Case Analysis – the Wyner case - University of Cape Town

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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intention in the Wyner case.

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It instead opted for the objective approach to test whether a business was being undertaken in a profit- making scheme. This represents a divergence, raising the question whether the approach in the Pick ‘n Pay case should be sustained as the eminent authority. A discussion of this case follows below.

There existed property in Clifton, owned by the municipality for the City of Cape Town. This was held by Wyner under a pseudo long-term lease, with which came an entitlement to erect bungalows. On account of internal municipal deliberations, the respondent was given an ultimatum: she could purchase the property for ZAR802,000, obtain a limited real per a 20-year lease at market rates, or vacate the property without compensation for improvements made.

Being unable to afford the first two options, the respondent would have been forced to vacate if not for Investec Bank having approached her with an offer to extend short-term secured credit. The cascade of transactions which followed was that the property was bought from the municipality in October 1994, listed for sale with the assistance of an estate agent, and eventually sold in September 1995 for ZAR2,850,000.

The issue, therefore, before the court was whether this amounted to operating a scheme of profit-making.

The respondent argued the following:

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It was not through her intervention that the municipality determined a willingness to sell at a price far less than market value.

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Her primary intention was to salvage her position to a point where she was able to repay her loan, and acquire a property within her means.

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The brevity between acquisition and sale was necessarily required by the terms under which Investec provided finance.

The court was not convinced. It held as follows:

126 Wyner supra note 75.

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The property was acquired with the intention to sell within 12 months at a profit, not that it would persist as the respondent’s domicile.

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The utilisation of an estate agent soon after the acquisition was indicative of this purpose.

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‘With the assistance of Investec the respondent devised a scheme whereby she could make the very large profit which was inherent in the offer.’

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She clearly was motivated by the profit from the sale, and so engaged in a scheme of profit making.

The finding of the court was inappropriate. In the first instance, it ignored the precedent set by Stott that an isolated transaction should not be viewed in the case of an individual as indicative of a trading arrangement,

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in which case the subjective ‘ipse dixit’ should be given greater probative value. Secondly, a taxpayer has license to attain the best price. Furthermore, a distinction can be drawn between a salvage operation, which is undertaken as a business as in the Stephan case,

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and what the respondent stated was a salvage of her domestic well- being.

In ITC 1283,

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the taxpayer, Angolan-based coffee bean trader, determined to de-risk his capital, which had come under threat due to civil unrest, by converting all his assets into coffee beans. These were specifically purchased with the intention of importing them into South West Africa for resale back into fiat currency. As a coffee bean dealer, the taxpayer may reasonably be regarded to possess specialist knowledge of the market. Furthermore, during the period under review, circa April 1975 to April 1977, the price of the commodity saw an increase in value of over 600%.

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A sceptical mind may consider the taxpayer’s actions, while having an objective of a salvage operation, were also

127 Ibid at p 11.

128 Ibid at p 4.

129 Stott supra note 76.

130 Stephan supra note 100.

131 ITC 1283 41 SATC 36 1978 (SW).

132 https://tradingeconomics.com/commodities/coffee.

tailored to realise a profit on eventual sale as the market was to experience a steady upward pressure, ie mixed intention.

The court, nevertheless, maintained a position of the proceeds being of a capital nature. If the facts and circumstances were held to define an evidentiary standard for salvage, it would appear the taxpayer’s ipse dixit cured all defects presented by the objective facts and circumstances.

Comparatively, the representations made by Wyner regarding the motive for the transaction are more persuasive, moreover the court was unconvinced by her insistence of intending to conduct a salvage operation.

The court balanced its finding on the fact that that the she was ultimately swayed by the profit inherent in the transaction, which seems to ignore what was said in the Paul case.

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If it is not in human nature to sell an asset at a loss, by corollary it is likewise not to decline to sell for hope that another party offers less money, ignoring any externalities.

Oguttu opines that the court misapplied the tenets of the Pick ‘n Pay case.

In a similar fashion, Wyner had merely transacted as a result of an external stimulus, and ought to have been considered properly as conducting a salvage operation.

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It is submitted that the court should not have tested the matter on what the taxpayer was willing to accept, but on what she was not willing to refuse. If the indicative sale price would have realised proceeds only sufficient to repay the loan and interest, recoup the value of the improvements to the property, and secure a domicile in the short to medium term (by lease or by ownership), a refusal by the taxpayer to contract would not seem to be a reasonable supposition.

Viewed holistically, the court may be criticised in conflating the subjective intention of Investec Bank to engage in a scheme of profit-making, as it was they who approached Wyner; they who contrived an opportunity to profit in employing their capital at a high interest yield with ample real security. Wyner’s motives being construed as objectively revenue is able

133 Paul supra note 81.

134 Annet Oguttu ‘Salvage or profit-making scheme?’ (2006) 14(3) 114-118 Juta’s Business Law.

to be attributed, indeed, to her being merely the pawn of another’s stratagem, which marred her intention but did not fundamentally alter it.

Surtees discusses ITC 1755,

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which involved circumstances of sale under duress. Whilst not specifically linking this to the Wyner case, the author writes with apparent approval of the court’s finding that where a taxpayer is forced to action by circumstance, profit-seeking as a principal motive is questionable.

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Comparatively, the imminent threat of vagrancy is arguably a source of duress compelling action.

Notwithstanding these highlighted inconsistencies, at this point the Supreme Court of Appeal has contradicted itself with the result that the propriety of the test laid down in the Pick ‘n Pay case is brought into question. Fortunately, in deciding between the objective or subject approach, the court in CSARS v Capstone 556 (Pty) Ltd upheld the subjective approach followed in the Pick ‘n Pay case.

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Case Analysis – the Wyner case