Case Analysis – Pick ‘n Pay case

 Continuity, or frequency: if there is continual buying and selling, it indicates revenue intention. However, a single transaction is not an absolute defence, see Stephan v CIR,

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and the Wyner case.

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 Nature of business – if the asset is not one typically bought and sold in the taxpayer’s business, it may be regarded as capital, see SIR v The Trust Bank of Africa Ltd.

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 Income stream: in the absence of an income stream, or a paucity thereof, where an enhancement in financial position can only be made by the selling of the asset, the asset is revenue in nature unless some other benefit is derived, see Bloch v SIR.

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 Special circumstances: where a sale is motivated by emergent and urgent circumstances, see CIR v Nel,

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ITC 1355,

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ITC1379,

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and ITC 1543 (“the Krugerrand cases”).

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 Mixed Intentions: there is a rebuttable presumption of

revenue intent.

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was obligated repay the finance within ten years, but no sooner than five years.

The trust acquired shares in one of three ways:

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Open market operations where it did not have sufficient supply to meet demand;

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If an employee were to be dismissed for impropriety, or resign prior to the minimum five year period, their shares were forfeit in favour of the trust; or

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Over-the-counter purchase from employees, realising their holdings at the ruling market price.

Over the observation period it recorded a profit, most notably from forfeited shares, having been acquired at a price less than the ruling market price. Consequently, the Commissioner assessed the trust to tax on these gains as the proceeds of conducting trade. The trust made a case to the Special Court for Income Tax Matters in terms of which it argued these gains were fortuitous and not sought or worked for. Having found in favour of the Commissioner, the matter was ultimately decided on appeal to the Supreme Court of Appeal.

The court of appeal found for the appellant, however it was not unanimous. In his minority judgment, Nicholas AJA expressed a view that there is no universal test for ‘of a capital nature’, and each case is to be assessed independently on its merits. Nicholas echoed the sentiments of Innes,

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in Overseas Trust Corporation Limited v CIR,

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who remarked that,

When an asset is realised as a mere change of investment there is no difference in character between the amount of enhancement and the balance of the proceeds.

The learned judge in the Overseas Trust case had gone on to cite the judgment handed down in Californian Copper Syndicate v Inland Revenue.

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In casu, Lord Justice Clerk opined,

110 Ibid at p 288.

111 Overseas Trust Corporation Limited v CIR (1926 AD 444) 2 SATC 71 at p 75.

112 Californian Copper Syndicate v Inland Revenue (1904) (41 Sc. L.R. 691).

It is equally well established that enhanced values obtaining from realisation or conversion of securities may be so assessable [as income]

where what is done is not merely realisation or change of investment but an act done in what is truly the carrying on or the carrying out of a business [carrying on a trade]. [Emphasis added]

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And further,

...a gain made by an operation of business in carrying out a scheme for profit making, then it is revenue derived from capital productively employed, and must be income.

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Nicholas, AJA held that the court a quo had erred in setting the matter to turn on whether the trust was operating a scheme of profit making; the decisive issue was whether the sale of shares was a realisation of an investment, or the carrying on of a business. While the trust did not carry on a business in the conventional sense, it nevertheless was trading (buying and selling) the shares, from which profits had arisen. He, therefore, agreed with the Commissioner.

It is noteworthy that the minority and majority judgement found consensus on many legal issues, notwithstanding they reached differing conclusions. One of the most fundamental of these was whether the test for carrying on a business or trade was a subjective or objective test.

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In ITC 1413,

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involving a trust and an employee share incentive scheme, it was found that the test to be applied was objective. In distinction, thereto, the majority in the Pick ‘n Pay case disagreed, and determined that it is insufficient that a taxpayer merely operate a business in a scheme of profit making; the taxpayer must do so with the intent to trade. Consequently, the court reaffirmed that the issue is what a taxpayer subjectively intended, not what was contemplated, but their objectives, aim and true purpose. Having determined this as being the lens through which to examine the issues before the court, the majority held:

113 Ibid.

114 Ibid.

115 Olivier Capital op cit note 97.

116 ITC 1413 (1985) 48 SATC 167.

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A motive to avail oneself of a profit is not decisive in itself.

Albeit a highly relevant consideration, it must be taken in the context of an overall purpose.

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In assessing a multi-layered purpose, the dominant purpose must be given the greatest probative value. The dominant purpose in the case of the trust was to act as a nexus between employees and the listed equity market, and not to engage in operating a business.

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The trust did not engage in active trading of shares. Its actions were precipitated by an external force, and were executed in a manner not akin to typical commercial undertakings.

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The receipts were never deliberatively worked for by the taxpayer, but were an incidental consequence of its activities.

It is remarked that the test for the conduct of a trade proffered by majority judgment is the preferred test of the court, and should be applied when dealing with the capital or revenue nature of a receipt of accrual.

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While acknowledging that the Pick ‘n Pay case held a taxpayer’s intention not to be decisive, albeit highly persuasive, it was remarked that the court exhibited contradictory behaviour in CIR v Smith,

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holding the taxpayer’s intention was decisive.

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These observations are suggested as being irreconcilable with the Pick ‘n Pay judgment,

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however this may be possible on close examination of the court’s finding in Smith, namely

It is commonplace in our law to refer to objective criteria in order to determine a subjective intention…but that is no reason to elevate the objective facts above the subjective element (which is the true object of the inquiry) [emphasis added]

The court instead opined that objective factors should not be given greater probative value than subjective factors, referring to the Commissioner’s contention that a ‘reasonable prospect of a profit’ (an objective standard) should be a test, independent of the taxpayer’s

117 Olivier Capital op cit note 97.

118 CIR v Smith 65 SATC 6.

119 Olivier Capital op cit note 97 at p 175.

120 Ibid.

intention to make a profit.

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This may be described as a neutral position on the issue, neither supporting nor rebuffing the Pick ‘n Pay judgement Joubert is more critical and writes that the majority judgment erred in not considering the persisting definition of trading stock per s 1 of the Act,

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namely,

Anything …purchases or in any other manner acquired by the taxpayer for the purpose of … sale or exchange by him or on his behalf…

He argues that the taxpayer bought shares with the intention to sell them to employees, prima facie satisfying the definition of trading stock, from which one may infer a trade being conducted. The reliance of the court on the lack of a profit motive to qualify the proceeds as not gross income was unreasonable, given that absence of a profit does not equate to an absence of a trade being conducted.

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This seems sensible as profit is the net income of a transaction, whereas the inquiry goes to gross income. Ultimately, Joubert posited that the fixed/floating capital concept should not be so quickly abandoned in favour of the scheme of profit- making tests; the two should co-exist, and complement each other.

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His contentions echo support for the minority judgment insofar as it advocates the view where a taxpayer is in possession of trading stock, as defined, it could only be for the purposes of trade. A profit motive, while persuasive, is not necessarily required in light of the view that the benefit of trade does not wholly originate from a profit derived from it.

In general, however, the Pick ‘n Pay case’s approach is considered the

leading case law authority.

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