Income tax - Exempt income - Receipts and accruals of educational institutions of a public character exempt from tax in terms of s10(1)(f) of the Income Tax Act 58 of 1962 - Whether surplus funds of Oxford University Press, the publishing arm of Oxford University, subject to income tax in South Africa - University's aim, through the Oxford University Press, to promote high standards of learning and of scholarship by the universal distribution of educational, scholarly and academic works - Oxford University Press itself not a legal Persona - Effective management and control of the Oxford University Press exercised n England by committee of senior members of the University - Committee in turn appointing person to act as executive functionary of the Oxford University Press who was empowered by the University to manage and carry on its activities both in the United Kingdom and in other countries including South Africa - University's activities in South Africa, carried on through the Oxford University Press, resulted in excess of income over expenditure - Surplus funds reinvested in furtherance of University's South African pursuits and excess over reinvestment requirements remitted to University in the United Kingdom for use there by it - Held that the 'end-user' of the income referred to in s10(1)(f) of the Income Tax Act 58 of 1962 had to be an institution providing at least an element of systematic or formal instruction, schooling or training, controlled and/or managed to some extent by some person or entity in South Africa - ITC 1262 (1977) 39 SATC 114 and ITC 1376 (1983) 45 SATC 213 applied - Held that the surplus funds of the Oxford University Press were not exempt from income tax as they were not employed by, or in or for an institution providing at least an element of systematic or formal instruction, schooling or training, and, even if the funds were used in the way described, they would not qualify for exemption from tax as the Oxford University Press was controlled and managed by a committee of senior members of the University in the United Kingdom.
Applicant was the University of Oxford which carried on its main academic activities in the United Kingdom through sixteen faculties in which formal courses of study were provided to undergraduate and postgraduate students.
Applicant's activities were furthered inter alia through the publishing arm of one of its 'departments' known as the Oxford University Press ('OUP') which operated world wide and it was applicant's aim, through the OUP, to promote high standards of learning and of scholarship by the universal distribution of educational, scholarly and academic works.
Applicant's publishing venture was conducted In South Africa and elsewhere in the subcontinent through its agent the OUP but the OUP itself was not a legal persona and the effective management and control of and over the OUP was exercised in England by a committee of senior members of applicant known as the 'Delegates of the Press'. These delegates appointed a secretary who acted as the executive functionary of the OUP and was empowered by way of a power of attorney, granted to him by applicant, to manage and carry on the activities of the OUP both in the United Kingdom and in other countries around the world, including, inter alia, the Republic of South Africa.
Applicant's activities in South Africa, carried on through the OUP, resulted in an excess of income over expenditure and these surplus funds were reinvested in the furtherance of its South African pursuits and, to the extent that all such surplus funds exceeded these reinvestment requirements, the further surplus was remitted to applicant in the United Kingdom which became available to it for use there and elsewhere in the world in other academic ventures conducted by it.
Applicant contended that its aforementioned activities were educational in character and the surplus of income over expenditure on those activities entitled it to be exempted from payment of tax leviable in terms of the Income Tax Act 58 of 1962 by reason of the provisions of s10(1)(f) of that Act.
The Commissioner for Inland Revenue (respondent) disputed this contention and contended in turn that the activities of the OUP in South Africa were not educational as, in his view, the OUP was a commercial undertaking conducting the business of a dealer in books and as a publisher thereof and that it accordingly fell outside the provisions of s10(1)(f).
The Commissioner for Inland Revenue had notified applicant, through the OUP, that its income derived from its aforementioned activities would be subjected to income tax from the year of assessment 1993, and for the past three years as well.
It was therefore the purpose of this application to decide which of these two contentions was correct and the parties agreed that the resolution of their dispute could more speedily be achieved by way of an application to the Cape Provincial Division of the Supreme Court for an order:
(a) declaring that applicant is an educational institution of a public character as contemplated in s10(1)(f) of the Income Tax Act 58 of 1962 and
(b) declaring that the receipts and accruals derived from the activities carried on by applicant in the Republic under the name and style of 'Oxford University Press' are accordingly exempt from income tax.
Section 10(1)(f) of Act 58 of 1902 provided at the relevant time:
"Exemptions
10 (1) There shall be exempt from tax -
(f)the receipts and accruals of all religious, charitable and educational institutions of a public character, whether or not supported wholly or partly by grants from public revenue;"
HELD
(i) That the primary question which falls to be answered is whether or not applicant's surplus funds are liable to taxation irrespective of whether it is applicant or the OUP which is accountable therefor.
(ii) That the proper approach to adopt is that of E M Grosskopf J (as he then was) in ITC 1262 (1977) 39 SATC 114 in that the 'end-user' of the income referred to in s10(1)(f) of Act 58 of 1962 had to be an institution providing at least an element of systematic or formal instruction, schooling or training.
(iii) That, in applying ITC 1376 (1983) 45 SATC 213, the 'end-user' of the income must be an institution controlled and/or managed to some extent by some person or entity in South Africa.
(iv) That the surplus funds earned by the OUP pass through the hands of applicant is not sufficient to render them exempt from tax, even though applicant is itself certainly an educational institution of a public character - were that the case then these surplus funds of the OUP, when paid over to applicant, would be exempt from tax even if applicant were to invest the whole of such income in the purchase and sale of shares of companies listed on the stock exchange.
(v) That it is simply not enough that the income earned by the OUP is received by applicant - that income, to be exempt from tax, must be devoted to scholastic or collegiate purposes of the nature contemplated by E M Grosskopf J in ITC 1262 and be, at least in part, controlled or managed from South Africa.
(vi) That is the 'end-user' of the OUP's surplus funds which, to be tax exempt, must be an educational institution as contemplated by E M Grosskopf J in ITC 1262 and the nature of the operations from which the income of the OUP is derived is irrelevant.
(vii) That on the facts applicant does not qualify for an exemption from income tax on any surplus funds earned by it from the activities of the OUP in South Africa - they were not employed by or in or for an institution providing at least an element of systematic or formal instruction, schooling or training and even if the funds were so used, they would not qualify for exemption from tax as the OUP was controlled and managed by the 'Delegates of the Press' in the United Kingdom.
Application dismissed with costs which are to be taxed on the basis that the employment of two counsel was justified.
BERMAN J: Applicant is described in the words of its counsel, Mr Emslie, In his heads of argument as 'the University of Oxford', the full title of which is 'The Chancellor, Masters and Scholars of the University of Oxford', a body corporate incorporated by an Act of the Parliament of Great Britain passed in 1571 and operating under the general terms of the Great Charter of 1636.
It carries on its main academic activities in the United Kingdom through 16 faculties, in which formal courses of study are provided to undergraduates and to postgraduate students. All students at the University are required to be members of a college, but the direct supervision of their studies is undertaken by applicant. Applicant furthermore provides laboratories, lecture halls, libraries and museums; It prescribes entrance requirements, courses and syllabi; sets, controls and marks examinations and examination papers; and awards degrees.
These activities pursued by applicant are furthered inter alia through the publishing arm of one of its 'departments' known as the Oxford University Press ('OUP'), which operates world wide, and no doubt with the funds received by it from OUP. It would appear to be applicant's aim, through the OUP, to promote high standards of learning and of scholarship by the universal distribution of educational, scholarly and academic works. This publishing venture of applicant's is conducted in the Republic of South Africa, and elsewhere in the subcontinent, from Cape Town through its agent, the OUP. The OUP, however, Is itself not a legal persona. The effective management and control of and over the OUP is exercised in England by a committee of senior members of applicant, known as the 'Delegates of the Press'. These delegates appoint a secretary, who acts as the executive functionary of the OUP: he is empowered by way of a power of attorney, granted to him by applicant, to manage and carry on the activities of the OUP both in the United Kingdom and in other countries around the world, including, inter alia the Republic of South Africa.
It is applicant's boast that it also promotes and distributes in southern Africa its own and other publishers' lists of educational, academic and general publications in the furtherance of its concern with the promotion of learning, education and scholarship throughout the world.
Apart from this applicant also carries on other activities in southern Africa through the OUP, namely the training of black teachers, curriculum development work, lobbying the local education department for the provision by the OUP of dictionaries and atlases to black schoolchildren and the teaching of dictionary skills, and involvement in public interest committees concerned with education.
Applicant's activities. carried on through the OUP, result in an excess of income over expenditure. The OUP is, after all, not a non-profit making organisation. These surplus funds are, it is true, reinvested in the furtherance of its South African pursuits; to the extent, however, that all such surplus funds exceed these reinvestment requirements, this further surplus is remitted to applicant in the United Kingdom, which further surplus thereby becomes available to it for use there and elsewhere in the world In other academic ventures conducted by it.
It is applicant's contention that its aforementioned activities are educational in character and the surplus of income over expenditure upon such activities entitles it to be exempted from payment of tax leviable in terms of the Income Tax Act 58 0f 1962 (as amended) by reason of the provisions of s10(1)(f) of that Act ('the Act') in terms of which 'the receipts and accruals of all ecclesiastical, charitable and educational institutions of a public character, whether or not supported wholly or partly by grants from the public revenue' are exempt from tax.
Respondent disputes this contention, and contends in turn that the activities of the OUP in the Republic of South Africa are not educational - the OUP is, in respondent's view, a commercial undertaking conducting the business of a dealer in books and as a publisher thereof, and that it accordingly falls outside the provisions of s10(1)(f). Respondent has notified applicant (through the OUP) that its income derived from its aforementioned activities will be subjected to income tax from the year of assessment 1993, and indeed for the past three tax-years.
It was the purpose of this application to decide which of these two contentions is correct, and the parties agreed that the resolution of their dispute could more speedily be achieved by way of an application to this court for an order
(a) declaring that applicant is an educational institution of a public character as contemplated in s10(1)(f) of the Income Tax Act 58 of 1962, as amended ('the Act') and
(b) declaring that the receipts and accruals derived from the activities carried on by applicant in the Republic under the name and style of 'Oxford University Press' are accordingly exempt from income tax.
[short passage here lost in transmission, insertion awaited - A.M.]
...than to proceed in due course by way of an appeal to the Special Income Tax Court after respondent disallows the exemption from income tax to be claimed by applicant in respect of the income earned by the OUP in the Republic.
Now it must be noted that Mr Emslie conceded, in the course of his argument, that applicant's contention that its income derived from its activities in the Republic was exempt from tax was not based on the nature of its operations here, i.e. the sale and distribution of academic and educational publications or classic literary works; just so long as applicant is itself an educational institution of a public character as contemplated in s10(1)(f) of the Act it was, so Mr Emslie continued, irrelevant that its activities related to such estimable publication and literary works, and the details contained in its papers describing and listing them can safely be ignored.
Indeed, doing business of any kind in the marketplace would make no difference to the validity of applicant's contention that the entire excess of income over expenditure earned in pursuit of such 'non-educational' activities should be remitted to applicant in the United Kingdom, exempt from income tax, as applicant is an educational institution of a public character as contemplated by s10(1)(f) of the Act. To the consideration of this proposition I now turn.
Mr Emslie submitted that, regard being had to his contention as set out above, the sole issue for determination by the court is whether applicant is an 'educational institution of a public character' as contemplated by s10(1)(f) of the Act. I do not understand respondent to suggest that applicant is not an educational institution of a public character. I accept also that the exemption in s10(1)(f) of the Act is granted irrespective of the nature of the activities which are the source of the surplus funds in regard to which the exemption is claimed. It does not, however, follow, to my mind, that it (or the OUP, if it is a 'person' or 'company' as defined and contemplated by the Act) is entitled to claim that the income derived from the activities of the OUP is exempt from income tax. In my view Mr Emslie's approach to the question of liability or non-liability for tax on this income is incorrect.
Mr Seligson (who, with Mr De Haan appeared for respondent) contended that the OUP, though nominally a department of applicant, functions as a conventional business corporation - indeed, on its own admission and in its own words, it is 'an international business of considerable size in terms of turnover, capital employed and staff numbers' and its income is liable to tax as a profit-making commercial enterprise, i.e. as a publisher and bookseller. Whilst I agree with Mr Seligson that the surplus funds derived from the operations of the OUP are subject to income tax, I don not accept that his reasoning for this submission is correct.
I doubt whether the declarations sought, as they appear in the notice of motion, provide an answer to the real dispute between the parties, or - put differently - whether either of the approaches adopted by them satisfactorily resolves the riddle: are the surplus funds obtained as a result of the activities of the OUP exempt from the payment of income tax? The arguments advanced on behalf of the parties concerned themselves with the question as to whether the OUP was a mere department of applicant's or whether it was, as an independent entity, carrying on a publishing business in South Africa. The primary question, as I see it, which falls to be answered in these proceedings is simply whether or not these surplus funds are liable to taxation irrespective of whether it is applicant or the OUP which is accountable therefor, if the question posed is answered in the affirmative. It is nevertheless necessary to consider the contentions advanced on behalf of the parties, albeit that in my view neither approach is correct. I set out hereunder what, in my view, is the proper approach.
In Income Tax Case 1262 (1977) SATC 114 E M Grosskopf J (as he then was) held (see headnote at 115):
(i) That, inasmuch as in the context of s10(1)(f) of the Act, "educational" cannot mean the acquisition of knowledge, skill or competence by any means whatever, it is necessary to draw the line between, on the one hand, the acquisition of knowledge etc. in a completely unsystematic and informal manner and, on the other hand, its acquisition in a formal institute of learning.
(ii) That such line cannot be drawn short of the dictionary definitions of "systematic instruction, schooling or training"; "a formal course of study, instruction or training"
(iii) That the concept of education which the Legislature had in mind when exempting "educational institutions" from tax, requires at least an element of systematic or formal instruction, schooling or training.
(iv) That, although applicant's activities are doubtless of cultural benefit to the majority of students who use the services offered, and while a very limited part of applicant's activities might conceivably approximate to (ii) above, the totality of applicant's activities falls short of (iii) above, and in reality amount to no more than a non-profit-making travel agent for students.
In Income Tax Case 1376 (1983) SATC 213 Melamet J held that, notwithstanding the fact that the institution was one established and conducted in a foreign country, funds raised for its assistance within the Republic and received from a South African society were exempt from tax as the management and control of that institution which met the requirements for recognition as an educational institution as contemplated by s10(1)(f) of the Act) was at least in part controlled by such local society, even if it exercised no day-to-day management over it.
It was not suggested in argument that either of these decisions was open to criticism, not indeed could they be. What can be extrapolated from these cases is the 'end-user' of the income must be an institution providing at least an element of systematic or formal instruction, schooling or training, controlled and/or managed to some extent by some person or entity in South Africa. It matters not what the source of that income is, whether it is obtained by way of the praiseworthy activities of the OUP or whether the OUP obtained its income from the sale of run-of-the-mill thrillers, science-fiction or love stories aimed at a market comprising the least discriminating of readers; taken to its logical conclusion it matters not one whit if the OUP limited its commercial activities to carrying on the business of a supermarket or of a department store or a franchised outlet for Kentucky Fried Chicken - provided that its surplus funds are paid over to and used by a school or college or like institution which to some degree is controlled from South Africa. That the surplus funds earned by the OUP pass through the hands of applicant is not sufficient to render them exempt from tax, even though applicant is itself certainly an educational institution of a public character - were that the case (as Mr Emslie would have it), then these surplus funds of the OUP, when paid over to applicant, would be exempt from tax even if applicant were to invest the whole of such income in the purchase and sale of shares of companies listed on the stock exchange. This, to my mind, cannot be the case; it is simply not enough that the income earned by the OUP is received by applicant - that income, to be exempt from tax, must be devoted to scholastic or collegiate purposes of the nature contemplated by E M Grosskopf J in ITC 1262 and be, at least in part, controlled or managed from South Africa.
It is the 'end-user' of the OUP's surplus funds which - to be tax-exempt - must be an educational institution as contemplated by E M Grosskopf J in ITC 1262; as I have said (and as Mr Emslie conceded in argument) the nature of the operations from which the income of the OUP is derived is irrelevant. The recipient of its surplus funds must be an educational institution, i.e. one which is something of the order of a school or college; that the income passes through the hands of an educational institution, but is put to some no-doubt estimable purpose other than a school or college (as is the case of the surplus funds derived from the activities of the OUP), is not enough to render that income exempt from tax. Thus, if the income of the OUP were to be devoted by applicant to maintaining a school for underprivileged children anywhere in Africa and controlled to some extent by the locally based OUP, it would be exempt from income tax, but used as it is for the purposes to which the surplus funds of the OUP are now being put, they are not tax-exempt as they are not employed by, in or for an institution which meets the criteria laid down by E M Grosskopf J in ITC 1262 (which, even if they were, would not qualify for exemption from tax as it would be controlled and managed by the delegates in England).
It is unnecessary for me to go any further for the purposes of this judgment. I note merely that no management nor control over the surplus funds of the OUP is exercised in South Africa; I do not find it necessary to consider the validity of Mr Seligson's alternative argument, based on the contention that applicant is obliged to pay income tax in respect of the receipts and accruals of which the OUP is the source by reason of the effect of the Double Taxation agreement with the United Kingdom. Nor again need I concern myself with the interesting, but in the circumstances academic, question as to whether the OUP is merely a department of applicant's , or an independent entity itself liable for income tax, carrying on a commercial undertaking; nor, for that matter, any of the other submissions advanced by counsel.
To put the matter simply - in order to be tax-exempt the surplus funds in question must be received by an educational institution of a public character such as was envisaged by E M Grosskopf J in ITC 1262 and (a)must be used for the educational purposes for which that institution is maintained and conducted, and (b) such institution must be controlled, at least partly, from South Africa, although its day-to-day management may be in the hands of those who run the institution. On the facts of the instant case, applicant does not qualify for an exemption from income tax on any surplus funds earned by it from the activities of the OUP in South Africa. In my view, it is enough to hold that the 'end-user' or ultimate receiver of the surplus funds of the OUP is not an educational institution of a public character as envisaged in s10(1)(f) of the Act. In ITC 1376 it was the school in India which was the 'end-user' which was the educational institution which gave rise to the tax exemption for the South African society which raised funds for that school; the local society was exempted from the income tax because its income was devoted to the school; applicant (or the OUP) does not devote the surplus funds of the OUP to an educational institution.
Insofar as it is required of me that I deal with the prayers set out in the notice of motion, suffice it to say that, whilst applicant is certainly an educational institution of a public character, the receipts and accruals derived from the activities of the OUP are not, for the reasons hereinabove set out, exempt from income tax. It follows that the application is dismissed with costs, which costs are to be taxed on the basis that the employment of two counsel was justified.
SA ITC1262 (1977) 39 SATC 114
Exemption - Meaning of 'educational institutions' as used in s10(1)(f) of the Income Tax Act 58 of 1962 - Limited company promoting student travel not an 'educational institution', therefore liable to tax .
SA ITC1376 (1983) 45 SATC 213
Requisites to fall within exempting provisions of s10(1)(f) - Society devoted income to subsidising educational institution in foreign country - society exercised control over institution without participating in administration thereof - Society held exempt from tax
1995 58 SATC 45 also cited as [1996] (3) 1 All SA 257 (A) OUP(SA)'s Appeal Court judgment, in which Berman J's judgment in 1994 57 SATC 231 (above) is set aside (includes Corbett CJ's Who's Who entry).
The South Arican saga introduction and index.
OUP's US tax-exemption introduction and options.