THE SUPREME COURT OF APPEAL OF SOUTH AFRICA

JUDGMENT

Reportable
Case No: 776/2017

In the matter between:

THE COMMISSIONER FOR THE
SOUTH AFRICAN REVENUE SERVICE
APPELLANT

and

CHAR-TRADE 117 CC t/a ACE PACKAGING
RESPONDENT

Neutral citation:
CSARS v Char-Trade (776/2017) ZASCA 89 (31 May 2018)

Coram:
Navsa, Lewis and Mbha JJA and Davis and Schippers AJJA

Heard:

21 May 2018

Delivered:

31 May 2018

Summary:
Assessment issued for secondary tax on companies (STC) – S 64B and
64C of the Income Tax Act – Commencement of prescription – S 99 of the
Tax Administration Act - Prescription commences to run against CSARS
when return for STC is submitted by the taxpayer - Return for STC never
submitted by taxpayer – Prescription never commenced  to run against
CSARS – Assessment confirmed.

______________________________________________________________________

ORDER
______________________________________________________________________
On appeal from: Tax Court, Johannesburg (Jansen J sitting as a court of first
instance).
1 The appeal is upheld,
2 The order of the court a quo is set aside and replaced with the following:
‘The assessment of the dividend cycle ending in the 2007 year of assessment is
confirmed.’
3 The respondent is ordered to pay the costs of this appeal.
______________________________________________________________________

JUDGMENT
______________________________________________________________________

Mbha JA (Navsa, Lewis JJA and Davis and Schippers AJJA concurring):

[1] This appeal concerns the question, whether an assessment issued for secondary
tax on companies (STC) in respect of the dividend cycle ending in February 2007, which
was levied in terms of ss 64B and 64C of the Income Tax Act 58 of 1962 (the ITA), had
become prescribed in terms of s 99 of the Tax Administration Act 28 of 2011 (the TAA).
The appeal is against the judgment and order of Jansen J, sitting with assessors, in the
Tax Court, Johannesburg, in terms of which it was held that prescription for the STC
assessment commenced running from 31 March 2007 and that, as the assessment was

issued on 19 November 2012, it had prescribed. The appeal is with the leave of the Tax
Court.

[2] The factual matrix from which the dispute arose can be described as follows:
During the 2007 to 2011 years of assessment the respondent, Char-Trade 117 CC t/a
Ace Packaging (Char-Trade), made various loans to related close corporations and
companies within its group of companies. These loans were reported by Char-Trade in
its annual financial statements and described as follows: ‘unsecured, bear interest at
current rates and have no fixed terms of repayment’.

[3] During an audit by the appellant (CSARS) of Char-Trade’s tax affairs, it was
discovered, so CSARS alleged, that the latter had provided interest free loans or loans
to a number of related close corporation and companies. CSARS subjected the loans to
STC on the basis that these loans constituted deemed dividends, as less than the
official rate was charged. As a result of the non-payment of STC by Char-Trade,
CSARS also levied interest in terms of s 64B(9) of the ITA on the capital amounts owed
by it.

[4] On 9 November 2012, CSARS issued assessments for STC against Char-Trade
for the 2007 to 2011 STC cycles, in terms of s 64C(2)(g) of the ITA. The adjustments
made by CSARS in the revised assessment resulted in Char-Trade’s total tax liability for
payment of STC in the amount of R4 653 870.20. Of this amount, R1 812 609.00 was in
respect of Char-Trade’s STC liability for the 2007 STC cycle.

[5] On 12 December 2012 Char-Trade filed a Notice of Objection against the
assessments on the basis that s 64C(2)(g) of the ITA was not applicable, as the loans it
had made to independent companies were not made to connected persons as defined
in the ITA. CSARS disallowed the objection on 18 January 2013, having regard to s
64C(2)(g), read together with the definition of ‘connected person’.1

[6] On 11 April 2013, Char-Trade lodged an appeal against the disallowance of its
objection. In the Notice of Appeal (ADR 2), Char-Trade conceded that the loans were
made to ‘connected persons’ as defined in the ITA. Char-Trade contended, however,
that the loans made to connected persons during the years of assessment, bore interest
that was not less than the official rate of interest. Thus, it contended,  s 64C(4)(d) of ITA
was inapplicable and that no STC was payable.

[7] On 17 June 2014, Char-Trade, relying on the provisions of s 99 of the TAA,
introduced a new and additional defence namely, that the assessment for 2007 had
become prescribed and fell to be set aside in its entirety. I will return to this aspect
shortly in fuller detail, as the 2007 year of assessment became, ultimately, the only
focus of this appeal.

[8] Shortly, before the commencement of the trial in the court a quo, Char-Trade
made a ‘with prejudice’ offer of settlement to CSARS, contained in a written letter dated
5 May 2015, in which it stated:

1 A connected person is defined in section 1 of the ITA to include a close corporation which is a
connected person to any member. It is common cause that the members of Char-Trade and the members
of the related entities to whom the loans were advanced have either the same members or shareholders.

‘1.3 The Appellant [Char-Trade] concedes the appeal except for the 2007 year of
assessment. The appellant will argue that the time period for raising the assessment for
2007 had prescribed;
1.4 The Appellant will not be proceeding with the appeal on the merits.
2. Please acknowledge receipt hereof and advise the Court of the above so as to
prevent any unnecessary preparation being done before trial date.’

[9] Indeed, when the trial resumed on 9 December 2015, Ms Dreyer, appearing for
Char-Trade, addressed the court stating:
‘So, M’ Lady, consequently, the only matter for determination by this Court is the
question of the 2007 year of assessment, whether in fact that has become prescribed.
At the initial hearing in May, I indicated to your Ladyship that the further years of
assessment, 2008, ’09,’10 and ’11, had been conceded. So that is the only issue that is
for determination. (My emphasis).

[10] In the light of what I have said, it is clear that, save for the singular issue relating
to the prescription of the assessment in respect of the 2007 STC cycle, Char-Trade
effectively conceded the entire merits of the appeal. Therefore, the only issue in dispute
is whether CSARS was prohibited by s 99(1)(b) of the TAA from issuing the assessment
for STC in respect of the dividend cycle that ended in 2007. This would be the case if
more than five years have lapsed since the date of assessment of the original
assessment. Ms Dreyer was constrained to concede this fact.

[11] In finding that the 2007 assessment had prescribed, the court a quo reasoned as
follows: Char-Trade’s dividend cycle coincided with its financial year end, being
27 February each year. Accordingly, the STC return and payment in respect of the
loans advanced by Char-Trade should have been submitted and paid by no later than
31 March 2007. Char-Trade’s dividend cycle for the 2007 year of assessment was
deemed to be declared on 27 February 2007. So it was from the date for the filing of the
STC return that an obligatory payment is determined in terms of s 64B(7) of the ITA.

[12] The Tax Court then concluded that, as the assessment for 2007 was raised on
9 November 2012, more than five years after the return and payment were deemed to
be due in terms of s 64B(7), the 2007 assessment had become prescribed.

[13] The issue as to whether or not the 2007 assessment has prescribed must be
determined against the backdrop of the following factors, which are common cause. In
the 2007 income tax return interest payable to the taxpayer by connected persons is
stated to be R2 160 868. In the amended Annual Financial Statement for 2007, dated
12 June 2014, interest received from connected persons is reflected as R8 273 267.
Char-Trade never submitted any return in respect of STC in respect of the dividend
cycle ending in 2007. Furthermore, no payment of STC has been made in respect of the
2007 year.

[14] Before I consider the parties’ submissions on appeal, it bears mentioning that
Char-Trade bears the onus in terms of s 102(1)(a) of the TAA, to prove that it is not

liable for STC for 2007, and must prove prescription. To do so, Char-Trade must prove
the jurisdictional facts required in terms of s 99(1)(b) of the TAA namely, that five years
have expired after the date of assessment of an original assessment.

[15] Char-Trade’s submissions regarding prescription can be summarised as follows:
(a) If there had been an obligation on Char-Trade to render a return and pay STC as
contended by CSARS, then the payment accompanied by the return should have been
made to CSARS by 31 March 2007; and (b) the assessment in respect of STC for 2007
was issued on 9 November 2012, more than five years after the end of the deemed
dividend cycle. Accordingly the assessment had become prescribed.

[16] Ms Dreyer also attempted to proffer an alternative argument based on
s 64C(4)(d) of the ITA, namely, that the loans that Char-Trade made to connected
persons bore interest at a flat rate of 10%. As this rate was not less than the prescribed
rate of interest in the 2007 dividend cycle, there was in terms of s 64C(4)(d) of the ITA,
no obligation on Char-Trade to render a STC return or pay any tax as a consequence of
a deemed dividend.

[17] In my view the alternative argument was no more than an attempt to re-introduce
the merits of the appeal in respect of the 2007 assessment for STC through the back
door. As I have said above, this aspect was squarely conceded on 5 May 2015. It is not
before this court and nothing further need be said on this aspect.

[18] The assessment in respect of STC for 2007 was issued in terms of s 64C(2) of
the ITA, which read:
‘For the purposes of s64B, an amount shall, subject to the provisions of subsection (4), be
deemed to be a dividend declared by a company to a shareholder, where –
. . . .
(g) any loan or advance is granted and made available to that shareholder or connected person
in relation to that shareholder’.

[19] Char-Trade was obliged in terms of s 64B(7) of the ITA to submit a return for
STC for 2007. At the relevant time this section provided:
‘The secondary tax on companies shall be paid to the Commissioner by the company liable
therefor by not later than the last day of the month following the month in which the dividend
cycle relevant to such dividend ends and each payment of such tax shall be accompanied by a
return in such form as the Commissioner may require’.

[20] There was no dispute that the return that was required in terms of s 64B(7) of the
ITA constituted a ‘self-assessment’. This is defined in of the TAA to mean:
‘determination of the amount of tax payable under a tax Act by a taxpayer and –
(a) submitting a return which incorporates the determination of the tax; or
(b) if no return is required, making a payment of tax’.
Clearly, Char-Trade was under an obligation to submit a return but failed to do so.

[21] What remains to be determined is, when did the five year prescription period
commence running? Section 99(1) of the TAA states that:
‘An assessment may not be made in terms of this Chapter –

(b) in the case of self-assessment for which a return is required, five years after the date of
assessment of an original assessment –
(i) by way of self-assessment by the taxpayer; or
(ii) if no return is received, by CSARS’.

[22] Section 1 of the TAA defines, in relevant part, ‘date of assessment’ to mean:
‘(b) in case of self-assessment by the taxpayer –
(i) if a return is required, the date that the return is submitted’.

[23] The intended effect of s 99(1)(b) of the TAA, read with the definition of ‘date of
assessment’, is that prescription cannot commence to run against CSARS until such
time as a return has been submitted by the taxpayer. It is by submitting a return that the
taxpayer informs CSARS about a dividend, including a deemed dividend, and that STC
is payable thereon.

[24] It follows that prescription in respect of the dividend cycle of 2007 could only
have commenced once Char-Trade had filed a return for STC. Having conceded the
merits of the assessment for all the years in question Char-Trade acknowledged it was
liable for STC and was obligated to file the return for all these years including the 2007
year of assessment. This return would have constituted the original assessment. As
Char-Trade failed to submit the STC return, there was no original assessment from
which assessment date the five year period could have run.

[25] In the light of what I have stated, it becomes apparent that prescription never
commenced to run. It could only have commenced in the event that Char-Trade filed a
return for STC which it failed to do. For this reason, the court a quo erred when it held
that prescription commenced in March 2007, which being one month following the
dividend cycle for 2007 and which was the date when Char-Trade was obliged to file a
STC return and make payment. The appeal must accordingly succeed.

[26] I make the following order:
1 The appeal is upheld,
2 The order of the court a quo is set aside and replaced with the following:
‘The assessment of the dividend cycle ending in the 2007 year of assessment is
confirmed.’
3 The respondent is ordered to pay the costs of this appeal.

_______________
B H Mbha
Judge of Appeal

APPEARANCES:

For Appellant:

C Louw SC
Instructed by:

The State Attorney, Pretoria

The State Attorney, Bloemfontein

For First Respondent:

CJ Dreyer
Instructed by:

Fluxmans Attorneys, Johannesburg

Lovius Block, Bloemfontein