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DEATH AND TAXES
Truth conquers all

It was an outrageous comment that subsequently led to his resignation but it was in keeping with the man. As the former headmaster of Rugby school he had heard many excuses of doubtful veracity and was presumably a good judge of the truth. It is said that his concept of muscular Christian education would have found favour with an 18th century ship's captain.

The Receiver of Revenue and the Customs Authorities are also taught to be suspicious although nowadays their task is helped by sophisticated computer programs. Quite rightly, little regard is had to a person's status in society.

In a court case in Cape Town, the taxpayer was a minister of the Dutch Reformed Church and had made a substantial profit on the sale of his flat when he was relocated to another town. The predikant testified that his father, who had also been a minister, died at a very young age and had left his family almost destitute without anywhere to stay. He had been greatly affected by this and, since he himself did not own a house but lived in the predikantshuis, he was determined to make provision for his family should he die suddenly.

He bought a flat in the centre of Cape Town with the dual intention of letting it to supplement his stipend and to provide somewhere to live when he retired, or for his family to live should he die before retirement.

Three years later, while he still owned the flat, a member of his congregation told him about a new townhouse development, which was still in the planning stages. His family had grown in size and as the townhouses were more spacious he decided to buy a unit. Those were the days before Capital Gains Tax had been introduced and he bought the townhouse with precisely the same intentions as the flat.

In the meantime, he was starting to experience problems with his flat. The long-term tenants moved to a retirement village and for three months he struggled to find suitable new tenants. In spite of this, the thought of selling the flat did not cross his mind. Then, out of the blue, a lady who lived in the block of flats approached him and asked him to sell the flat to her. He decided to sell and he made a handsome profit which he declared on his tax return as a receipt of a capital nature.

The Receiver of Revenue decided that the gain was of a revenue nature and issued an assessment. The predikant, against the advice of his professional adviser, was determined to fight the Receiver's decision and in the Special Court he made a good impression on the judge and the assessors assisting him. The Court decided that he had not bought the flat as part of a profit making scheme and that it was totally accidental that he sold it. If his tenants had not moved out when they did he would still have owned the flat. Although he had struggled to find new tenants at no stage did he put the flat up for sale.

This case illustrates, once again, that in situations like this the taxpayer's demeanour in the witness box is critical. Often the only evidence will be what lawyers call the ipse dixit of the taxpayer. Literally – he himself said so. The evidence will be accepted by the court only to the extent that the reputation and conduct of the author merit trust. In this case the reputation of the predikant was beyond reproach and he triumphed.

The message to practitioners is clear. Before advising your client to take an appeal to court be sure that he will make a good impression in the witness box. There is an unreported case in 1975 in which the senior partner of a large accounting firm took his appeal to court – against the initial advice of the late Rex Welsh QC, who felt that the odds of winning were insuperable. Returning from Army service in 1945, the senior partner and three of his partners formed two companies with a view to providing for their retirement. Retirement Annuity Funds had not been invented then. One company was an investment company for long-term growth in which the share portfolio seldom changed; the other was a share dealing company in which all the profits were subject to tax.

In 1967, a client offered them the opportunity to get in on the ground floor of the first unit trust to be formed in South Africa. They invested R50 000 in the name of the investment company with the firm conviction that the investment would be held until their retirement twenty years hence. Many readers will remember the feverish Stock Exchange activity in 1968 and 1969 when fortunes were won and lost on a whim or a rumour. The senior partner, being a prudent Chartered Accountant, was alarmed at the lack of substance in most of the gains and hastily sold the investment, realizing a profit of R850 000 in the process.

Inevitably, after questioning the transaction, the Receiver assessed the investment company on the profit. The rate of company tax in those days was 50%. Five years later the case came up in the Special Court. There were two witnesses: the senior partner and the Johannesburg Receiver, who was subpoenaed on the advice of Advocate Welsh. The third provisional “top-up” tax payment had not been invented and it was common practice at the time for many taxpayers to ask for an extension of a year or more in which to submit their tax returns. In a period of rising profits, the cash flow benefits of this strategy were significant.

Led skilfully by Welsh QC so that the Receiver could not rely on the secrecy provisions of Section 4 of the Income Tax Act, the Receiver testified that all the tax returns of the partners and their associated companies were lodged with him within sixty days of the tax year end. It was his understanding that the senior partner of the firm had forbidden his partners to apply for an extension of time unless there were exceptional grounds. The Receiver also testified that on one occasion the senior partner had returned to him a very large refund cheque for a client because the assessor had made a mistake. It was unlikely, he said, that the mistake would have been uncovered.

The senior partner gave evidence on behalf of the taxpayer company and the Judge said that his integrity and character - like Caesar's wife - were beyond reproach. The court held that the profit on the sale of the shares was of a capital nature and the appeal was allowed, although not before the Accountant member of the court, himself the senior partner of a large firm, dissented and expressed doubts about the taxpayer's real intentions at the time of making the unit trust investment.

As Caesar said: vincit omnia veritas – truth conquers all things. What Caesar did not add was that in tax matters it often takes a long time, requires a lot of courage, and costs a lot of money. But the rewards can be great.

Penelope Webb, who for some years worked in industry, is a former tax partner of a large international accounting firm.

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