature of business never changed, except for the 2005 and 2006 years of assessment, when the labelling of its business activities was described in the tax returns "marketing" and Judge Mbha determined that it is "marketing consulting".

The taxpayer employed one person on a half-day basis, as a personal assistant during the relevant tax years, and also employed subcontractors to carry out its functions in certain areas of South Africa in order to extend the scope of its activities. In carrying out these functions, the taxpayer  and its sub-contractors acted on the instructions of their principals. They made recommendations to the principals relating to the exercise of their functions but did not advise them on any other matter. The appellant was remunerated on the basis of the sales generated by its activities and in some cases, there was a basic retainer which applied until the sales reach an agreed volume.


 The taxpayer in its accounting financial statements accompanying its tax returns for the 2000-2004 years of assessment, described its business as one of "trade marketing consultancy”. The revenue of the taxpayer was described in these financial statements as "consultancy fees”. In respect of the 2000-2004 years of assessment, the taxpayer accepted, as reflected in its returns of income (IT14s) for those years, that it was not a small business corporation, and SARS properly assessed the appellant, for the 2000 to 2004 years of assessment, as a company rendering a personal service and not as a small business corporation.

In respect of the 2005 and 2006 years of assessment, the taxpayer submitted its tax returns on the basis that it is a small business corporation in terms of section 12E. In the annual financial statements for those years, the main income of the company was described as "fees received, which … represents the invoiced value of services provided to clients”, and in the tax returns the appellant’s business is stated as "Marketing”. The appellant was accordingly assessed for the 2005 and 2006 tax years, as a small business corporation.

The issue before the Tax Court was whether the taxpayer meets all the requirements for classification as a small business corporation ('SBC') in terms of section 12E of the Income Tax Act 58 of 1962 ('the Act'). 

Another issue before the Tax Court was SARS' contention that the appellant did not qualify for the classification as a SBC as it provided a personal service as defined in section 12E(4)(d), and derives more than 20% of its receipts and accruals from the provision of that service and from investment income, as prescribed by section 12E(4)(a)(iii) of the Act.

The taxpayer, on the other hand asserted that it did not derive any income from the provision of a personal service and that its investment income for the relevant years was minimal.

Held by Judge Mbha:

Meaning of 'consulting'

Judge Mbha accepted that generally, the meaning of words in a statute is derived from the common law. He stated [at 19]:

'The basic rule of interpretation is that the meaning must, unless a statute provides otherwise, or unless it would result in an absurdity, be taken to be the ordinary meaning of the word which can be found in a dictionary of established authority.'

SARS endorses this approach in Interpretation Note No. 9, dated 13 December 2002, para 2.3(b).

Judge Mbha stressed that if there is any doubt about the ordinary meaning of a word used in a particular context, that certain rules must be applied. He emphasised two rules relevant to this specific case [at 21]:

'A word included in the group of words must be regarded as being of the same type as the other words in that group (eiusdem generis); on the other hand, if a word is not included in the group, it must not be regarded as subject to the same prescriptions as that group (exclusio alteris).'

The word "consulting" as used in section 12E(4)(d) is not defined in the Act or in any other applicable law in South Africa, hence Judge Mbha held that the two rules above must be applied and its meaning determined by reference to authoritative works.  

The definitions of "consulting" in the standard dictionaries consulted by the Tax Court revealed that there are several meanings to the nouns derived from the verb "consult", namely consulting, consultant and consultation, and to the verb itself. Judge Mbha held [at 23] that these fell into three major categories:

- Those derived from the transitive verb "consult", which means to seek advice or an explanation from a person with knowledge, from a dictionary or other sources.

- Those derived from the intransitive verb "consult" which means to offer advice or information by such person.

- Those related to the idea of consultation as a form of discussion between persons having different interests in a particular situation.

Judge Mbha held that:

'…the meaning of "consulting" as referred to in section 12E(4)(d), falls into the second category, as the activities referred to in the first and third groups do not normally involve any commercial transactions, and would therefore not be relevant for taxation purposes. It is necessary to establish the intention of the legislature when passing the relevant provision. The legislature's intention embodied in section 12E of the Act can clearly be seen from the contents of SARS' Interpretation Note 9, which was issued at the time of the introduction of that section [section 12e]. Accordingly, in interpreting the term "consulting", as applicable to a personal service provided by a small business corporation for the purposes of section 12E(4), the term "professional person" is crucial in defining that term."

The view that a person providing a consulting service must of necessity be a professional person, or someone of that nature is supported by the application of the eiusdem generis-rule of interpretation. The fields of activity listed as personal services in section 12E(4)(d) fall into two categories, the first of which is accounting, actuarial science, architecture, auctioneering, auditing, broking, draftsmanship, education, engineering, health, information technology, law, management, real estate, research, secretarial service, surveying, translation, valuation and veterinary service which are all professional or quasi-professional activities, requiring a particular qualification and, in many cases, a licence, certificate, or membership of a professional body before the person concerned can participate in that activity. The second category comprises broadcasting, commercial arts, entertainment and sport, none of which is relevant to the activity carried out by the taxpayer.

The Tax Court held that since the term "consulting" is the least easily defined of all the terms, the rules of interpretation that have referred to, must be strictly applied. The dictionary definition of the term must be applied and it must be regarded as the offering of advice by a professional or qualified person.  Furthermore, the fact is that a taxpayer, as a close corporation, in its own right cannot hold a certificate as a "professional person". Nor does the sole member of the taxpayer hold any such licence, certificate or membership of a professional body. Judge Mbha concluded that the taxpayer in this case is not involved in the business of "consulting" as envisaged in section 12E(4)(d) of the Act.

In any event, even if no definite conclusion as to the interpretation of the term 'consulting' can be arrived at by the application of any of the rules of statutory interpretation the court has referred to, then the contra fiscum rule must be applied and the statute interpreted in favour of the taxpayer.

Meaning of "broking" and/or "management"

With reference to the Concise Oxford Dictionary and Longman Business English Dictionary (2007), Judge Mbha held that "it is clear that the taxpayer does not conduct any "broking" transactions on behalf of its clients neither does it purport to act as a broker in any way."

With reference to the Concise Oxford Dictionary and the Longman Business English Dictionary (2007), Judge Mbha held that the taxpayer clearly did not control or direct the activities of its clients and that the management function rested with the taxpayer's clients.

Held that the terms "broking" and "management" did not apply to any of the activities conducted by the taxpayer. The Tax Court relied on the evidence that was presented by the taxpayer and the documents filed as part of the dossier describing the taxpayer's business activities, that none of the activities of broking or management were reflected in the terms cited by SARS. The key word in the description of the activities must be "marketing" which is not a professional service and the member who personally performs a part of the taxpayer's services has neither a professional qualification nor a professional licence.

SARS' contention that the taxpayer rendered a personal service, as defined in section 12E was unsuccessful.

The court held that SARS was incorrect in classifying the taxpayer was a personal service provider as defined in section 12E of the Act, as its activities did not constitute as a personal service; alternatively, that the revenue generated by any personal service provided by a member of the taxpayer, did not exceed the prescribed amount.

Download the full decision here.



Michael G. White says...
Posted 01 July 2012
According to the court, SARS interpretation note 9 (issue1) sets out the legislature’s intention regarding the meaning of the words,” personal service” This seems unusual, given that it is the court’s prerogative to determine what the legislature intended and not an organ of the state Furthermore, SARS’ version 5 of the same interpretation note omits reference to the fact that the relevant section refers to professional persons being included in the definition of “personal service”. Refer paragraph 4.5 page 8.In summary nowhere does it state that the words” personal service “are limited to professional persons as indicated in its original version (page5) which the court has used. Quite probable that the court’s decision is not the final word on the matter.


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