Volkswagen South Africa (Pty) Ltd v Commissioner for the South African Revenue Service [2018] 1 All SA 716 (SCA)
Volkswagen, South Africa (the ‘‘Appellant’’) one of the largest motor vehicle manufactures in South Africa, derives its income from the sale of manufactured and imported motor vehicles. In 1995, the South African Government implemented the motor industry development program (the ‘‘MIDP’’) with the objective of growing the automotive industry and for the industry to become internationally competitive. The MIDP had shown to be successful and the government extended the MIDP with a further objective – to rationalise the models of vehicles being produced.
However, this would require capital expenditures for plant upgrades and technology enhancements. This led to the introduction of the Productive Asset Allowance (the ‘‘PAA’’) for vehicle manufactures that have invested a minimum value to productive assets for the assembly of light vehicles. The PAA was awarded in the form of a duty rebate certificate – equal to a maximum of 20% of a manufacturer’s total capital investments. It was an investment incentive, and not a trading incentive. The Appellant reflected the rebates it had received as accruals of a capital nature in its income tax returns. The Commissioner refused to accept that the amounts were of a capital nature, and assessed the Appellant on the basis that they were income. The Appellant objected to the assessment, which was overruled, and led to an appeal in the Tax Court whose judgment was the subject of the appeal to the Supreme Court of Appeal (the ‘‘SCA’’). The question to be answered by the SCA was whether the rebates were receipts or accruals of a capital nature or revenue in nature.
The Commissioner argued that the rebates were not intended to support capital expenditure but merely to allow vehicle manufactures to reduce the cost of importing vehicles and thereby increased revenue. However, the SCA concluded that the rebates were paid to compensate manufacturers for a portion of their capital expenditure incurred for the rationalisation of motor vehicle models. The SCA concluded that the benefits derived from rebates amount to a benefit received by the Appellant in respect of its capital expenditure, and such rebates are clearly to be regarded as a receipt of a capital nature. It can be concluded that the reason or purpose of rebates being awarded must be established before one can determine whether the rebates will constitute a receipt of a capital nature or revenue in nature.