THE SUPREME COURT OF APPEAL
REPUBLIC OF SOUTH AFRICA

JUDGMENT

Case No: 59/09

In the matter between:

TCT LEISURE (PTY) LTD

Appellant

and

THE COMMISSIONER FOR THE SOUTH AFRICAN
REVENUE SERVICES

Respondent

Neutral citation: TCT Leisure  v The Commissioner for the South African

Revenue Services (59/09) [2010] ZASCA 10 (12 March

2010).

Coram:
HARMS DP, CLOETE et CACHALIA JJA

Heard:
19 February 2010

Delivered:
12 March 2010

Summary:
VAT Act 89 of 1991; 'equity security' exemption s 12; the goods
'supplied' comprised preferent shares and other discrete rights; because the
rights were not included in the shares, the 'equity security' exemption in
s 12(a) was not applicable; the turnover from the sale of the rights was
therefore subject to VAT.

______________________________________________________________

ORDER
______________________________________________________________

On appeal from: Special Tax Court (Durban) (Hurt J presiding):
The appeal is dismissed with costs including the costs of two counsel.
______________________________________________________________

JUDGMENT
______________________________________________________________

CLOETE JA (HARMS DP et CACHALIA JA concurring):

[1] The Holiday Club is an organisation which has for some time sold
holiday accommodation commonly known as 'time-share' to members of the
public. The organisation was restructured in 1995. Before that date, VAT was
paid on the product it supplied and thereafter, it was not. The cardinal
question in this appeal is whether VAT was payable in respect of the product
sold after the restructuring.

[2] The various components of the organisation making up The Holiday
Club from time to time, have varied. In 1993 Leisure Property Trust ('the trust')
was formed. The trust acquired rights to accommodation introduced to it by
TCT Leisure (Pty) Ltd (to which, without begging the question, I shall refer as
'the taxpayer') and in return for which the trust issued 'points rights' to the
taxpayer. These points rights conferred a contractual right of occupation
enforceable against the trust exercisable subject to defined conditions. The
taxpayer sold the points rights to members of the public. It was common
cause before this court that these transactions constituted a 'taxable supply'
on which VAT was payable; and VAT was in fact paid. The relevant provisions
of the Value-Added Tax Act 89 of 1991 read:
'7(1)
Subject to the exemptions, exceptions, deductions and adjustments provided
for in this Act, there shall be levied and paid for the benefit of the National Revenue
Fund a tax, to be known as the valued-added tax ─

(a) on the supply by any vendor of goods or services supplied by him on or after the
commencement date in the course or furtherance of any enterprise carried on by
him;
. . .
calculated at the rate of 14 per cent on the value of the supply concerned . . . .'1

[3] When The Holiday Club was restructured in 1995 a new company,
Leisure Holiday Club Ltd ('LHC'), was formed. The trust became its sole
ordinary shareholder. The taxpayer transferred properties and rights of use in
properties comprising holiday accommodation, which it owned, to LHC for a
consideration of R27,5m consisting of the issue to the taxpayer of 62 500
preference shares in LHC with a nominal value of one cent each ('the shares')
and 62 500 'debentures'2 with a face value of R439,99 each. These properties
and rights of use in properties were then acquired by the trust from LHC; and
the taxpayer began selling the shares (and possibly the 'debentures') which it
had acquired in LHC, to members of the public. It is in respect of the turnover
from these sales, for the financial years ending February 1998 to February
2002, that the Commissioner issued the revised assessments levying VAT
which are at issue in this appeal.

[4] The Commissioner raised the assessments on the basis that the
taxpayer dealt in 'timeshare interests' which were included in the definition of
'fixed property' in the VAT Act and, accordingly, that those interests were
'goods' and their supply fell within the purview of s 7(1) of the Act.3 The basis
of the assessments was unanimously upheld by the Special Tax Court,
Durban (Hurt J presiding). Leave to appeal to this court was subsequently
granted in terms of s 34 of the VAT Act read with s 86A(2)(b)(i) and s 86(5) of
the Income Tax Act 58 of 1962.

1 Section 7(1) has been reproduced in its present form. The amendments to it from time to
time since its commencement are irrelevant to the present appeal.
2 It is not necessary for purposes of the appeal to decide whether this description is accurate.
3 In s 1 of the VAT Act, 'goods' are defined as meaning inter alia 'fixed property'; and 'fixed
property' is defined as meaning inter alia 'in relation to a property time-sharing scheme, any
time-sharing interest as defined in section 1 of the Property Time-sharing Control Act, 1983
(Act 75 of 1983), and any real right in any such . . . time-sharing interest.'

[5] Because of the view I take it is unnecessary to consider the
correctness of the basis of the order made by the Special Tax Court because
even if the basis was incorrect, as contended by the taxpayer (and I express
no view in this regard), the onus was on the taxpayer, in terms of s 37 of the
VAT Act,4 to prove that the turnover from the sales was nevertheless exempt.
This the taxpayer sought to do by arguing that what was supplied to the
members of the public were 'financial services' in the form of 'equity
securities', as defined in s 2, which were exempt from VAT in terms of s 12(a)
of the Act. Those provisions read inter alia:
'12.
The supply of any of the following goods or services shall be exempt from the
tax imposed under s 7(1)(a):
(a)
The supply of any financial services . . . .'
'2(1)
For the purpose of this Act, the following activities shall be deemed to be
financial services:
. . .
(d)
the issue, allotment or transfer of ownership of an equity security . . .
. . .
(2)
For the purposes of subsec (1) ─
. . .
"equity security" means any interest in or right to a share in the capital of a juristic
person . . . .'

[6] In the words of counsel who drew the heads of argument on behalf of
the taxpayer:
'The essential question is whether the basis of the scheme was changed [in 1995] to
one in which "shares" rather than "points" were sold.'
Put differently, in order to succeed, the taxpayer would have had to show that
the occupation rights formed part of the bundle of incorporeal rights
comprising the shares in LHC which the taxpayer sold to members of the
public. The source of such rights could only be found in the memorandum or

4 Section 37 provides:
'The burden of proof that any supply . . . is exempt from or not liable to any tax chargeable
under this Act . . . shall be upon the person claiming such exemption . . . and upon the
hearing of any appeal from any decision of the Commissioner, the decision shall not be
reversed or altered unless it is shown by the appellant that the decision is wrong.'

articles of association of LHC5 or in any valid resolution passed in accordance
with the memorandum and articles setting out the rights attaching to the
shares to be issued pursuant to the resolution.6

[7] At the time LHC was incorporated, the terms governing the shares
were set out in clause 3 of its original articles of association. That clause gave
the right to shareholders to use the property of the company in the following
terms:
'3(a)
The preference shareholder shall:
1.
Be entitled to use any property acquired by the company for leisure or holiday
purposes in accordance with a schedule of use to be prepared by the directors of the
company, which schedule shall ensure that each shareholder has equal access to
the use and enjoyment of the property, determined pro rata to the number of shares
held . . . .'
However by special resolution passed on 15 September 1995, which was
before any shares at issue in this appeal were issued and therefore before the
taxpayer sold such shares to members of the public, clause 3 was amended
to exclude the paragraph just quoted.

[8] The articles of LHC did not provide that the shareholder would be
entitled to an allocation of points rights pro rata to its shareholding ─ indeed,
there is no link between the two in the articles (or memorandum) of LHC.
Certificates issued to members of the public read as follows:
'Share Certificate
This is to certify that the undermentioned is the registered owner of fully paid
Preferent Shares of one cent each in the abovementioned Company subject to the
Memorandum and Articles of Association of the Company.

5 Commissioners of Inland Revenue v Crossman & others: Commissioners of Inland Revenue
v Mann & others [1936] 1 All ER 762 (HL) at 787; Wessels & 'n ander v D A Wessels & Seuns
(Edms) Bpk & andere 1987 (3) SA 530 (T) at 561G-H; Letseng Diamonds Ltd v JCI Ltd &
others; Trinity Asset Management (Pty) Ltd & others v Investec Bank Ltd & others 2007 (5)
SA 564 (W) para 17.
6 Blackman et al Commentary on the Companies Act ad s 91 p 5─174-1; Morse et al Palmer's
Company Law para 6.104.

Points Rights Certificate
Subject to the payment of Membership and Reservation Fees, this certificate also
entitles the holder to the equivalent user rights in Points in The Holiday Club.'

[9] Clause 1 of the standard sale agreement between the taxpayer and
members of the public read:
'The Trading Company [the taxpayer] hereby sells to the Investor who hereby
purchases in perpetuity upon the terms and conditions of this Agreement a share
interest in the Company [LHC], referred to as Points Rights in the Scheme, which
entitles him/her to be credited each year with the number of Points as determined in
Schedule 2 hereto.'
Certain of the concepts are defined as follows:
'Points Rights ─ means a right for the Member to be credited each year with the
number of Points specified in the Points Rights/Share Certificate;
Points/Shares ─ means the instrument by means of which the Member of
Points/Shares becomes entitled to exercise the right to the Use and Occupation of
Accommodation;
Scheme ─ means a property time-sharing scheme known as "The Holiday Club"
pertaining to the Accommodation conducted in terms of the rules thereto;
Accommodation ─ means the property, immovable or otherwise, intended for use
by any Member in any Resort, including the movables, and in respect of which the
Accommodation is owned, leased, rented or otherwise available from time to time by
the Trust and are accordingly included in the Scheme.'
From what I have previously said it is quite clear that it was not the 'share
interest in the Company' (ie LHC) referred to in clause 1 of the standard sale
agreement which entitled the member of the public 'to be credited each year
with points rights' which, in turn, entitled the member to accommodation rights
in terms of the scheme. The points rights conferred such entitlement. What
was sold were shares and points rights. As Mr Fernandes, the company
secretary of the taxpayer (called to testify on its behalf), correctly said in
cross-examination:
'CROSS-EXAMINER: I'd just like to put it to you for any further comment you wish to
make that after 1995, if you sold shares, what you sold were 1 cent preference
shares and points.
MR FERNANDES:
And?

CROSS-EXAMINER: And points, the same points that you'd been selling before you
continued to sell but you tagged on to it a 1 cent preference share.
MR FERNANDES:
Correct. The points for accommodation and the shares for
ownership.'
The fact that the taxpayer as a matter of commercial practice only sold points
together with shares (a fact much emphasized in the heads of argument and
by counsel who represented the taxpayer when the matter was argued in this
court) does not result in a merger of the rights attaching to each, nor does it
entitle the shareholder qua shareholder to exercise the right of a points holder
or a points holder to exercise the rights of a shareholder.

[10] Counsel representing the taxpayer when the appeal was argued before
this court relied on the decision of the New Zealand Court of Appeal in
Commissioner of Inland Revenue v Gulf Harbour Development Ltd.7 In that
matter one member of a group of companies sold to the public redeemable
preference shares in another member that operated a golf club and related
facilities. The rights attached to each share, which passed to the purchaser,
included membership of the club. The issue was whether such sales were to
be treated as a supply of financial services for the purposes of the Goods and
Services Tax Act 1985. The high court had held that the supplier of a share in
a company operating a country club was an equity security and that the
transaction was, therefore, an exempt supply of financial services for GST
purposes. The Commissioner's primary submission on appeal was that what
was supplied in substance was membership of the golf club and that this
supply should attract GST; that the equity security element was ancillary to, or
incidental to, the supply of membership of the club; and alternatively, that
there were two supplies in the transaction namely the supply of an equity
security and the supply of membership of the golf club. The Commissioner's
appeal was dismissed and the Court of Appeal held inter alia that how the
offer was marketed and why people purchased the shares was irrelevant, in
that everyone who buys a share in a company buys it to acquire the rights
attaching to that share; that the share is in all cases a 'vehicle' for acquisition
of the rights attached to it; and the fact that in this case the rights attached to

7 (2004) 21 NZTC 18, 915.

the shares were rights to membership in the country club did not alter what
the purchasers were acquiring. The high court's view that there was no
evidence to support the supply of more than the shares was confirmed and
the Court of Appeal held that the right to membership passed not as a
discrete element, but as an incident of share ownership.

[11] In the present matter I have held that the right to occupy was supplied
not as an incident of share ownership, but as a discrete element (in the form
of points rights). The case is for that reason of no assistance to the taxpayer.

[12] It was in dispute whether, at the same time that shares and, as I have
found, points rights were sold to members of the public, the 'debentures'
acquired by the taxpayer in LHC were also sold. It is not necessary to resolve
the dispute nor is it necessary to establish a value for the shares. The VAT
Act makes express provision for a composite supply of goods which are
subject to VAT and those that are not in s 10(22) which reads as follows:
'Where a taxable supply is not the only matter to which a consideration relates, the
supply shall be deemed to be for such part of the consideration as is properly
attributable to it.'
But the Taxpayer conceded that if the rights to accommodation supplied to
members of the public did not form part of the rights attaching to the shares,
the full consideration paid by members of the public was subject to VAT.

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

_______________
T D CLOETE
JUDGE OF APPEAL

APPEARANCES:
APPELLANTS:

K J Kemp SC (with him I Pillay)
Instructed by Cox Yeats, Durban;
McIntyre & Van der Post, Bloemfontein

RESPONDENTS:

O L Rogers SC (with him Ms A A Gabriel)
Instructed by The State Attorney, Cape Town;
The State Attorney, Bloemfontein
THE SUPREME COURT OF APPEAL
REPUBLIC OF SOUTH AFRICA

MEDIA SUMMARY – JUDGMENT DELIVERED IN THE SUPREME COURT OF APPEAL

From: The Registrar, Supreme Court of Appeal
Date: 12 March 2010

Status: Immediate
Please note that the media summary is intended for the benefit of the media and does not
form part of the judgment of the Supreme Court of Appeal

TCT LEISURE (PTY) LTD v THE COMMISSIONER FOR THE SOUTH AFRICAN
REVENUE SERVICES

The Holiday Club, which sells holiday accommodation commonly termed time-share to
members of the public, was restructured in 1995. Shares were thereafter sold by TCT Leisure
(Pty) Ltd, one of the entities forming part of The Holiday Club after it was restructured, to
members of the public. TCT argued that the shares were equity securities and therefore the
turnover from the sales of the shares was exempt from VAT. The SCA rejected this
argument, holding that it was not the shares which conferred an entitlement to occupy time-
share accommodation, but the points rights sold with the shares. The court reasoned that the
fact that TCT sold both at the same time as part of one indivisible transaction did not mean
that rights of accommodation were conferred on shareholders. It was the points rights that
conferred this right. The court accordingly confirmed the decision of the Durban Tax Court
that the turnover from the sales was subject to VAT.

--ends--