The Brummeria decision
The decision of the Supreme Court of Appeal in the case of SARS v Brummeria Renaissance (Pty) Ltd and others (2007 SCA 99, 69 SATC 205) is well known. The Court found that the right to use loan capital without having to pay interest, is a benefit measurable in money. Accordingly this “right” with its monetary value was included in the taxpayer’s gross income as an amount which has accrued to it.
Following the decision, SARS published a Draft Interpretation Note stating that the judgement can be applied in all cases where benefits in a form other than money are granted in exchange or as a quid pro quo for goods supplied, services rendered or any other benefit given.
The Draft Interpretation Note also made it clear that interest-free loans granted by a shareholder to a company may not necessarily intend the right to be in exchange for some or other benefit. Interest-free loans may be granted in a capital context and may therefore not necessarily be affected by the Brummeria case.
The Brummeria decision is also important because the Court of Appeal revisited the provisions of Section 79 of the Income Tax Act. In terms of Section 79 an assessment becomes final after three years. It thus allows the Commissioner three years to collect a tax, unless the taxpayer was guilty of:
- misrepresentation or
- non-disclosure of material facts.
It has been stated in the case of Natal Estates v SIR 1975 (4) SA 177 (A) that Section 79 actually provides the taxpayer with immunity after a three year period.
The first round of assessments issued by SARS to the taxpayers in the Brummeria case commenced when SARS issued assessments in terms whereof the loans were included as gross income in the hands of the taxpayers. Needless to say, the taxpayers quite correctly objected to this assessment. It is indeed settled law that a borrower does not receive a loan amount as gross income (see CIR v Genn 1955 (3) SA 293 (A)).
SARS allowed this objection in full, but then changed the basis of assessment and issued the first revised assessments. Subsequently further revised assessments were issued to the company taxpayers.
The Commissioner argued that the three-year period of Section 79 did not commence on the date of the original assessments, but on the date of the revised assessments, namely March 2002. This was less than three years before the further revised assessments were issued.
The Court found that it was in the public interest that disputes should come to an end. It would be unfair to an honest taxpayer if the Commissioner were to be allowed to continue changing the basis upon which taxpayers were assessed until the Commissioner got it right. SARS was only successful in its appeal with regard to the 2000 year of assessment against the taxpayers. The revised assessments which applied to the 1996, 1997, 1998 and 1999 years of assessment were set aside by the Appeal Court.
Section 79 of the Income Tax Act therefore served to considerably soften the financial impact of the Appeal Court decision for taxpayers.
The Brummeria case proves once again that taxpayers and their advisors must remain alert to the taxpayers’ powerful defence of prescription which arises after three years from date of an assessment.
For more information, contact Sonja Frank at Exceed Stellenbosch, tel. 021 882 8140.