THE SUPREME COURT OF APPEAL
REPUBLIC OF SOUTH AFRICA

JUDGMENT

REPORTABLE
CASE NO 41/06

In the matter between

MP FINANCE GROUP CC (IN LIQUIDATION)

Appellant

and

COMMISSIONER FOR THE  SOUTH AFRICAN
REVENUE SERVICE

Respondent

_____________________________________________________________________

CORAM:
HOWIE P, NUGENT, LEWIS, VAN HEERDEN JJA et

SNYDERS AJA
_____________________________________________________________________

Date Heard:
2 May 2007

Delivered:
31 May 2007
Summary:
Amounts taken by illegal and fraudulent pyramid scheme
constitute amounts ‘received’ within the meaning of ‘gross income’
in the Income Tax Act where intention of scheme operator is not to
contract with the investors but to appropriate their money to
facilitate the fraud.

Neutral citation:   This judgment may be referred to as MP Finance Group CC v
Commissioner for South African Revenue Service [2007] SCA  71 (RSA)
_____________________________________________________________________
HOWIE P

HOWIE P

[1] For some years beginning in 1998 one Marietjie Prinsloo operated
an illegal investment enterprise commonly called a pyramid scheme. As
is the pattern with such schemes, it readily parted greedy or gullible
‘investors’ from their money by promising irresistible (but unsustainable)
returns on various forms of ostensible investment. It paid such returns for
a while to some before finally collapsing – owing many millions – when
the predictable happened and the total amount of supposedly due returns
vastly exceeded the total amount of obtainable investment money.

[2] The scheme was conducted by way of successively created entities,
incorporated and unincorporated. They were all eventually insolvent. By
order of 4 February 2003 made by the High Court at Pretoria, these
original entities were, for ease of administration and legal practicality,
consolidated into a single entity named MP Finance Group CC (in
liquidation) (the CC). The order decreed, among other things, that it did
not prejudice claims against an individual entity provided that only assets
of that entity could be realised to meet such claims. It laid down, further,
that the joint liquidators of the CC (who are also the joint liquidators of
the original entities) were to regard claims proved against any of the
individual entities as claims against the CC.

[3] Presumably pursuant to that order, the respondent (the
Commissioner) has regarded the CC as the taxpayer liable for the taxes
respectively due by the original entities. He accordingly assessed the CC
to tax in respect of the tax years 2000, 2001 and 2002. (These were
revised assessments. It is unnecessary to refer to the original ones.)  The

liquidators objected on behalf of the CC. By letter dated 15 December
2003 their attorneys ‘accepted that the ... assessments are indeed
assessments as contemplated in Part II of the Income Tax Act’ but
contended, in the main, that investment amounts (referred to by them and
in the record as ‘deposits’, among other terms) were not ‘received’ within
the meaning of ‘gross income’ as defined in the Income Tax Act 58 of
1962 (the Act). (For convenience I shall refer to the monies paid to, and
accepted by, the entities concerned as deposits.)

[4] The objection was disallowed and the CC appealed. The appeal
was heard by the Tax Court at Durban, Levinsohn J presiding. The appeal
was dismissed, the Tax Court concluding that notwithstanding that the
scheme was illegal, as also the investors’ transactions in the course of the
scheme, the deposits were ‘receipts’ within the meaning of the Act. With
the necessary leave, the CC appeals to this Court.

[5] On behalf of the CC, its counsel advanced two arguments in their
heads. The principal one was that, as contended before the Tax Court, the
deposits were not taxable because they were not amounts ‘received’. The
other submission was that any tax payable could not in law be owed by
the CC because it was merely a creature of convenience formed after the
tax years in question.

[6] The second argument has no merit and was not seriously pressed
before us. Not only were the liquidators parties to a consolidation
agreement which led to the Court order of 4 February 2003 but, as
already stated, they accepted that the assessments in issue were
appropriately raised on the CC. In terms of that order it will still be a
question of determining which deposits relate to which original entity and

calculating the tax accordingly. The convenience of consolidation will be
that the tax can be claimed from the CC.

[7] Reverting to the main contention for the CC, it relied essentially on
a passage in a judgment of this Court pertaining to the same scheme in
which the question was whether repayments to investors were recoverable
by the liquidators in terms of s 30(1) of the Insolvency Act 24 of 1936.1
On the premise that investors’ deposits were loans, the passage in
question reads as follows: 2
‘All loans made to the scheme were – in the light of at least the provisions of section
11 of the Banks Act 94 of 1990 and a prohibition under the Consumer Affairs (Unfair
Business Practices) Act 71 of 1988 – illegal and therefore void; this proposition of
law is uncontested. The scheme never had the least entitlement to retain investors’
money until the date which had supposedly been agreed as the due date for
repayment. The perpetrators of the scheme knew the investments to be illegal. There
is, on the other hand, no evidence that any of the investors knew their investments to
be tainted, nothing from which to infer that any of them acted ex turpi causa. That
being so, no question arises of relaxing the in pari delicto potior est conditio
defendentis rule ... . Upon receipt of a payment the scheme was liable promptly to
repay it to the investor who had a claim for it under the condictio ob iniustam causam.
Instead it used the money to pay the claims of other investors who had invested
earlier.  That was the whole idea of the scheme.’

[8] The argument for the CC was that because, on the authority of the
quoted passage, the scheme was liable in law immediately to refund the
deposits, there was no basis on which it could be said that the deposits
were ‘received’ within the meaning of the Act. They were, it was argued,
consequently not subject to tax.

1   Fourie NO v Edeling NO [2006] 4 All SA 393 (SCA).
2   Para 13.

[9] In s 1 of the Act ‘gross income’ means the total amount ‘received
by or accrued to or in favour’ of a taxpayer during a tax year. This case is
concerned with receipt, not accrual.

[10] To place the CC’s principal argument in proper perspective I would
make brief reference to the contents of the statement of agreed facts
admitted into the record before the Tax Court.  The salient features may
be summarised as follows. Prinsloo operated the scheme with the aid of
family and employees, as also so-called agents who solicited and
transmitted investors’ deposits in return for commission. She controlled
the various entities in the names of which the scheme was conducted and
procured their printing of a range of convincing-looking documentation
issued to investors when they made deposits. This included
acknowledgments of receipt, membership certificates and share
agreements, all of which purported to pertain to their investments. Most
of the money received by the scheme was kept in cash and not banked.
This cash float provided the source of payments to investors. However,
substantial amounts of it were appropriated by Prinsloo and her
accomplices. Some investors received repayment of their investments
plus returns. The majority received less or nothing. What is of essential
importance in the present matter is that throughout the tax years in
question ie 1 March 1999 to 28 February 2002, the perpetrators of the
scheme knew that it was insolvent, that it was fraudulent and that it would
be impossible to pay all investors what they had been promised.

[11] On those facts the inference must be that whatever intention there
was at any time on the part of investors to enter into a contractual
relationship with the entities concerned and whatever corresponding
intention to contract there might possibly have been on the relevant

entities’ part prior to 1 March 1999, there can no longer have been any
such corresponding intention after that date. In short, from that date
onwards the entities run by Prinsloo made their money by swindling the
public. That was their income. It must follow that the amounts they were
paid in that period were ‘received’ within the meaning of the Act. It was
for the CC to prove the contrary and that onus was not discharged.3

[12] This Court’s judgment in the matter of Fourie NO v Edeling NO
cannot assist the CC. That dealt with the relationship between investor
and scheme. This case is about the relationship between scheme and
fiscus. Even if, as correctly stated in that matter, with respect, the scheme
was legally obliged to repay an investor immediately on receipt, that was
because of the legal principles applicable to the parties to an illegal
contract, as between themselves. An illegal contract is not without all
legal consequences; it can, indeed, have fiscal consequences.4 The sole
question as between scheme and fiscus is whether the amounts paid to the
scheme in the tax years in issue came within the literal meaning of the
Act.5 Unquestionably they did. They were accepted by the operators of
the scheme with the intention of retaining them for their own benefit.
Nothwithstanding that in law they were immediately repayable, they
constituted receipts within the meaning of the Act. In other words it does
not matter for present purposes that the scheme was not entitled, as
against the investors, to retain their money. What matters is that what
they took in was income received and duly taxable. The assessments were
correctly raised.

3   See 82 of the Act.
4   Commissioner for Inland Revenue v Insolvent Estate Botha 1990 (2) SA 548 (A) at 556C-557B.
5   Ibid at 557I-558A.

[13] In dismissing the appeal before it the Tax Court referred the case
back  to the Commissioner to consider the quantum of the receipts and if
necessary to issue a further assessment. It has not been suggested that
such referral was unwarranted if the appeal to that Court was correctly
dismissed.

[14] The appeal is dismissed, with costs, including the costs of two
counsel.

___________________
CT HOWIE
PRESIDENT
SUPREME COURT OF APPEAL

CONCUR:

NUGENT  JA
LEWIS JA
VAN HEERDEN JA
SNYDERS AJA
THE SUPREME COURT OF APPEAL
REPUBLIC OF SOUTH AFRICA

MEDIA SUMMARY – JUDGMENT DELIVERED IN THE SUPREME COURT OF APPEAL

MP FINANCE GROUP v CSARS
FROM:

The Registrar, Supreme Court of Appeal
Date:

31 May 2007
Status:

Immediate
Pyramid scheme swindlers must pay tax on their takings.   This is the
conclusion reached by the Supreme Court of Appeal.  The case before it
involved an illegal and fraudulent scheme operated by Marietjie Prinsloo
through various corporations in the tax years 2000 to 2002 in Gauteng
and neighbouring provinces.
All the corporations went insolvent and very many so-called investors
received either much less than their promised huge returns or nothing at
all.  When the Commissioner for the SA Revenue Services demanded that
the scheme’s operators pay tax on what they received, the liquidators of
the scheme objected.   When their objection was disallowed they
appealed to the Tax Court and when the appeal failed they appealed to the
Supreme Court of Appeal. The liquidators argued that what was paid to
the scheme were not ‘amounts received’ with the meaning of ‘gross
income’ as defined in the tax law.  This was so, they said, because what is
received in terms an illegal contract or scheme is, in law, immediately
repayable to the payer.   The SCA held that, although that argument
correctly stated the position as between the investors and the scheme, it
overlooked the position as between the scheme and the revenue.  The

scheme made its money by illegal means. That was its income.  The
operators took the money for their own benefit, not with the intention to
comply with supposed contracts with the investors.  The scheme never
had that contractual intention in any of the tax years.  The appeal was
dismissed.