Income
Tax Appeal
KUDYA
J:
These
six appeals were filed separately. The parties were all represented
by the same firm of legal practitioners', which in turn briefed one
counsel. All the appeals raised the same legal issues. At the
pre-trial hearing of 1 October 2014, the appeals were for these
reasons consolidated for hearing.
In
the absence of factual disputes, the parties argued the legal issues
on the basis of the statement of agreed facts furnished at the
pre-trial hearing. The essence of the statement of agreed facts was
as follows:
1.
All the six appellants were private senior schools operating in
Zimbabwe in terms of their respective trust deeds. The second to
fourth appellants also operated primary schools, which were jointly
administered with the high schools.
2.
In the case of each appeal and each school, certain employees of
these schools had their children enrolled at the schools where they
worked or at other schools which had mutual agreements with the
school at which they were members of staff.
3.
In terms of those arrangements, the employees of the appellant
schools, whose children were enrolled at these schools, did not pay
the same amount of school fees as other non-staff parents whose
children were enrolled at the school. These children were spread
across the schools they were enrolled, in various classes.
4.
In either case the employees were charged by the appellants between
20% and 25% of the full fees and no taxes were paid on the difference
between the 20% and 25% of the fees and the full fees payable at the
respective schools. The first, second, third and sixth respondents
charged 20% while the remaining two charged 25%. The fourth used to
charge 3% before it was directed on 30 November 2009 by the
respondent to charge 25% which it did from the third term of 2009.
5.
The employee parents, like all other non-staff parents, provided all
other school items that were not provided by the schools.
6.
The appellants asserted that some of their costs were not affected by
and did not vary because of the addition of children of staff
members. They termed them non-variable costs.
6.1
These direct costs of education comprised teacher and other employee
salaries as well as the capital costs of the buildings, moveable
assets such as motor vehicles and buses and sports equipment as well
as municipal taxes and the costs for sport and cultural facilities,
school transport, school magazines, awards, class outings and annual
group camps.
6.2
The costs related to the repairs and maintenance of buildings and
other facilities at each school was not affected by the number of
pupils enrolled at the school.
6.3
In none of the schools was the salary paid to any teacher dependent
on the number of pupils actually taught, or in the case of
administrators and other staff related to the number of pupils
enrolled at the school.
6.4
No additional staff were employed as a consequence of the pupil
sponsoring schemes.
7.
The appellants further asserted that there were some costs incurred
by the appellant schools which were affected by the addition of
children of staff members, which varied depending on the number of
pupils enrolled at the school. They termed them variable costs. These
comprised stationery and book costs and for boarders food costs.
8.
The respondent contended that the difference between the amount of
the fees paid by the employee parents to the schools and the full
fees payable at the school was an advantage or a benefit in terms of
section 8(1)(f) of the Income Tax Act [Chapter
23:06] enjoyed
by the employee parents arising from their employment relationship
with the appellants that fell to be taxed in the relevant period. The
appellants disputed the position.
9.
The respondent also asserted that the cost of the benefit to the
appellants in respect of each benefiting child was the same as the
costs of every other pupil at the school and assessed to tax the
appellants on the basis that the advantage or benefit claimed by the
respondent was equivalent to the waived amount. The appellants
disputed this position.
10.
Tax assessments were raised and issued against the appellants in
terms of paragraph 10 of the Thirteenth Schedule to the Income Tax
Act for taxes that were alleged to be due from the employee parents
and which the respondent asserted the appellants were obliged but
failed to withhold from the incomes of the concerned employee
parents.
11.
The appellants disputed both the obligation asserted by the
respondent and the application of the legislation in the manner
invoked by the respondent. The appellants accordingly objected to the
tax assessments in terms of the law and all the objections were
dismissed. 12. The appellants appealed to this Honourable
Court against the various decisions of the Commissioner-General to
disallow their objections.
The
determination of the issues referred on appeal will of necessity be
decided on the basis of the statement of agreed facts and the
information placed before me in the Rule 11 documents
in respect of each appellant.
The
Rule 11 documents
The
Rule 11 documents comprised 199 pages consisting of the schedules of
the grossed up benefits for each employee, certified copies of the
assessments raised, the objection to tax assessment on school fees
benefit for employees whose children were enrolled at the school,
requests for suspension of the payment of the new assessments, the
determination of each objection and the notice and grounds of appeal
of each of the six appellants. The first five determinations were
made on 29 November 2012 while the last determination was made on 4
November 2013. The first five appellants filed their notices of
appeal on 21 December 2012 while the sixth appellant did so on 25
November 2013. All the appellants averred amongst other things in
their letters of objection that the benefit which staff members
received was the placing of their children in a few places at the
school.
Their collective contention was that the respondent wrongly valued
the benefits in kind received by these employees. The Commissioner
opined that these benefits unravelled during the payroll audit should
have been included in the gross income in terms of section 8(1)(f) of
ITA.
On
12 October 2011 the association to which the appellants belonged
wrote to the respondent seeking written guidance on the correct tax
treatment of the school fees benefit accruing to these employees. The
guidance from the Commissioner-General was based on section 8(1)(f)
of the Income Tax Act. He advised that the use of any educational and
boarding facilities of any of the association affiliated schools by
the children of these employees constituted a section 8(1)(f) benefit
equivalent to the waived amount. It was common cause from the letters
seeking suspension of payment of tax of 21 December 2012 that all the
schools were non-profit making organisations
whose anticipated costs of providing education were derived solely
from prospective school fees income.
The school fees income was disparately computed between full fee and
concessionary paying pupils based on anticipated non-variable and
variable costs of providing education to all these pupils. The
anticipated cost of providing education to pupils in each category
was proportionately shared between them.
The
first appellant: AS
The
first appellant, AS's maximum enrolment capacity was for 540
pupils. In 2009 and 2010 it enrolled 515 and 521 pupils respectively
of which 174 and 162 were boarders. In each year 11 children
benefitted from the payment of concessionary school fees. The
cumulative waived amounts for these children were in the sum of
US$28,314 in 2009 and US$40,524 in 2010. The respondent raised
assessments
against the appellant on the waived amounts provided to these
employees to which objection was raised on 21 June 2012 and
disallowed on 29 November 2012.
The
audited 2009 and 2010 financial statements indicated the values of
non-current assets
and current assets
and the revenue inflows and outflows. A deficit of US$43,241 was
incurred in 2009 while a surplus of US$120,306 was earned in 2010.
The actual expenditure in these two tax years in respect of
non-variable expenditure
consisted of six categories that were further divided into different
line items. The main categories were administration, staff,
educational, boarding, motor vehicles and maintenance. The line items
under administration were audit/accountancy; bank charges, insurance,
legal expenses, sundry, telephone and postage and security. Staff
costs comprised of salaries and wages, pensions, NSSA pensions,
medical aid, staff training, staff welfare and uniforms. Educational
costs covered bursaries and bad debts while maintenances costs
covered cleaning, electricity and water, depreciation, repairs and
maintenance. The lion's share of costs were absorbed by staff costs
in the sum of US$1,262,234 constituting 58.62% of the total
expenditure in 2009 and US$1,695,232 constituting 58.08% in 2010. The
expenditure for non-variable costs was US$2,026,901 constituting
94.14% in 2009 and US$2,691,254 constituting 92.12% in 2010.
Variables costs consisted of a different category of “educational”
incorporating printing and stationery, textbooks, library, magazine,
science, sport, travel and accommodation, medical and subscriptions
line items. The total expenditure under this head was in the sum of
US$126,215 constituting 5.86% in 2009 and US$227,555 constituting
7.80% in 2010.
The
second appellant: CSS
The
maximum enrolment capacity of the second appellant was 840. It
enrolled a total of 694 with 54 in boarding in 2009 and 715 with 55
boarders in 2010. The number of pupils who benefited from the
concessionary scheme were 25 in 2009 and 30 in 2010. The assessed
benefits were in the cumulative sum of US$74,600 and US$115,337 in
each respective year. In addition, there were 28 children in 2009 and
29 in 2010 whose parents were employees of the second appellant who
attended other association affiliated schools at concessionary rates
applicable to those schools. The assessed benefit was in the sum of
US$73,508 and US$95,584 in each year respectively. The second
appellant objected to the schedule on 6 July 2012. It only received
the official assessments
on 29 October 2012 and proceeded to incorporate them in the earlier
objection on that date.
The
expenditure heads and line items were similar to those in the first
appellant's pleadings. The total non-variables costs in 2009 were
US$2,988,953 constituting 96.33% and in 2010 were US$3,523,448
constituting 96.16% of the total costs. The variable costs amounted
to US$113,750 constituting 3.67% in 2009 and US$140,645 constituting
3.84% in 2010. The financial statements as at 31 December 2009 and
2010 indicated that the school costs were all met from school fees
income and showed the amounts charged against depreciation on all
categories of property, plant and equipment.
The
third appellant: SET
The
maximum capacity for both the primary and secondary schools operated
by the third appellant was 1,120.
In 2009 both had 523 and 628 pupils respectively. The number of
children on the concessionary scheme in both schools was 32 in 2009.
In 2010 the schools enrolled 524 and 661 pupils of whom 33 were on
the concessionary scheme. The waived amounts in respect of each tax
year were indicated in the schedules raised by the respondent. In
addition, there were 10 children of staff who enjoyed concessionary
fees at another kindred school in both 2009 and 2010. The benefit
that accrued to their parents was in the sum of US$28,368 in 2009 and
US$37,008 in 2010. Six assessments were raised on 17 October 2012
in respect of each year to which the appellant unsuccessfully
objected.
The
appellant prepared its financial statements in the same format as the
other appellants.
The non-variable expenditure in 2009 was US$1,411,915 constituting
95.91% of total expenditure for the primary school and US$2,847,300
being 93.96% for the secondary schools. The variable expenditure and
percentage of total expenditure for each school in 2010 was US$60,146
constituting 4.09% and US$183,092 being 6.04%, respectively. The
respective figures and percentages for each respective school in 2009
for non-variable costs was US$1,723,371 constituting 95.44% and
US$3,221,243 being 91.69% of total expenditure. The variable
expenditure for 2010 was US$82,423 (4.56%) and US$291,757 (8.31%).
The line items covering variable expenditure were more detailed than
in the other schools. They covered art and pottery materials, bond
paper, computer expenses and maintenance, exercise books, stationery,
trips and camps, magazine, library, music drama play, photocopier
maintenance consumables, science materials, departmental hand-outs,
clubs travel, equipment, IB curriculum, Cambridge courier, staff
training and sports.
The
actual audited reports for the two schools encompass some 70 pages.
While minimal income was earned from voluntary donations and fund
raising activities, the bulk of the revenue was derived from tuition
and general purposes fees. Surpluses of US$131,734 and US$173,700
accrued to the primary school in 2009 and 2010, respectively.
During the same periods the secondary school sustained deficits of
US$507,673 and US$265,295.
The
property and equipment listed comprised of land and buildings,
furniture and fittings, books and equipment, musical instruments,
office equipment, plant and equipment, school books and equipment,
science equipment, sports equipment, computer equipment, and motor
vehicles and work-in-progress.
The
fourth appellant: GST
In
2009 the primary school enrolled 640 pupils against 625 pupils at the
secondary school. In 2010 each had 647 and 620 students,
respectively. In 2009, 82 children were on the concessionary scheme
while in 2010 the number stood at 96. The variable costs for both
schools constituted 3.31% in 2009 and 2.94% in 2010 of the total
costs of educating them. In the first two terms of 2009 the
concessionary fees constituted 3% of the fees paid by other pupils
and 25% thereafter following a directive from the respondent. In 2009
the aggregate benefit of US$202,256.50 accrued to the 57 staff
members while the figure was US$312,126.56 in 2010 in respect of 66
members.
The
audited financial statements listed thirteen cost centres and their
respective detailed line items.
In 2009 the non-variable cost centres utilised US$3,942,558
constituting 96.69% of total expenditure for the primary school and
US$6,517,352 constituting 97.06% for the secondary school. The
variable costs were US$134,962 (3.31%) and US$197,472 (2.94%),
respectively.
The
audited financial statements showed that the appellant incurred a net
deficit of US$281,721 in 2009 and US$301,281 in 2010. In addition in
2010 liabilities exceeded assets by US$645,767. These were against
aggregate school fees payments of US$3,794,625 in 2009 and
US$6,413,543 in 2010 and an asset base less depreciation of
US$10,897,111 and US$11,163,319 in each respective year. The
appellant took an overdraft of
US$353,346
to fund building operations in 2010.
The
fifth appellant: SC
The
maximum enrolment capacity was 383 for the primary school and 780
for the secondary school.
The
fifth appellant objected to both the schedules to tax of 26 May 2012
and the subsequent assessments of 12 September 2012. The Rule 11
documents incorporate 2012 term 3 concessionary rates which were
irrelevant to the 2009 and 2010 assessments. The relevant documents
are found in the appellant's bundle of documents. In 2009 the
primary school enrolled 369 pupils of whom 10 were on the
concessionary scheme. In 2010 the figures were 368 and 9. The primary
school had 13 classes. For the secondary school the 2009 enrolment
was 769 and concessionary scheme children were 27 while in 2010 the
figures stood at 768 and 24. The secondary school had 30 classes. The
combined total benefit was US$103,558 in 2009 and US$110,196 in
2010.
The concessionary scheme was contractually sanctioned. The appellant
apportioned costs between non-variables and variables. The
non-variables for the primary school were in the sum of US$1,179,353
(96.87%) in 2009 and US$1,394,155(96.9%) in 2010. The figures and
percentages to total expenditure for the secondary school were
US$3,133,850 (92.66%) in 2009 and US$4,070,650 (92.61%) in 2010. The
variable costs for the primary school were US$38,050 (3.13%) in 2009
and US$44,557 (3.10%) in 2010. Those for the secondary school were
US$248,323 (7.34%) and US$325,399 (7.39%) in each respective year.
The
income raised from tuition fees was in the sum of US$4,379,183 in
2009 and US$5,323,110 in 2010.
The financial statements reveal amongst other information that
depreciation charged on buildings, plant and equipment furniture and
fittings, computers, motor vehicles, bicycles library and text books
was in the sum of US$423,753 in 2009 and US$434,871 in 2010. The cash
flow statement indicated that fixed assets valued at US$226,338 and
US$294,442 were added to the inventory of the secondary school in
each year, respectively. The cost of refurbishments in each
respective year were in the sum of US$210,400 and US$383,704.
The
sixth appellant: CB
In
2009, the school had a total enrolment of 560 children of whom 8 were
on the concessionary scheme. The figures in 2010 were 601 and 15. The
benefit that accrued to these children amounted to US$17,680 in 2009
and US$39,240 in 2010. The concessionary amount paid was deemed by
the appellant to be the cost of education to the employer.
The present appeal is limited to the assessments in respect of 2009
and 2010 notwithstanding the figures and amounts availed in the
pleadings for the 2011 and 2012 tax years. On 23 May 2013
the respondent waived the penalties in full resulting in the
withdrawal of the penalty objection. The appellant apportioned costs
under the broad headings of non-variable and variable costs for both
years. The non-variables were in the sum of US$1,528,991 (94.37%) in
2009 and US$1,883,392 (91.43%) in 2010.
The variables were US$91,287 (5.63%) in 2009 and US$176,576 (8.57%)
in 2010. In addition a review as opposed to an audit of the accounts
revealed a deficit of US$44,778 in 2009 and a surplus of US$14,909 in
2010.The
fixed assets of the school were valued at US$2,934,700 after
depreciation of US$133,967 and US$2,961,831 after depreciation of
US$280,489 while the current assets were US$78,946 and US$196 39 in
each tax year, respectively.
The
appellant objected to the four assessments on 15 March
and 15 May 2013. All the seven objections were disallowed on 4
November 2013. On appeal, the sixth appellant collaborated with the
other appellants in attacking the correctness of the interpretation
and application of section 8(1)(f) rendered by the respondent.
A
summary of Rule 11 Documents
The
Rule 11 documents delineated the interaction between the appellants
and the respondent that gave rise to the present appeal. They
revealed that the appellants categorised their running expenses into
non-variable and variable costs on the basis of their respective
accounting policies which inter
alia
placed the burden of funding non-variable costs on full fee paying
students as long as the maximum enrolment threshold of each school
was not breached. They also revealed that the appellants modelled
their applicable accounting policy, objection to the Commissioner and
appeal to this court on an English statute that was discussed and
applied in the interesting case of Pepper
(Inspector of Taxes) v
Hart
[1993]
AC 593. Unfortunately for the appellants, Mr de
Bourbon,
wisely abandoned that case on the ground that it was irrelevant to
the present appeal.
The
issues for determination
The
following three issues were referred on appeal.
(a)
Whether each employee parent whose children are educated at any of
these schools at either a lesser cost than charged to other parents
or at a notional cost received an advantage or benefit as defined in
section 8(1)(f) of the Income Tax Act subject to the deduction of pay
as you earn by each appellant;
(b)
If so, the computation of the value of such an advantage or benefit,
that is whether or not it is equivalent to the waived amount;
(c)
Whether Zimra was correct to add back the waived amount into gross
income and assess pay as you earn on the aggregate amount.
My
task is essentially to determine whether or not the waived amounts
were an advantage or benefit and if so how the advantage or benefit
is to be computed.
It
was common cause that in terms of sub-para (1) of para (3) of the
13th Schedule to the Income Tax Act, each of the appellants were
employers obligated by law to deduct pay as you earn in respect of
benefits forming part of the gross income of their employees. They
did not deduct and remit the full extent of the tax due on the
benefit and rendered themselves liable to make payment in terms of
para 10 of the 13th
Schedule of the Income Tax Act.
The
benefiting employees paid concessionary school fees ranging between
20% and 25% of the normal fees paid by other students. The rationale
for paying less fees being that their salaries were inadequate to
meet the education provided by their employers.
The
starting point is to set out the relevant portions of section 8(1)(f)
of the Income Tax Act that were applicable in both 2009 and 2010. The
section read:
“8
Interpretation of terms relating to income tax
(1)
For the purposes of this Part—
“gross
income” means the total amount received by or accrued to or in
favour of a person or deemed to have been received by or to have
accrued to or in favour of a person in any year of assessment from a
source within or deemed to be within Zimbabwe excluding any amount
(not being an amount included in “gross income” by virtue of any
of the following paragraphs of this definition) so received or
accrued which is proved by the taxpayer to be of a capital nature
and, without derogation from the generality of the foregoing,
includes —
(f)
an amount equal to the value of an advantage or benefit in respect of
employment, service, office or other gainful occupation or in
connection with the taking up or termination of employment, service,
office or other gainful occupation:
Provided
that —
(i)……….
(ii)……….
For
the purposes of this paragraph—
I.
“advantage or benefit”—
(a)
means —
(i)
board; or
(ii)
the occupation of quarters or of a residence; or
(iii)
the use of furniture or of a motor vehicle; or
(iv)
the use or enjoyment of any other property whatsoever, corporeal or
incorporeal, including a loan, whether of the same kind as that
referred to in subparagraph (i), (ii) or (iii) or not, which is not
an amount referred to in paragraph (a),
(b)
or (c)
of the definition of “gross income” in this subsection; or
(v)
an allowance;
[granted
to an employee, his spouse or child by or on behalf of his employer
in so far as it is not consumed, occupied, used or enjoyed, as the
case may be, for the purpose of the business transactions of the
employer and in so far as an amount is not paid by the employee, his
spouse or child in respect of its grant; words qualify all 5 now 6)
of the defined forms of advantage or benefit] and
(b)
……………….
(c)
………………..
“employee”
includes a person who is a director of a company, agent or servant or
is otherwise gainfully occupied and “employer”, in relation to
such person shall be construed accordingly;
II.
the value of the grant of an advantage or benefit, other than a
payment by way of an allowance shall be determined —
(a)
in the case of the occupation or use of quarters, residence or
furniture, by reference to its value to the employee; and
(b)
in the case of any other advantage or benefit, by reference to the
cost to the employer:
The
definition of gross income denotes a positive aspect on the one hand
and a notional aspect on the other. The positive aspect involves the
actual receipt or accrual while the notional aspect deems such
receipt or accrual of income.
In
my view, the waived amount was not physically received but was deemed
to have been received by each affected employee. I am however
satisfied that the amounts positively accrued to each employee on
enrolment of each child at each of the participating schools. It was
common cause that the waived amount was regarded by all the
appellants as a benefit or advantage. Para 5 of each appellant's
case denoted the waived amount as a supplement to the low earnings of
each qualifying employee. In addition, except for the second
appellant all the other appellants juxtaposed the right to
participate in the concessionary scheme with the other benefits of
employment.
The
legislature in its wisdom deliberately broke down the definition of
gross income into two parts demarcated by the word “includes”.
The opening words
preceding
“includes” generalise while those subsequent to it particularise
and stretch the meaning of gross income by way of inexhaustive
examples of the term without limiting its broadness. It seemed to me
that both Mr de
Bourbon,
for the appellant and Mr Magwaliba,
for the respondent were agreed that the particularised provisions
were intrinsically subsumed in the opening words of the definition.
The correctness of this submission was underscored firstly by the
deliberate resort by the legislature to the phrase “without
derogation from the generality of the foregoing” that immediately
precedes “includes”. And secondly, by the sentiments in
Thornton's Legislative
Drafting
2nd
ed at p 60 cited with approval by Gwaunza JA in Sagittarian
(Pvt) Ltd v Workers Committee, Sagittarian (Pvt)
Ltd 2006 (1) ZLR 115 (SC) at 118F that “a section of whatever
length must have unity of purpose………separate subsections must
all have some relevance to the central theme which characterises the
section”.
All
the appellants admit in para 5 of their respective cases that the
payment of the concessionary fees was a benefit enjoyed by the
affected staff members. They received the benefit by virtue of their
status as employees at these schools. An amount referred to in
section 8(1) of the Income Tax Act for the determination of the gross
income, income or taxable income, is defined in section 2 as:
“(a)
money; or
(b)
any other property, corporeal or incorporeal, having an ascertainable
money value.”
A
reading of Lategan
v
CIR
1926 CPD 203 reveals that this was not how it was defined in the
Income Tax Act in force at that time. Watermeyer J stated at p
208-209 that:
“But
the word income in its ordinary sense does not always consist of
money, as was pointed out in Booysen's
case (1918 AD 576). “Income”, unless it is in some form such as a
pension or annuity, is what a man earns by his work or wits or by the
employment of his capital. The rewards which he gets may come to him
in the form of cash or some other kind of corporeal property or in
the form of rights.” Ordinarily speaking, the value of these
rewards is the man's income. Unless the word “amount” means
something more than amount of money, the definition given in the Act
would not seem to be wide enough to include the “value” of
property or rights earned by the taxpayers, unless they were benefits
granted in respect of employment. The legislature could hardly have
intended such as a result, because then it would be open to any
taxpayer [who did not earn his income by employment] to receive
payment in some form other than money, and thus escape taxation. In
my opinion, the word “amount” must be given a wider meaning, and
must include not only money, but the value of every form of property
earned by the taxpayer, whether corporeal or incorporeal, which has a
money value……if this view be correct then the taxpayer's income
for taxation purposes includes not only the cash which he has
received or which has accrued to him, but the value of every other
form of property which he has received or which has accrued to him,
including debts and rights of action......which he could turn into
money if he wished.”
It
appears that at the time the Lategan
case was decided “amount” was limited to money and was extended
by dint of judicial interpretation to include the value of every form
of property earned by the taxpayer, whether corporeal or incorporeal,
which had a money value. The rewards earned by his work or wits or
the employment of his capital accrued to him in the form of cash or
some kind of property or in the form of rights.
The
meaning of the word amount proffered by Watermeyer J was cited and
approved by Sandura JA in Standard
Chartered Bank (Zimbabwe) Ltd v
Zimbabwe
Revenue Authority
2009 (1) ZLR 251 (S) at 255A and 257B.
In
the present matter, the right to have children educated at the
concessionary rate derived from employment. It vested in each
employee parent and accrued to him in the year of assessment and was
capable of being turned into money. The right had an ascertainable
money value equivalent to the waived amount. In my view, it
constituted income. I accordingly agree with the sentiments expressed
by Mr Magwaliba
in para 13 of his heads of argument that:
“The
employees in this case get the benefit of paying less fees than other
parents only because they render service to the appellants. There is
therefore a causal nexus between the contract of employment and the
benefit. If it had not been for the employment of their labour,
service or wits, they would not be entitled to this benefit. The
ordinary and grammatical meaning of the word income therefore
includes the right which these employees get to educate their
children at these and other schools at a concessionary fee.”
The
children paid between 20 and 25% of the fees paid by other children
whose parents were not employed at these schools. The waived amount
was between 75% and 80% of the normal school fees and had an
ascertainable monetary value. At the very least it was money
notionally received by or at best money that actually accrued to or
was in favour of each employee parent by virtue of employment. It
clearly fits into the opening words of section 8(1).
The
appeal would fail on this ground.
While
conceding that section 8(1) of the Income Tax Act had to be
considered as a whole and not in fragments, Mr de
Bourbon
sought to persuade me to resolve the first issue by excising para (f)
and its consequential provisions from the opening words of the
subsection under consideration. In so doing he suggested that gross
income “means” rather than “includes” para (f) and its
constituent definitions of advantage or benefit.
It
was common cause that the liability of an employer arises from its
failure to deduct, as prescribed by para (3)(1) of the 13th
Schedule of the Income Tax Act the correct pay as you earn from the
gross income of the subsidised employee parents. It was also common
cause that Act No. 6 of 2012 which came into force on 1 January 2013
amended para (f) of section 8(1) of the Income Tax Act to
specifically incorporate the school fees benefit. A new subpara (vi)
states that:
“in
the case of an employee whom
is a member of the teaching or non-teaching staff of a “school”
as defined in the Education Act [Chapter
25:04],
the waiver of the whole or any portion of the amount of tuition fees,
levies and boarding fees (hereinafter called a “school benefit”)
that would otherwise be payable by employee for any child of his or
hers who is a student at that or another school”.
The
contention by Mr de
Bourbon
that the benefit was not previously incorporated in section 8(1)(f)
before the 2012 amendment does not prove the benefit was beyond the
tax reach prior to the amendment. In my view the benefit was at that
time also caught in the tax net by the provisions of section 8(1)(b)
of the Income Tax Act, which reads:
“(b)
any amount so received or accrued in respect of services rendered or
to be rendered, whether due and payable under any contract of
employment or service or not, and any amount so received or accrued
by reason of the cessation of the employment or service of a person
other than a benefit (not being a pension or gratuity) received or
accrued by reason of contributions made to the Consolidated Revenue
Fund, and any amount so received or accrued in commutation of amounts
due under a contract of employment or service provided that [all the
provisos are inapplicable to the present case]”.
In
my view, the waived amount accrued to each of the affected employees
on enrolment of their children at each of the participating schools.
It was on that basis correctly added back to each employee's gross
income and assessed for pay as you earn.
Mr
de
Bourbon
concentrated his firepower on the meaning of section 8(1)(f) and its
consequential paragraphs. In that paragraph the key words are an
amount equal to the value of an advantage or benefit in respect of
employment.
He
contended that the definition of advantage or benefit in para (f) is
restricted to the five meanings postulated in subpara I.
In
my view, he correctly contended that the waived amount did not
constitute board, nor occupation of quarters or residence. He
forcefully argued that the waived amount could not be equated to the
use of furniture or motor vehicle. He further argued that the waived
amount did not constitute the use or enjoyment of any other property
whatsoever, corporeal or incorporeal, including a loan, whether of
the same kind as board, occupation of quarters or of residence or use
of furniture or a motor vehicle or not which was not an amount
referred to in para (a) (b) (c) of the definition of gross income in
this subsection. He however recognised that all the six schools own
furniture in the form of chairs and desks used in class rooms and
vehicles such as buses and other smaller motor cars available for use
by these day scholars in various school driven extra-curricular
activities.
In
my view furniture and motor vehicles constitute property. In fact all
the items listed in (f) I (i) (ii) and (iii) constituted property in
the mind of the legislature otherwise the word “other” in the
phrase “any other property whatsoever” in subpara (f) (iv) would
be tautologous. The financial statements and the various cost centres
of each school defined the specific activities that constituted
education. Each school was identified by the building and classrooms,
grounds, desks and chairs, equipment, books and stationery and
vehicles. These constitute corporeal property availed for the use and
enjoyment of each student at each specific school. These are covered
in the definition of an advantage or benefit. The only cost centre
that may pose difficulties concerns staff costs. The staff corps do
not work in a vacuum. They utilize school premises and property and
provide both formal and informal education to the students. The
students have the right to receive, use and enjoy that education. The
triad of premises, property and the right to education constitute in
my view an admixture aptly incorporated in the phrase “use or
enjoyment of any other property whatsoever, corporeal or
incorporeal”. Fortunately, for the school staff, we no longer live
in the era of slavery where providers of labour where regarded as
chattels to capital.
In
27
LAWSA 'Things'
cited by Mr de
Bourbon
in his written heads of argument Professor van der Merwe states,
inter
alia,
in para 5 the following enlightening description of and distinction
between corporeal and incorporeal property in these terms:
“When
signifying a legal object, the word “property” refers to
everything which is susceptible of pecuniary evaluation that is
everything which has a monetary value or can constitute an asset in
an estate. The notion “property” thus not only includes corporeal
or material objects like land, houses and motor vehicles but also
incorporeal or immaterial objects like personal rights, shares in a
company and patent rights.”
Again,
Stander
v
CIR
59 SATC 213 at 218 cited CIR
v
Estate CP Crewe & Anor 1943
AD 656 at 667 where Watermeyer CJ said:
“One
would expect that when an estate of a person is described as
consisting of property what is meant by property is all rights vested
in him which have a pecuniary or economic value. Such rights can
conveniently be referred to as proprietary rights and the include
jure
in rem,
real rights, such as rights of ownership in both immovable property
and also jure
in personam
such as debts and rights of action.”
In
my view, the right to education at concessionary rates constituted
incorporeal property that was used or enjoyed by these children at
these schools. It had a monetary value. It was a personal right
possessed by the employee. It was capable of enforcement. That the
right was intrinsically transferable was underscored by the
determined efforts of the schools to prohibit such transfer to other
parents. The waived amount would be disqualified for inclusion in
gross income had it been utilised in the business operations of the
schools or had the employee made any contributions in respect of its
grant.
In
casu,
the appellants were actually denied use of the monetary value of the
waived amounts nor did any employee pay any amount in respect of its
grant. It was therefore not utilised in the business transactions of
each school.
Viewed
from a functional perspective, the waived amounts met the
requirements of subpara (f) I (iv) of section 8(1) of the Income Tax
Act and constituted an advantage or benefit.
The
observation made by the respondent in dismissing the objections that
“the benefit granted to the employee was for the use of school
property whatsoever, corporeal or incorporeal, (which property)
included educational and other facilities that were offered by the
school”
was on point.
The
word “whatsoever” in the provision is wide enough to embrace all
the school property used or enjoyed by the targeted student
notwithstanding that other staff members without children at the
school used the same facilities. The waived amounts were not consumed
in the business of the employer.
Mr
de
Bourbon
further
contended that the waived amount was not a loan contemplated in (iv)
nor an amount regarded in (a) (b) (c) of the definition of gross
income nor in the same class with them.
I
agree with Mr Magwaliba
that the waived amount is an amount equal to the value of an
advantage or benefit in respect of employment. It falls into the
definition of amount as defined in section 2 of the Act. Again, it
seems to me that the use of “other” in the phrase “any other
property” suggests that the legislature regarded money as property.
The advantage or benefit advanced to the parent employee of paying
concessionary fees constituted an amount which accrued to the
employee parent and warrants inclusion in his or her gross income.
Accordingly,
the answer to the first issue is that each employee whose children
were educated at either a lesser cost than charged to other parents
or at a notional cost received an advantage or benefit as defined in
section 8(1)(f) of the Income Tax Act which is subject to the
deduction of pay as you earn by each appellant. I would answer the
first issue referred on appeal in favour of the respondent.
It
seems to me that even if the argument advanced by Mr de
Bourbon
was valid the benefit would form part of the gross income in terms of
section 8(1)(b) of the Income Tax Act. It was money or property,
corporeal or incorporeal, having an ascertainable money value that at
the very least accrued to the parent employee in each respective tax
year of assessment. The appellant's argument would also fail on the
basis of the main provisions of section 8(1) and also the specific
provisions of section 8(1)(b).
The
second issue referred to trial was whether the computation of the
value of such an advantage or benefit was equivalent to the waived
amount.
The
determination of this issue only arises in respect of a tax liability
founded on the provisions of section 8(1)(f) of the Income Tax Act.
In other words, the issue would not arise in respect of liability
based on the main charging portion of section 8(1) or 8(1)(b).
The
key to the determination of this issue is found in section
8(1)(f)II(b) of the Income Tax Act which provides that:
“II.
the value of the grant of an advantage or benefit, other than a
payment by way of an allowance, shall be determined----
(a)
In the case of the occupation or the use of quarters, residence or
furniture, by reference to its value to the employee; and
(b)
In the case of any other advantage or benefit, by reference to the
cost to the employer.”
The
parties disagree on what the cost to the employer in respect of the
advantage or benefit of paying the concessionary school fees was. The
six appellants produced financial statements for each tax year in
which they apportioned costs under two major headings styled
non-variable and variable costs. The non-variable or basic costs were
divided into six sub-heads of administration, staff, educational,
motor vehicles and maintenance while the variable or additional costs
were lumped together under a separate sub-heading of educational.
Under each sub-head were listed detailed lines of expenditure. I have
drawn up a table summarising the apportionment of the costs by each
appellant.
|
NUMBER
|
SCHOOL
|
YEAR
|
NON-VARIABLE
US$
|
PERCENTAGE
OF TOTAL
|
VARIABLE
US$
|
PERCENTAGE
OF TOTAL
|
|
1.
|
AS
|
2009
2010
|
2 026 901
2
691 254
|
94.14 %
92.2 %
|
126
215
227 555
|
5.86
%
7.80 %
|
|
2.
|
CSS
|
2009
2010
|
2
988 953
3
523 448
|
96.33 %
96.16 %
|
113
750
140 645
|
3.67%
3.84%
|
|
3
|
SET
|
2009
2010
|
1
723 371
3
221 243
|
95.44 %
91.69%
|
82 423
291 757
|
4.56
%
8.31%
|
|
4
|
GST
|
2009
2010
|
3
942 558
6
517 352
|
96.69 %
97.06 %
|
134
962
197 472
|
3.31
%
2.94%
|
|
5
|
SC-PRIM
PRIM
HIGH
HIGH
|
2009
2010
2009
2010
|
1
179 353
1
394 155
3
133 850
4
070 650
|
96.87 %
96.9 %
92.66 %
92.61%
|
38 050
44 587
248
323
325 399
|
3.13
%
3.10
%
7.34
%
7.39%
|
|
6
|
CB
|
2009
2010
|
1
528 991 1 883 392
|
94.37%
91.43 %
|
91 287
176 576
|
5.63
%
8.57 %
|
The
accuracy of the computations were not put in issue by the respondent.
The calculations demonstrated that the variable costs for each school
were below the 20 to 25% of the concessionary school fees paid by
each employee parent at each school. Each appellant contended that
the actual cost to each school of running that school ranged in the
two year tax period between 2.94% for the lowest and 8.57% for the
highest. The net result was that each school actually benefitted on
the 20% to 25% of the concessionary fees paid by the employee parents
who benefited from the scheme.
The
respondent did not dispute the accuracy of the computations. Rather,
it consistently attacked the legal basis for the apportionment of the
expenditure into non-variable and variable costs throughout the
audit, in the determination of the objection, in the appeal pleadings
and in both its written and oral heads of argument.
The
basis for the apportionment advanced by all the appellants was simply
that they crafted their budgets against the backdrop of the full fee
paying pupils. The schools were all non-profit making organisations.
The school fees were fixed based on the anticipated costs of each
school divided by the anticipated enrolment. The anticipated costs
were all met by the pupils. These pupils paid for all the fixed costs
and expenses budgeted under the so called non-variable costs. The
fixed costs covered the budget lines under the broad headings
adverted to earlier on in this judgment. The very fact that these
non-variable costs were budgeted to cover the anticipated yearly
costs of the appellants underscored their absolute necessity.
This
method of budgeting was not derived from nor sanctioned by any known
legal instrument.
The
contention by Mr Magwaliba
that the budgeting process was based on each school's accounting
preferences was not refuted by Mr de
Bourbon.
It is trite law that all accounting practices, procedures, policies
and preferences play second fiddle to the tax legislation in force in
any given year of assessment. I made the same point in Standard
Chartered Bank of Zimbabwe v
Zimbabwe Revenue Authority 2007
(1) ZLR 228 (H) at 249G.
That
the distinction sought by the appellants has no force of law in this
country was laid out some 35 years ago by Squires J in the local
Income
Tax Case No. 1336
(1981) 43 SATC 114.
In
that case the appellant was allocated a motor vehicle as a perquisite
of employment. The taxman estimated all the costs incurred by the
employer in running the vehicle and incorporated them into the gross
income of the employee as an advantage or benefit received from his
employment in terms of section 8(1)(f)II(b) of the Income Tax Act. In
objecting to the assessment the taxpayer apportioned the costs to his
employer of running the motor vehicle into two categories of variable
costs for fuel and garage repairs and service and non-variable costs
for constant expenses such as licensing, insurance, depreciation and
the like.
He
averred that only the variable or additional costs constituted a
benefit since these were directly the result of the use of the motor
vehicle and that the constant basic or non-variable costs were
incurred by his employer and remained the same whether the employee
used the vehicle or not. In jettisoning the narrower interpretation
advocated by the taxpayer, based as it was on strikingly similar
contentions raised in the present matter, Squires J stated at p 117
that:
“The
clear intention of the legislature is manifestly to tax in a
taxpayer's hands all the benefits or advantages afforded to him as
an employee from his employment, as well as the income he earns. The
advantage or benefit of using a car belonging to the employer is to
relieve the employee taxpayer of the financial burden of owning the
car himself. It can be a very substantial benefit compared to the
person who receives no such advantage, and not the least relief is
the costs of licencing and insuring such asset, quite apart from the
diminution in value that is inherent in the aspect of depreciating
whether actual or notional. Since the relief thus afforded is
unquestionably a benefit to the employee, I can see no basis on which
the spirit of the Act would save to exclude these from what falls
into the gross income, particularly as they are equally clearly a
cost to the employer. Not only, therefore, is there no reason for
implying additional words, but, as it seems to me, a strong reason
for giving the words used their ordinary meaning.”
The
reasoning of the learned judge is unassailable and applies, mutatis
mutandis,
with equal force to each of these six appeals. The necessity for
these constant basic costs to each school cannot be gainsaid. They
were all costs required to run the school, otherwise they would not
have been budgeted for and levied against the full paying students. A
simple survey of the line costs demonstrates the fiction advanced by
each school that these costs would not and were not directly related
to the benefiting pupils. Again, the provision under consideration
does not differentiate the costs incurred by the employer on the
basis of variable and non-variable costs. The underlying reason
behind the dismissal of the objections was simply that all these
schools were non-profit making organisations mainly run on the school
fees paid in an equal amount by each enrolled student. The intrinsic
nature of such schools demand that their running costs should be
equitably met by every enrolled student. And this is apparent from
the application of this principle to all full fee paying pupils.
I
however find the formula applied in computing the cost to the
employer flawed in one respect.
The
cost of the benefit is not equivalent to the difference between what
other pupils paid and what the benefiting pupils paid. The correct
cost to the employer under this provision for all these schools would
be equivalent to the total cost incurred in running each school
divided by the total enrolment of each school inclusive of the
favoured pupils less the concessionary fees paid. As all the
beneficiaries were day scholars the calculation would of necessity
exclude all costs that all other day scholars are exempted from
paying such as those associated with boarding facilities.
However,
as I dismiss this appeal on the basis of both the opening words in
section 8(1) and section 8(1)(b) the method of computation applied by
the respondent in arriving at the value of the amount that accrued to
the employee parents that was susceptible to inclusion in the gross
income of each employee for payment of pay as you earn was the
difference between what was paid by full fee paying students and what
each of these students paid. The respondent therefore correctly added
back the waived amount to the gross income before assessing pay as
you earn on the aggregate amount.
The
last issue raised by Mr de
Bourbon
pertains to the second and third appellants only. Some of the
employees of these two appellants had children enrolled at the other
school at the concessionary rates offered by the other school. The
respondent taxed the two appellants based on the waived amounts
availed by the two appellants to those employees whose children were
enrolled by the appellants rather than on the waived amount of the
enrolling school. A total of 77 children were involved.
The
respondent took the view that the arrangement of allowing children to
attend another school was an amount equal to the value of an
advantage or benefit in respect of the employment consequent upon
such employment.
Mr
de
Bourbon
contended that the contract between the parent and school where the
child was educated was not based on an employer-employee relationship
between the appellant and the parent. It was simply a discount
offered by the enrolling school to some of the employees of the
appellants that could not invoke any tax liability for the
appellants.
It
seems to me that the contention ignores the averments made in para(s)
2 and 3 of the statement of agreed facts and 16 and 17 of each
appellant's case. The statement of agreed facts indicated that this
was by mutual agreement between the schools. The employees of the
other school were treated in the same way as employees of the
enrolling school whose children were enrolled thereat. The effect of
para 16 and 17 of each appellant's case was that the children of
staff members enrolled at the other appellant paid concessionary
school fees offered by the other school. And further, that each
appellant did not incur any costs in respect of those children of
staff members enrolled at the other school.
The
employees under consideration were not employees of the enrolling
schools. They received the benefit from the enrolling school by
virtue of the agreement between their employer and the enrolling
school. It seems to me that section 8(1)(f) applies to these
employees in that they received the value of the advantage or benefit
by virtue of their employment not with the enrolling school whose
property their children enjoyed but with the appellants who executed
these mutual agreements for these employees' benefit. In my view,
the appellants were caught in the respondent's tax net by the
closing words “granted to an employee, his spouse or child by or on
behalf of his employer” perched at the tail end of section
8(1)(f)I(a). It seems to me that these benefits were granted to these
employees by each of the appellants on behalf of the other appellant,
respectively. Consequently, as the value of the advantage or benefit
that accrued to each employee was made on behalf of his or her
employer, it must be taxed in the hands of that employer.
The
respondent wrongly assessed the value of the benefit in respect of
these children as equivalent to the amount waived by each employee
parent's employer. He should have assessed the benefit on the
amount waived by the school at which these children attended.
In
line with my earlier findings on the computation of the value of the
benefit, it would be equivalent to the pro
rata
share paid by each student at the enrolling school in each tax year
calculated by dividing the total costs incurred by the school by all
the children enrolled at the school, inclusive of all concessionary
fee beneficiaries, less the concessionary fees paid.
However,
I do not base liability against the two appellants on the basis of
section 8(1)(f) of the Income Tax Act. Liability for the inclusion of
the amounts that accrued to each of the 77 children into their
parents' gross income is derived from the main charging provision
of section 8(1) of the Act. The amount that accrued to or was
received by or was in favour of each employee of the appellants was
equivalent to the difference between the amounts paid by the full
paying students and those paid by each of the 77 children at the
school each was enrolled. In my view, by virtue of the agreement
executed between the two appellants, which initiated the benefit, the
benefit is known and is payable by the employee and each employee's
pay as you earn is administered by his own employer, the outstanding
pay as you earn in question should for convenience and ease of
administration be assessed in the hands of his or her employer. In my
view, while the respondent correctly found the employee parents of
these 77 children liable for pay as you earn, he erroneously assessed
it on the amount waived by each parent's own employer.
I
do not find the claims made by the respondent unreasonable nor the
grounds of appeal frivolous. The appeal has neither been allowed in
full or to a substantial degree as would warrant an imposition of
costs in favour of the second and third appellants on the issue
raised in argument on the correct computation of the waived amount to
be included in the gross income of the parent employees of the 77
children. The imposition of costs as against either the appellants or
the respondent is not warranted.
Accordingly,
it is ordered that:
1.
The appeal of the 1st,
2nd,
3rd,
4th,
5th
and 6th
appellants against the inclusion of the waived amounts brought into
the gross income of each employee parent who participated in the
concessionary scheme offered by each appellant and the subsequent
assessment of pay as you earn against each appellant in respect of
such employee parent whose child was enrolled by such parent's
employer in respect of the 2009 and 2010 tax years be and is hereby
dismissed.
2.
In respect of the second and third respondents:
(a)
The assessments raised by the respondent in respect of the employee
parents of the 77 children enrolled at the other school are hereby
set aside.
(b)
The respondent shall include in the gross income of each such
employee parent the amount waived by the school at which the child of
such an employee parent was enrolled before re-assessing the
appropriate pay as you earn liability of the second and third
appellants.
3.
Each party shall bear its own costs.
Dube,
Manikai and Hwacha,
appellant's legal practitioners
1.
The Rule 11 documents comprise 199 pages
2.
Para 5 pp6, 38, 66, 95 and 134 of Rule 11 documents
3.
Letter of 12 May to third appellant p 78 of the Rule 11 documents
4.
Para 4 pp 18, 57, 82, 106,145 and p175 dated 25 November 2013
5.
Para 58 p13 of first appellant's plea of waiver against 100%
penalty, para3.7 pp 22, 40, 57 and 76 of third appellant's bundle
of documents
6.
12 samples for each 2010 calendar month of US$1 404.55 on p 21-32 of
Rule 11 documents
7.
Consisting of land and buildings US$8,397,600, estate plant and
equipment US$61,910, household and office equipment US$527,169
electronic equipment US$190,827 motor vehicles US$118,700
8.
Consisting of inventory US$21,582; debtors and prepayments US$56,067;
and cash at bank US$536,259
9.
P6 of first appellant's bundle of documents
10.
P59 and 60 of US$79,750.77 and US$113,660.62 for 2009 and 2010
respectively
11.
P66 para 6 contrary to enrolment figures of 520 for primary and 670
for secondary on p77 of Rule 11 documents
12.
Certified copies on p p84-89
13.
P10 of bundle of third appellant's bundle of documents
14.
P 17 and 34 of third appellant's bundle of documents
15.
P52 and 70
16.
P61 and 78-79
17.
P34-37 and 53-56 of the fourth appellant's bundle
18.
P11 of bundle of this appellant
19.
P8 and 10 of bundle
20.
P18 and 39 of bundle of this appellant
21.
P3 of bundle of documents for this appellant
22.
P177-178, 181 and 182 of Rule 11 documents
23.
p, 6, 7 and 20 of appellant's bundle of documents
24.
P11 and 19 of bundle of documents
25.
P13 and 21 of bundle of documents
26.
P185-191 of Rule 11 documents
27.
P16 Rule 11 documents letter dated 29 November 2012
