The definition of 'person' in the Income Tax Act 58 of 1962 (ITA) and other taxing statutes forms a critical component of their charging provisions. If the target of the tax is not a person, no tax can be charged even if that target has a representative.
The procedure for determining whether the target is a person involves a three-step process. First, examine the definition in the taxing act, secondly, examine the definition in the Interpretation Act 33 of 1957, and finally, examine the ordinary meaning of the term. It must then be determined whether there are grounds for departing from the defined meaning.
The taxing act definition
For the purposes of this article, I will examine the definition in the ITA but later will mention some other tax acts.
Section 1 of the ITA defines a person as follows:
' “[P]erson" includes—
(a) an insolvent estate;
(b) the estate of a deceased person;
(c) any trust; and
any portfolio of a collective investment scheme,
but does not include a foreign partnership;'
The inclusions
In
Jones and Co Ltd v CIR Gardiner AJP stated the following on the use of the word 'includes':[1]
'Now 'includes', as a general rule, is not a term of exhaustive definition; sometimes it is so employed, but, as a general rule, it is a term of extension ….'
The word 'includes' in the definition of 'person' is used to extend the meaning of the term by including entities that would not otherwise be persons. However, in some instances, such as in the definition of 'trading stock' in s 1(1), 'includes' may imply an exhaustive list.[2]
Deceased estate
The definition of 'person' in the principal Act published in 1962 included only the estate of a deceased person. That inclusion followed
CIR v Emary NO,[3] a case falling under the Income Tax Act 31 of 1941, in which the Appellate Division (AD) had held that a deceased estate was not a person under the common law, Interpretation Act or the 1941 ITA. In fact, the 1941 ITA contained no definition of 'person'.
Trust
The inclusion of a trust, backdated to years of assessment commencing on or after 1 March 1986 by the Income Tax Act 129 of 1991, resulted from
Trustees of the Phillip Frame Will Trust v CIR,[4] confirmed on appeal to the AD in
CIR v Friedman and others NNO[5] in which it was held that a trust was not a person. This inclusion needs to be read with the definition of 'trust' which is defined in s 1(1) to mean
'any trust fund consisting of cash or other assets which are administered and controlled by a person acting in a fiduciary capacity, where such person is appointed under a deed of trust or by agreement or under the will of a deceased person'.
The impact of including a trust as a person is still under debate today. More recently, it has arisen in the
Thistle Trust case[6] heard in the Constitutional Court on 8 February 2024 in which it was argued by the appellant that making a trust a person had no impact on the conduit principle. SARS, on the other hand, argued that the conduit principle fell away when a trust was made a person and the principle was embodied in s 25B. At the time of writing, judgment is still pending.
It appears to be implied that when an entity is defined as a person, it assumes ownership of the related pool of assets and liabilities controlled by its representative. In the case of a trust, this representative would be its trustees. This conclusion finds support in the Eighth Schedule to the ITA, specifically para 11(1)(d) of the Eighth Schedule to the ITA, which refers to 'an asset of a trust', as well as in the definition of 'trust'.
Insolvent estate
In the 1975 case of
Thorne and Molenaar NNO v Receiver of Revenue, Cape Town,[7] an insolvent estate was ruled not to be a 'person'. However, it took 22 years for an insolvent estate to be included in the definition of 'person' under the Income Tax Act 28 of 1997. The lack of urgency in addressing this gap can likely be attributed to the relatively small risk of fiscal loss, as insolvent estates of natural persons typically do not generate significant income during winding-up. Since 2001, capital gains can arise in an insolvent estate when the trustee realizes the estate's assets, providing further justification for the inclusion of an insolvent estate in the definition of 'person'. The situation differs for a company in liquidation: it remains the same taxable entity until it is finally dissolved, and no separate estate comes into existence when a company enters into liquidation.[8]
Portfolio of a collective investment scheme
Paragraph (d) of the definition of 'person' encompasses a portfolio of a collective investment scheme. When first inserted into the definition of 'person' by the Taxation Laws Amendment Act 17 of 2009, para (d) referred to 'any portfolio of a collective investment scheme in securities' (CISS). Since then, it has been expanded to include all collective investment schemes. Its insertion coincided with the deletion of a portfolio of a CISS from para (e)(i) of the definition of 'company' in s 1(1). A collective investment scheme is typically structured as a type of vesting trust although it can also take the form of an open-ended investment company.[9] Given that a portfolio of a collective investment scheme is not a person – it is simply a separate pool of assets of a collective investment scheme – it makes sense that it was necessary to include it as a separate legal entity. Interestingly, a portfolio of a collective investment scheme does not have its own distinct tax rate in the annual Rates and Monetary Amounts and Amendment of Revenue Laws Acts. In practice, SARS treats it as a trust for tax rate purposes.
In
Van der Merwe NO and others v Minister of State Expenditure and others[10] the court held that the short-term insurance business of an insurance company, which had been placed under the control of liquidators, does not qualify as a 'person' for income tax purposes and should not be confused with the company itself. Surprisingly, this omission from the definition of 'person' has never been addressed, presumably because such situations are relatively rare.
What unites all these cases is that they deal with situations in which the target of the charging provision is essentially an aggregate of assets and liabilities managed by someone acting in a fiduciary capacity, such as a trustee or liquidator. Without recognising this target as a legal 'person', the
fiscus would be unable to enforce tax obligations and collect revenue.
Exclusion
A 'foreign partnership' as defined in s 1(1) is excluded as a person even if it is given legal personality under a foreign statute. The definition of 'foreign partnership' describes it as a 'partnership, association, body of persons or entity formed or established under the laws of any country other than the Republic' which in simple terms is transparent for tax purposes (that is, the partners pay the income tax).
The Interpretation Act
The Interpretation Act defines 'person' as follows:
' “person" includes—
(a) any divisional council, municipal council, village management board, or like authority;
(b) any company incorporated or registered as such under any law;
(c) any body of persons corporate or unincorporate;'
This definition applies to the interpretation of any law in South Africa unless to do so would be 'repugnant to such provisions or unless the contrary intention appears'.[11]
Similar to the definition of 'person' in the ITA and other taxing statutes, this definition also starts with the word 'includes' and broadens the ordinary meaning of the term.
A 'body of persons corporate' includes a
universitas personarum, a separate legal entity under the common law which as perpetual succession with rights and duties independent of the rights and duties of its members.[12]
According to
Oxford Reference.com[13] a body unincorporate' means:
'An association that has no legal personality distinct from those of its members (compare corporation). Examples of unincorporated bodies are partnerships and clubs.'
Unincorporated associations
In
CIR v Witwatersrand Association of Racing Clubs[14] the association had arranged a race meeting at the race course of the Johannesburg Turf Club, the proceeds from which were to be paid to two charities. Readers will probably be familiar with the principle established by this case that income cannot be disposed of after accrual, which resulted in the association being taxed on the proceeds. But the case is also important because it found that the association was a body unincorporate under the Interpretation Act and thus was a taxable entity despite not having a constitution or any written rules or legal
persona separate from its members. .
Partnerships
In
Chipkin (Natal) (Pty) Ltd v C: SARS Cloete JA stated the following:[15]
'The definition of “person" in s 1 does not include a partnership and a partnership is not a person at common law.'
While it is true that the definition in s 1(1) of the ITA does not specifically include a partnership, neither the tax court[16] nor Cloete JA made any mention of the Interpretation Act, and on the face of it, the statement is wrong because a partnership is a body of persons unincorporate. That a partnership is such a 'body of persons' is confirmed by the dictionary meaning cited earlier, and in fact finds support in para (b) of the definition of 'representative employer' in the Fourth Schedule to the ITA, which refers to 'in the case of any municipality or any body corporate or unincorporated (other than a company or a partnership) …'. If a body unincorporated did not include a partnership, there would be no point in excluding it.
The difference between a body of persons corporate such as a universitas and a body of persons unincorporate is that the former has, under the common law, legal personality while the latter does not. Yet, the lack of legal personality did not stop the court in the
Witwatersrand Association of Racing Clubs case from taxing the unincorporated association because the association was given legal personality by the Interpretation Act. Comparing the position of an unincorporated association with a partnership, the court stated the following:
'The express provision, contained in section 67(7) of the Act, directing that partners are to be separately assessed is, I think, in harmony with what I have said above in relation to sections 5 and 10(1)(e), and also points away from the Special Court's view that only such associations as have a persona separate from their members are taxable.'
By way of explanation, s 5 of the 1941 ITA is similar to s 5 of the present ITA in that it imposes income tax on the taxable income of a person. Section 10(1)(e) exempted various associations, including those which were unincorporated bodies . There would have been no need for such exemption if such bodies were not subject to income tax.
Section 67(7) of the 1941 ITA provided:
'(7) Separate assessments shall be made upon partners, the provisions of sub-section (15) of section fifty-five notwithstanding.'
Section 55(15) provided:
'(15) Persons carrying on any business in partnership shall make a joint return as partners in respect of such business, together with such particulars as may from time to time be prescribed, and each such partner shall be separately and individually liable for the rendering of the joint return.'
Similar provisions in the form of s 66(15) and 77(7) were contained in the 1962 ITA, although they were deleted as a result of the introduction of the Tax Administration Act 28 of 2011. The point the judge was making was that a partnership, as a person, was required to submit a return, but despite this, the ITA placed the liability for the tax on the partners.
While a partnership may be a person for purposes of the ITA, it is not a taxpayer, since s 24H(5)(a) deems the income of the partners received by or accrued to them in common to be received or accrued to them individually. Similarly, para 36 of the Eighth Schedule treats a partner's share of the proceeds on disposal of an asset to accrue to the partner at the time of disposal. This tax treatment was recognised in the
Chipkin case in which Cloete JA stated:[17]
'A partnership cannot have a taxable income, simply because it is not a taxable entity.'
Nevertheless, the ITA does recognise a partnership as a person for purposes of procedural convenience. For example, the definition of 'agent' in s 1(1) includes a partnership and para 2A of the Seventh Schedule treats a partnership as an employer for the purposes of para 2 of the same schedule.
By contrast, the definition of 'person' in the Value-Added Tax Act 89 of 1991 specifically includes a body of persons unincorporated, which seems unnecessary in view of their inclusion under the Interpretation Act. Section 51 of the VAT Act contains rules which deem a partnership to be a vendor carrying on an enterprise separate from the members of the body as well as other rules such as those governing registration and payment.
Section 23C of the ITA requires the cost or value of an asset to be reduced by input tax when the taxpayer is a vendor. This would seem to be problematic as the vendor is the partnership and not its individual members and perhaps needs to be clarified by the legislature.
The definition of 'person' in the Securities Transfer Tax Act 25 of 2007 includes 'any body of persons (incorporated or unincorporated)'. The STT Act is concerned with a change in beneficial ownership of a security.[18] Since under the common law ownership of securities rests with the individual partners,[19] it would seem that the incidence of the tax falls on the partners and not on the partnership. Such an interpretation can be justified on the basis that[20]
'it is a sound rule to construe a statute in conformity with the common law rather than against it, except where and so far as the statute is plainly intended to alter the course of the common law'.
In practice, when the partnership sells securities, the STT would be paid by the nominee or general partner on behalf of the partners.
But when an individual partner sells their interest to an incoming partner, the STT would need to be imposed on the incoming partner's fractional interest in the share portfolio. There is a
de minimis threshold of R40 000 (R100 × 100/0,25) to prevent STT on small value changes in ownership.[21]
The ordinary meaning of 'person'
Natural persons are not mentioned in the Interpretation Act but clearly are persons in the ordinary sense of the word.[22] After examining the ordinary meaning of 'person' according to various dictionaries, Grosskopf JA held in
Van Heerden and others v Joubert NO and others[23] that a stillborn baby was not a person.
Conclusion
In a 1948 speech to the British House of Commons, Winston Churchill said that 'those who fail to learn from history are doomed to repeat it'. Those words seem particularly apposite when looking at the history of the inclusions in the definition of 'person' in the ITA and the string of adverse findings by South African courts against SARS. Understanding the background to the definition and the role of the Interpretation Act remains as relevant and important as ever.
This article was first published in
ASA June 2024
