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The Origins of Inc.

Thursday, 10 April 2008   (0 Comments)
Posted by: TaxFind™
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The Origins of Inc.
Every once in a while a tax matter arises that has far-reaching consequences and can even change legislation.One such matter arose in the late sixties, when a chartered accountant did his homework and advised his clients in such a way that it not only relieved their tax burden but consequently also resulted in changes to the Income Tax Act.

It’s common practice that firms of professionals - such as engineers, attorneys and even doctors - add the abbreviation Inc. behind their name.Although we know that Inc. is an abbreviation for "Incorporated”,not many people know where it came from.

A chartered accountant - Eric Johnson from the Pretoria-based accountancy firm Coetzee Johnson- had the consulting engineering firm Geustyn, Forsyth & Joubert as a client.Partnerships of professionals carried a huge tax burden as individuals at that stage, as they could not be registered as Limited Companies (with limited liability) in terms of the Companies Act in force in those years.
Limited companies had a significantly reduced tax burden (in the region of 32% versus more than 70% for individuals).Johnson, now an 80-year-old, realised that nothing stopped his client from being registered as an Unlimited Company and approached a Johannesburg attorney, Ed Broomberg, to undertake the registration.
That would result in his client being liable for a much lower tax rate.The Receiver of Revenue did not accept that registration and took the firm of engineers to the Income Tax Court in 1969.The judge found that there was nothing that could stop a firm of professionals to be registered as an unlimited company and found in favour of the engineering firm.

The Receiver took the case to the Appeal Court in Bloemfontein and the case was heard in front of five judges (Secretary for Inland Revenue v Geustyn, Forsyth & Joubert 1971(3) SA 567 (A) at 571E-H). Again, the court found in favour of the defendants. In the Companies Act that appeared on the statute books soon after, unlimited companies were changed to incorporated companies - and that is the origins of Inc.

It was considered a landmark case and is often cited in discussions on the General Anti-Avoidance Rules (GAAR), or the now repealed section 103(1) of the Income Tax Act.In a research dissertation on the GAAR, in fulfilment of a post-graduate diploma in tax law (2007), Izak Louw refers to the Guestyn case, but also states: "Taxpayers, as often cited, are entitled to arrange their affairs in such manner with the result that the tax payable is less than it otherwise would have been, provided there is no provision in the law designed to prevent or counter the avoidance of tax by means of that specific scheme.

Lord Tomlin stated (at 520) in  IRC v Duke of Westminster, 1936, 19 TC 490:’Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be.If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow-taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.’”

It is possible that the abbreviation Inc. will be changed in the near future. Cabinet recently cleared the way for the Companies Bill – which will replace the 1973 Companies Act – to be tabled in the National Assembly.
Source: By TaxTALK



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