THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT

Case No: 58/2010
No precedential significance

In the matter between:

THE ABRAHAM KROK TRUST
Appellant

and

THE COMMISSIONER FOR THE SOUTH
AFRICAN REVENUE SERVICE
Respondent

Neutral citation: The Abraham Krok Trust v SARS (58/10) [2010]
ZASCA 153 (29 NOVEMBER 2010)

Coram:
NAVSA, NUGENT, MAYA and CACHALIA JJA
and BERTELSMANN AJA

Heard:
4 NOVEMBER 2010

Delivered:
29 NOVEMBER 2010

Summary:
Donations tax – alleged donation by trustees – whether
donation authorised by trust deed and thus exempt from
donations tax.

_______________________________________________________________________

ORDER
_______________________________________________________________________

On appeal from: Tax Court, Johannesburg (Mathopo J and Messrs Hefer
and Mabhoza sitting as court of first instance).

The appeal is upheld, and the cross appeal is dismissed, in both cases
with costs that include the costs of two counsel. The order of the tax court
is set aside and substituted by an order setting the assessment aside.

_______________________________________________________________________

JUDGMENT
_______________________________________________________________________

NUGENT
JA
(NAVSA,
MAYA
and
CACHALIA
JJA
and
BERTELSMANN AJA concurring)

[1] In 1973, under a notarial deed of donation, Ms Sarah Krok created
‘The Abraham Krok Trust’, and made certain donations to the trustees for
the benefit of six children. In 1981 the notarial deed was revoked and
substituted by a new trust deed. Under that trust deed the assets that were
being held in the Abraham Krok Trust were ‘deemed to have been
divided into six trusts, one for the benefit of each of the children’. I will
refer to those six trusts as the ‘1981 trusts’. Notwithstanding that the six
trusts existed separately, the terms of each was to be governed by the
terms of the 1981 deed, which also provided that they would be
administered collectively under the name ‘The Abraham Krok Trust’.

[2] In 1994 Mr Abraham Krok executed six trust deeds. The trust
deeds established new trusts for the benefit of each of the children that I
referred to earlier. Simultaneously Mr Krok donated a nominal sum to
each of the trusts. I will refer to those trusts as the ‘1994 trusts’.

[3] Thus at the time that is now material each of the children was the
beneficiary of two trusts – each was a beneficiary of one of the 1981
trusts, and each was a beneficiary of one of the 1994 trusts.

[4] Each of the 1981 trusts concluded an agreement of sale with its
counterpart 1994 trust. In terms of each such agreement the 1981 trust
sold to its counterpart certain stipulated assets. The purchase price
payable in each case was R61 635 174. In each case the purchase price
was to be discharged by the 1994 trust assuming certain liabilities
amounting to R9 232 125 and the balance of R52 455 232 was treated as
a loan owing by the 1994 trust to the relevant 1981 trust.

[5] In 1997 the ‘Abraham Krok Trust’ (the collective name under
which the 1981 trusts were administered ) made what was referred to as
an ‘award’ to the 1994 trusts – retrospective to the 1996 tax year – in an
amount of R52 455 232 in each case. At the same time the trustees of the
respective trusts agreed that the amount of the ‘award’ would in each case
be set off against the debt that was at that time owing by the relevant
1994 trust to its counterpart.

[6] For the 1996 tax year the Commissioner assessed ‘the Abraham
Krok Trust’ for donations tax on the ‘awards’ that were made and for
interest on that tax. The tax for which it was assessed amounted in all to
R78 682 849 and the interest amounted to R93 862 092. Although

assessed in that name it was agreed that in reality each of the 1981 trusts
was assessed for its proportionate share of that amount.

[7] The 1981 trusts (acting under the name of the Abraham Krok
Trust) objected to the assessments. The Commissioner dismissed the
objections and the trusts appealed to the tax court. The tax court
(Mathopo J with Messrs Hefer and Mabhoza) dismissed the appeal and
ordered that the matter be referred back to the Commissioner to assess the
trusts ‘on the basis that the [donations were] made on 21 June 2006’. The
trusts appeal against the dismissal of the appeal, with the leave of that
court, and the Commissioner cross-appeals against the grant of the second
part of the order.

[8] Section 54 of the Income Tax Act 58 of 1962 levies a tax called
‘donations tax’ on ‘the value of any property disposed of (whether
directly or indirectly and whether in trust or not) under any donation by
any resident’. Section 55(1) defines a ‘donation’ to mean
‘any gratuitous disposal of property including any gratuitous waiver or renunciation
of a right’.
And ‘property’ means
‘any right in or to property movable or immovable, corporeal or incorporeal,
wheresoever situated’.

[9] Donations tax is payable by the ‘donor’ but if the donor fails to pay
the tax within three months1 then the ‘donee’ becomes jointly and
severally liable with the donor for payment of the tax.2 Where the
donation has been made to any trustee to be administered for the benefit
of a beneficiary then the ‘donee’ is defined to include the trustee.

1 Or such longer period as the Commissioner may determine.
2 Section 59 read with s 60(1).

Donations tax paid or payable by a trustee in his or her capacity as such is
recoverable from the assets of the trust.3 In Welch’s Estate v
Commissioner, South African Revenue Service4 this court observed that
the effect of that inclusion in the definition of a ‘donee’
‘is to deem the trustee rather than the beneficiary to have benefited from the donation,
even although the trustee obviously has not, and to render the trustee jointly and
severally liable with the donor for the donations tax payable if the donor has not paid
it within the prescribed period of three months from the date upon which the donation
takes effect’.

[10] A donation that is made by a trustee to the beneficiary of a trust
would ordinarily attract donations tax. But such a donation is exempted
from the tax by s 56(1)(l),5 which exempts ‘property which is disposed of
under a donation if such property is disposed of under and in pursuance
of any trust’. In Welch’s Estate Marais J observed that ‘the obvious
purpose of [the exemption] is to avoid donations tax being levied twice
upon what was in essence one donation by the donor’.6 In the same vein
he said later:7
‘Section 56(1)(l) seems to be intended to protect the donor and the trustee from the
levying yet again of donations tax upon the ultimate disposal by the trustee of the
corpus to the beneficiary who gives nothing in return for it. Its apparent purpose is
simply to avoid taxing twice what is in reality one donation traceable to the initial act
of the donor in settling assets upon the trust’.

[11] Whatever the true nature of the ‘awards’ that were made by the
1981 trusts to the 1994 trusts, I think it must be accepted that if they were
capable of being applied to extinguish the debts that were owing by the

3 Proviso to the definition of ‘donee’ in s  55(1).
4 2005 (4) SA 173 (SCA) para 24.
5 Incorrectly referred to as s 56(1)(e) in Welch’s Estate.
6 Para 25.
7 Para 70.

1994 trusts to the 1981 – and the trustees say that they were capable of
doing so – then they must have been ‘disposals of property’ by the 1981
trusts as contemplated by the definition of a ‘donation’. For purposes of
this judgment I will treat and refer to them as such. I will also assume that
the disposals were made ‘gratuitously’ – although that is disputed by the
trustees – and thus would ordinarily be donations that attract donations
tax under s 54.

[12] The present dispute between the trustees and the Commissioner
arose in the following way. At some stage after the trusts were assessed
for donations tax the trustees consulted counsel, who informed them that
in his view the disposals ‘might’ (I emphasise that the advice went no
further than that) not have been authorised by the trust deeds – in which
case they would have been invalid. (I should add that there is no dispute
that at all times the trustees genuinely believed that they were authorised
to make the awards.) Upon receiving that advice the trustees took the
view that if the disposals had indeed been unauthorised that would add
another string to their bow in their dispute with the Commissioner. If the
disposals had been unauthorised and were thus legally invalid – so their
argument went – then they were not taxable under s 54 because that
section, they submitted, applied only to legally valid donations. But the
trustees intended to argue in the alternative (amongst other things) that if
the disposals were authorised, and thus taxable under s 54, they were
similarly exempt from tax under s 56(1)(l). So they decided that for so
long as there was uncertainty as to the validity of the disposals they
would not pin their colours to either mast but would await, if necessary, a
definitive determination by a court on the validity or otherwise of the
disposals.

[13] The written objections to the assessment that the trustees placed
before the Commissioner reflected, essentially, that view of the matter
that was taken by the trustees, which later formed the basis for the
submissions that were made to this court. They submitted in their
objection that ‘on a proper construction of the deed … the trustees had no
power to make [the awards]’ and thus the awards were ‘invalid and of no
force or effect, and could not constitute a donation as contemplated by
section 54, read with section 55 …’ (the contention being that s 54 taxed
only legally valid donations). But if the awards were authorised, they
submitted in the alternative, then they fell within the exemption. (Other
objections were taken that are not now relevant.)

[14] The response of the Commissioner on the first point was that it
mattered not whether the disposals were valid or invalid at law – in either
event the disposals occurred in fact and s 54 required no more than that.
On the second point the Commissioner was more definite. He contended
that the disposal was not authorised by the trust deed and was thus not
made ‘under and in pursuance’ of the trust – accordingly it fell outside
the exemption. That was the only ground that he advanced – in the
reasons for his assessment and in this court – for why the exemption did
not apply.

[15] Argument before us was directed largely to the proper construction
to be placed upon the various sections. The respective arguments raise
interesting questions of construction of the relevant sections but on the
view that I take of the matter those questions need not be resolved.

[16] It will be apparent from the respective positions that the parties
have adopted that the validity or otherwise of the disposals is not

necessarily decisive of the trustees’ case. But that is not so for the case
advanced by the Commissioner. On the case advanced for the
Commissioner the disposals are taxable only if the trustees were not
authorised to make them, for only then would they fall outside the
exemption (on the construction of the exemption adopted by the
Commissioner). If the disposals were indeed authorised then the
Commissioner accepts that they fall within the exemption. Thus it is
critical for the Commissioner’s case that the trustees were not authorised
to make the disposals.

[17] At first counsel for the trustees submitted that the disposals were
not authorised by the trust deed but he later abandoned the submission.
When the question was probed with counsel for the Commissioner in the
course of the appeal he could advance no reasons why the disposals were
not unauthorised. After the hearing of the appeal we directed certain
questions to the Commissioner in clarification of his position. It seems
that by then he had found a second wind because his counsel submitted in
reply to those questions that the trustees had indeed not been authorised
to make the disposals and he advanced reasons why that was so.

[18] It is not usual for a court to pronounce upon the validity of a
bilateral transaction if all the interested parties are not before it – which
they usually will not be in tax proceedings. By itself that seems to me to
suggest that the legislature did not intend s 54 to apply only to an
authorised donation (as submitted for the trustees) nor to exempt from
donations tax only authorised donations (as submitted for the
Commissioner) and thus the validity or invalidity of the transaction would
be irrelevant. But once more it is not necessary to pursue that enquiry.

[19] In his reply to our questions the Commissioner submitted that the
court is indeed entitled to determine the validity of the disposals. He
added that in this case the court is not called upon to do so because – so
the argument went – the trustees bear the burden of proving that the
disposals are exempt8 and they have not discharged that burden. The
Commissioner’s reliance upon the burden of proof is misplaced. The
material facts in this matter are not in dispute. The question under
consideration is a matter for construction of the trust deed and on that
question the burden of proof does not come into play.

[20] I will assume in favour of the Commissioner that the exemption,
properly construed, applies only to a donation that the trustees were
authorised by the trust deed to make – which was the submission that was
made on his behalf. If that construction of the section were to be correct it
would seem to follow implicitly that the legislature intended the tax court
to be competent to pronounce upon that question (if only for tax
purposes). Once more I have assumed in favour of the Commissioner that
it is indeed competent for the tax court (and thus this court) to pronounce
on the issue – which is also what his counsel submitted. With that in mind
I turn to the construction of the trust deed.

[21] The parties seem at first to have applied their minds to the effect of
clause 21 of the deed but that clause is not exhaustive of the enquiry.
Clause 12.1 confers upon the trustees a discretion to dispose of capital of
the trust in the following terms:
‘The trustees shall have the right, if they in their sole and absolute discretion deem it
necessary, to apply and utilize any portion of the capital of the trusts towards the
purposes set out in 11.1, for the benefit of the child for whom the trust has been

8 Section 82 of the Act.

established and should they in their discretion deem fit, for the benefit of any of the
other children, should circumstances in their opinion so warrant’.

[22] The first part of clause 11.1 provides as follows:
‘The income of the trusts shall be applied by the trustees in such amounts and in such
manner, for the benefit of the children and for their maintenance, well being,
education, upbringing and reasonable pleasures, as the trustees may determine in their
absolute discretion’.

[23] The conjunction ‘and’ signifies that the purpose to which income
may be applied is not confined to the maintenance etc. of the children and
that is not disputed by the Commissioner. Thus on the face of it clause
12.1, read with clause 11.1, could not be clearer: capital of the trust may
be applied for the benefit of the children in the manner that the trustees
may determine in their absolute discretion.

[24] But the Commissioner points out that clause 11.1 goes on to
provide that until a child has attained the age of 21 years no income may
be paid to any of the children but may be paid for their benefit. And he
points out that clause 11.2 provides that ‘should the trustees resolve in
terms of 11.1 to pay or apply any of the income of the trusts for the
benefit of any of the children’ then the income ‘shall accrue to the
beneficiary concerned’, but the trustees may nonetheless, at their
discretion, administer the funds ‘as agents for the beneficiary’, and may
‘[pay the income over to the beneficiary] from time to time … as the
trustees may determine’. He also draws attention to clause 11.3, which
permits the trustees to make an allowance from time to time to the
guardian of the child.

[25] Thus it was submitted for the Commissioner (I use the words of
counsel in his written reply to our questions) that ‘what is envisaged by
the application of income “for the benefit of the children” in paragraph
11.1 is either the payment of such income to a child who had attained the
age of 21 years or the awarding of such income to a child in
circumstances where such awarded income accrued to and vested in such
child but was administered by the trustees in the name of such child, the
trustees [of the trust] acting as agents for such child’. The only exception
to the application of the income in that way, so it was submitted, was to
pay an allowance under clause 11.3.

[26] On that basis, it was submitted for the Commissioner, so far as
clause 12.1 permitted the trustees to apply capital ‘towards the purposes
set out in 11.1’, they were permitted only to pay it to a child who had
reached the age of 21 years (the second part of clause 11.1), or to award
capital to a child to be administered by the trustees as his or her agent
(clause 11.2), or to pay an allowance to his or her guardian (clause 11.3).

[27] In my view there is no merit in that submission. The various
clauses relied upon for the submission do not relate to the purpose for
which it may be used – which is ‘for the benefit of the children’ – but to
how the income is to be dealt with if it is applied to that purpose. Clearly
the donor intended those portions to apply only to the application of
income and not to the application of capital as well. Had he intended
them to apply to capital under clause 12.1 he would not have confined
himself to a reference-back to clause 11.1 alone. Indeed, had his intention
been as contended for by the Commissioner, that could have been
achieved by referring in clause 11 both to income and capital and not
having clause 12.1 at all.

[28] Counsel for the Commissioner also submitted that the construction
of clause 12.1 that I suggested earlier is inconsistent with clause 12.2. I
do not think it is necessary to elaborate on the submission. In my view it
is founded upon a contorted construction of clause 12.2 that is not
justified.

[29] In my view the language of clause 12.1 is clear and I see no reason
to strain it – it permits the trustees in their discretion to apply capital for
the benefit of the children. There is no dispute that the disposals in this
case indeed benefited the children and thus the trustees were authorised to
make them. It follows that the premise upon which the assessment was
made was unsound and thus the decision of the Commissioner was
wrong. The Commissioner advanced no other grounds for opposing the
appeal. The cross appeal also falls away.

[30] The appeal is upheld, and the cross appeal is dismissed, in both
cases with costs that include the costs of two counsel. The order of the tax
court is set aside and substituted by an order setting the assessment aside.

_________________
R W NUGENT
JUDGE OF APPEAL

APPEARANCES:

For appellant:
P A Solomon SC

J T Boltar

Instructed by:

Werksmans Incorporating Jan S de Villiers, Sandton

Matsepes Inc, Bloemfontein

For respondent:
T S Emslie SC

N Mayesi

Instructed by:

The State Attorney, Cape Town

The State Attorney, Bloemfontein