AS SCHOOL & ORS v COMMISSIONER-GENERAL, ZIMBABWE REVENUE AUTHORITY

HIGH COURT, HARARE

[Income Tax Appeal HH 314-16]

February 24, 2015 and May 20, 2016

KUDYA J

Revenue and public finance  –  Income tax  –  Income  –  Whether waived school fees an advantage or benefit in terms of section 8 (1)(f) of the Income Tax Act [Chapter 23:06].

The six appellants were private schools operating in Zimbabwe in terms of their respective trust deeds. 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. 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. In either case the employees were charged by the appellants between 20 per cent and 25 per cent of the full fees and no taxes were paid on the difference between 20 per cent and 25 per cent of the fees and the full fees payable at the respective schools. The employee parents, like all other non-staff parents, provided all other school items that were not provided by the schools. 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. 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. 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 s 8 (1)(f) of the Income Tax Act [Chapter 23:06] (“the Act”) 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.

Held, that the right to education at concessionary rates constituted incorporeal property that was used or enjoyed by these children at these schools.

Held, further, that the waived amount is an amount equal to the value of an advantage or benefit in respect of employment and falls into the definition of amount as defined in s 2 of the Act.

Held, further, that each employee whose children were educated at either a lesser cost than that charged to other parents or at a notional cost received an advantage or benefit as defined in s 8 (1)(f) of the Act which is subject to the deduction of pay as you earn by each appellant.

Cases cited:

Commissioner for Inland Revenue v Estate CP Crewe and Another 1943 AD 656, referred to

ITC 1336 (1981) 43 SATC 114 (Z), referred to

Lategan v CIR 1926 CPD 203; 2 SATC 16, referred to

Pepper (Inspector of Taxes) v Hart [1992] UKHL 3; [1993] AC 593; [1992] 3 WLR 1032; [1993] 1 All ER 42; (1992) 65 Tax Cas 421, not followed

Sagittarian (Pvt) Ltd v Workers’ Committee, Sagittarian (Pvt) Ltd 2006 (1) ZLR 115 (S), referred to

Standard Chartered Bank Zimbabwe Ltd v Zimbabwe Revenue Authority 2007 (1) ZLR 228 (H), referred to

Standard Chartered Bank (Zimbabwe) Ltd v Zimbabwe Revenue Authority 2009 (2) ZLR 251 (S), referred to

Stander v Commissioner for Inland Revenue 1997 (3) SA 617 (C); 59 SATC 212, referred to

Legislation considered:

Finance (No 2) Act, 2012 (6 of 2012)

Income Tax Act [Chapter 23:06], ss 2, 8 (1)(b) and (f), Thirteenth Schedule paras 3 (1), 10

Books cited:

Thornton CG Legislative Drafting (2nd edn, Butterworths, London, 1979)

Van der Merwe CG “Things” in Joubert WA (ed) The Law of South Africa (1st reissue, Vol 27, 2002)

AP de Bourbon SC, for the appellants

T Magwaliba, for the respondent

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 per cent and 25 per cent of the full fees and no taxes were paid on the difference between the 20 per cent and 25 per cent of the fees and the full fees payable at the respective schools. The first, second, third and sixth respondents charged 20 per cent while the remaining two charged 25 per cent. The fourth used to charge 3 per cent before it was directed on 30 November 2009 by the respondent to charge 25 per cent 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, movable 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 s 8 (1)(f) of the Income Tax Act [Chapter 23:06] (“the Act”) 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 para 10 of the Thirteenth Schedule to the 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 r 11 documents 1in respect of each appellant.

The rule 11 documents

The r 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. 2Their 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 s 8 (1)(f) of the Act. 3

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 s 8 (1)(f) of the 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 s 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 4whose anticipated costs of providing education were derived solely from prospective school fees income 5. 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 benefited 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 assessments6 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 7 and current assets8 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 9 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 maintenance 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 per cent of the total expenditure in 2009 and US$ 1 695 232 constituting 58.08 per cent in 2010. The expenditure for non-variable costs was US$ 2 026 901 constituting 94.14 per cent in 2009 and US$ 2 691254 constituting 92.12 per cent in 2010. Variable 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 per cent in 2009 and US$ 227 555 constituting 7.80 per cent 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 assessments10 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-variable costs in 2009 were US$ 2 988 953 constituting 96.33 per cent and in 2010 were US$ 3 523 448 constituting 96.16 per cent of the total costs. The variable costs amounted to US$ 113 750 constituting 3.67 per cent in 2009 and US$ 140 645 constituting 3.84 per cent 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.

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