Stellenbosch Farmers' Winery Ltd v Commissioner for the South African Revenue Service, Commissioner for the South African Revenue Service v Stellenbosch Farmers' Winery Ltd (511/2011, 504/2011) [2012] ZASCA 72; 2012 (5) SA 363 (SCA) (25 May 2012)

Key Facts

Tax Type

Issues

• In case no. 504/2011, the court considered if the R67 million payment for terminated distribution rights was subject to VAT at 14% under s 7 of the Value-Added Tax Act or zero-rated under s 11(2)(l)(ii). The taxpayer claimed the services (surrender of rights) were not directly connected to movable property in South Africa. The court agreed, ruling the receipt was zero-rated as the rights were incorporeal and situated abroad.
• The primary issue in case no. 511/2011 was whether the taxpayer's receipt of R67 million for the early termination of exclusive distribution rights to Bells whisky constituted a capital or revenue receipt under the Income Tax Act. The taxpayer argued it was compensation for a capital asset (distribution rights), while the Commissioner claimed it should be taxed as revenue. The court upheld the taxpayer's position, finding the receipt was capital in nature.

Tax Years

Holdings

• The main appeal was upheld with costs, including the costs of two counsel. The additional assessment of the taxpayer in respect of the 1999 tax year was set aside. The court found that the receipt of R67 million by the taxpayer was of a capital nature and therefore not subject to income tax. The cross-appeal was dismissed with costs.
• The appeal in case no. 504/2011 was dismissed with costs, including the costs of two counsel. The court determined that the services supplied by the taxpayer (surrender of exclusive distribution rights) were not directly connected to movable property situated in South Africa, making the supply of services subject to VAT at 0% under s 11(2)(l)(ii) of the Value-Added Tax Act.

Remedies

• The additional assessment of the taxpayer in respect of the 1999 tax year is set aside.
• The main appeal is upheld with costs, including the costs of two counsel.
• The cross-appeal is dismissed with costs, including the costs of two counsel.
• The appeal is dismissed with costs, including the costs of two counsel.

Tax Issue Category

• Capital Vs. Revenue
• Input Vs. Output Vat

Legal Principles

• The judgment relied on the purposive approach in interpreting tax provisions, examining the substance of the transaction rather than its form to classify the receipt as capital or revenue.
• The court emphasized that the taxpayer's accounting treatment of the R67 million as an 'exceptional item' did not override the need to determine its true tax nature through a substance-over-form analysis.
• The court interpreted ambiguous terms in the termination agreement against the party who drafted it (UD), supporting the finding that the R67 million payment was for the closure of the taxpayer's business relating to the distribution rights.
• The court applied the burden of proof principle under s 82 of the Income Tax Act, requiring the taxpayer to establish that the R67 million payment was of a capital nature and not assessable as part of gross income.
• The court addressed anti-avoidance considerations, noting the taxpayer's attempt to structure the R67 million receipt to avoid tax liability but ultimately finding the payment was correctly classified as capital.

Precedent Name

• Commissioner for Inland Revenue v Pick 'n Pay Employee Share Purchase Trust
• Commissioner of Inland Revenue v Illovo Sugar Estates Limited
• Bourke's Estate v Commissioner for Inland Revenue
• Secretary for Inland Revenue v Eaton Hall (Pty) Ltd
• MV Snow Delta: Serva Ship Ltd v Discount Tonnage Ltd
• Inland Revenue v Fleming & Co (Machinery) Ltd (3)
• ITC 1341 (1980)

Cited Statute

• Value-Added Tax Act 89 of 1991
• Income Tax Act 58 of 1962

Penalty Amount

Judge Name

• Van Heerden
• Boruchowitz
• Kroon
• Brand
• Tshiqi

Passage Text

• The court held that the services supplied by the taxpayer (surrender of distribution rights) were not supplied directly in connection with movable property situated inside the Republic, rendering the supply subject to zero-rate VAT under s 11(2)(l)(ii) of the Value-Added Tax Act.
• The judgment of the Tax Court proceeded on the premise that it was the taxpayer that surrendered the distribution rights in question, and in consideration thereof received payment of the sum of R67 million.
• The court found that the taxpayer, which did not carry on the business of the purchase and sale of rights to purchase and sell liquor products, did not embark on a scheme of profit-making, and that it did discharge the onus of establishing that the receipt of R67 million was of a capital nature.

Interest Amount