SARS Interpretation Note 58 Issue 3: The Brummeria case and the right to use loan capital interest free (source: https://www.sars.gov.za/lapd-intr-in-2012-58-brummeria-case-right-use-loan-capital-interest-free/)
INTERPRETATION NOTE 58 (Issue 3)
DATE: 12 May 2022
ACT : INCOME TAX ACT NO. 58 OF 1962
SECTION : SECTION 1(1), DEFINITION OF “GROSS INCOME”
SUBJECT : THE BRUMMERIA CASE AND THE RIGHT TO USE LOAN CAPITAL
INTEREST FREE
Preamble
In this Note unless the context indicates otherwise –
• “BGR” means a binding general ruling issued under section 89 of the Tax
Administration Act, 2011;
• “SCA” means the Supreme Court of Appeal of South Africa;
• “section” means a section of the Act;
• “TA Act” means the Tax Administration Act No. 28 of 2011;
• “the Act” means the Income Tax Act No. 58 of 1962;
• “the Brummeria case” means the judgment handed down by the SCA in
Commissioner, SARS v Brummeria Renaissance (Pty) Ltd 2007 (6) SA 601
(SCA), 69 SATC 205; and
• any other word or expression in this Note bears the meaning ascribed to it in
the Act.
1. Purpose
This Note outlines the treatment of receipts or accruals in a form other than money for
purposes of the definition of “gross income” in section 1(1) as a result of the SCA
judgment in the Brummeria case.
This Note reproduces, under 7, paragraph 3 of BGR (Income Tax) No. 8 (issue 3)
“Application of the principles enunciated by the Brummeria case”, which is a BGR that
prescribes in which year of assessment the right to use an interest-free loan should be
included in the taxpayer’s gross income as well as the method to calculate the value
of such right.
2. Background
The Brummeria case concerned a group of companies (the taxpayers) that granted life
rights over units in a sectional title scheme operating as a retirement village to the
occupiers (life-right holders). As a quid pro quo (in exchange) the life-right holders
granted interest-free loans to the taxpayers for as long as they occupied the units.
The SCA had to adjudicate the appeal on the issues as defined in the statement of the
grounds of assessment read with the statement of the grounds of appeal. Issues that
were not raised in the statement of grounds of appeal could not be pursued before the
court. The court had to consider the taxpayers’ contention that the interest-free loans
did not result in any “amount” being “received by” them which could be, and was,
wrongly included in their gross income.
The complete facts of the case and the arguments of the Commissioner and the
taxpayers may be found in the reported judgment and are therefore not repeated in
this Note.
The SCA held that the right to use the loan capital interest free has an ascertainable
money value that should be included in the gross income of the taxpayers.
The SCA did not, in the context of the appeal, consider the position of the life-right
holders. This Note therefore focuses on the borrowers of the money in the context of
trade and not on the position of the life-right holders.
3. The law
Extract from the definition of the term “gross income” in section 1(1)
“gross income”, in relation to any year or period of assessment, means—
(i) in the case of any resident, the total amount, in cash or otherwise, received by
or accrued to or in favour of such resident; or
(ii) in the case of any person other than a resident, the total amount, in cash or
otherwise, received by or accrued to or in favour of such person from a source
within or deemed to be within the Republic,
during such year or period of assessment, excluding receipts or accruals of a capital nature,
but including, without in any way limiting the scope of this definition, such amounts (whether of
a capital nature or not) so received or accrued as are described hereunder, namely—
4. Principles enunciated by the Supreme Court of Appeal in the Brummeria case
The judgment of the SCA in the Brummeria case may be referred to as authority for
the following principles:
• The word “amount” in the definition of “gross income” is to be interpreted widely.
• The right to use the loan capital interest free (the right) has a monetary value.
• Even though the receipt or accrual of the right is in a form other than money (in
this case the benefit of the use of an interest-free loan), which cannot be
alienated or turned into money, it does not mean that the receipt of the right
has no money value. The test to be applied in order to determine whether the
receipt or accrual has a monetary value is an objective one and not subjective. 1
• The value of the receipt or accrual in a form other than money (in this case, the
right to use an interest-free loan) constitutes an “amount” that “accrues” to the
1 On this point, Stander v CIR 1997 (3) SA 617 (C), 59 SATC 21 was found to incorrectly reflect the
law.
taxpayer and should be included in the gross income of the taxpayer for the
year of assessment in which the right is received by or accrued to the taxpayer. 2
• For a benefit of this nature to be taxable the amount does not need to fall within
paragraph (i) of the definition of “gross income” in section 1(1) (that is, a
“taxable benefit” as defined in the Seventh Schedule to the Act).
5. Issues not decided by the Supreme Court of Appeal
The SCA merely accepted, without deciding –
• the nature of the rights under the transaction – that is, whether they were of a
capital or revenue nature (this was not an issue before the court);
• the timing of the accrual; and
• the valuation method.
The court merely accepted the approach taken by the Commissioner in the submission
on these matters, since the taxpayers had not contested them in their grounds of
objection and appeal.
6. Application of the principles enunciated by the Brummeria case
6.1 Receipts and accruals in a form other than money in exchange for goods
supplied, services rendered or any other benefit given
It is evident from the facts of the Brummeria case, that the rights to use the interest-
free loans were intended by the lenders (the life-right holders) to be in exchange for
the life rights granted by the borrower.
As a result the principles from the judgment may be applied in all cases in which
benefits in a form other than money (such as the right to use an interest-free loan) are
granted in exchange for goods supplied, services rendered or any other benefit given.
The receipt or accrual in a form other than money could constitute an amount. Unless
this amount is of a capital nature which is not specifically included in the definition of
“gross income”, it should be valued and included in the gross income of the taxpayer
in the year of assessment in which it is received or accrued.
As regards the determination of the market value of the assets or services given in
exchange in a barter transaction, Binns-Ward J noted in South Atlantic Jazz Festival
(Pty) Ltd v C: SARS 3 in relation to sponsorships in kind provided to the Jazz Festival
that –
“…accepting, as one may [in these specific circumstances], that the transactions were
at arm’s length, the value of the goods and services provided by the appellant [the
South Atlantic Jazz Festival] to the sponsors in each case falls to be taken as the same
as that of the counter performance by the relevant sponsor…In an ordinary arm’s length
barter transaction the value that the parties to it have attributed to the goods and
services that are exchanged seems to me, in the absence of any contrary indication,
to be a reliable indicator of their market value.”
2 The principles in Lategan v CIR 1926 CPD 203, 2 SATC 16, CIR v People’s Stores (Walvis Bay)
(Pty) Ltd 1990 (2) SA 353 (A), 52 SATC 9 and Cactus Investments (Pty) Ltd v CIR 1999 (1) SA
315 (SCA), 61 SATC 43 were confirmed.
3 2015 (6) SA 78 (WCC), 77 SATC 254 at 260 and 261.
Therefore, it can be accepted that in a barter transaction, the market value of the
assets or services will, “absence any contrary indication”, be the market value of the
assets or services as agreed between the parties and would be of equal value. In most
instances the market value of the assets or services to be exchanged between the
parties is reflected in the relevant agreement. The facts and circumstances of the
particular transaction, including the contractual terms, must be considered as they
could impact on valuation and timing.
6.1.1 Determination of the value of receipts and accruals in a form other than money
(a) General principles of valuation enunciated by the Supreme Court of Appeal
in the Brummeria case
The SCA made it clear in the Brummeria case that the question whether a receipt or
accrual in a form other than money has a money value is the primary question. The
ability to turn such a receipt or accrual into money is but one of the ways in which it
can be determined whether it has a money value. It does not follow that a receipt or
accrual which cannot be turned into money has no value. The test is objective and not
subjective. 4
Arm’s length principles of valuation must be applied in each case, having regard to the
facts and circumstances and the intention of the parties.
(b) Value of the right to use an interest-free loan
The basis upon which the right to use an interest-free loan was valued by SARS was
never challenged on appeal by the taxpayers and therefore was not under dispute
before the court. The SCA therefore did not rule on the basis used in valuing the right.
In the Brummeria case SARS applied the weighted-average prime overdraft rate of
banks to the average amount of interest-free loans in possession of the taxpayer in the
relevant year of assessment as a method in order to place a value on the right to use
an interest-free loan. The SCA neither accepted nor rejected this approach. It does not
necessarily follow that this method will always be the most appropriate for valuing a
right to use an interest-free loan. Each case must be evaluated on its own merits and
all facts and circumstances pertaining to the right to use the interest-free loan must be
taken into account in the valuation. A person adopting a different method of valuation
will bear the burden of proving its appropriateness in the specific case.
6.1.2 Time of accrual of an amount in a form other than money
The timing of an accrual of an amount in a form other than money must be determined
in accordance with general legal principles. In this regard, the courts have determined
that an accrual can only take place when the taxpayer has become unconditionally
entitled to the amount in question. 5
The timing of an accrual of an amount in a form other than money must therefore be
determined in each individual case having regard to the law and the facts and
circumstances of each case.
4 The Stander case was found to incorrectly reflect the law on this point.
5 In Lategan v CIR 1926 CPD 203, 2 SATC 16, CIR v People’s Stores (Walvis Bay) (Pty) Ltd 1990
(2) SA 353 (A), 52 SATC 9 and Cactus Investments (Pty) Ltd v CIR 1999 (1) SA 315 (SCA), 61
SATC 43.
The borrower in the retirement village industry is assessed on the right to use the
interest-free loan in exchange for granting a right of occupation only in the year in
which the borrower becomes entitled to the right to use the loan.
Note: The borrower is not assessed on the right to use the same loan in subsequent
years irrespective of the term of the loan.
6.2 The right to retain and use an interest-free loan in the context of a group of
companies and between shareholders and their companies
The right to use an interest-free loan given by a shareholder to a company or by a
company to another company in the same group of companies may be made with the
intention of providing long-term working capital to the company or to meet capital
expenditure requirements within the group of companies.
The shareholder or group company that grants the right to use an interest-free loan
may not necessarily intend the right to be in exchange for goods sold, services
rendered or some other benefit granted by the borrowing company. Interest-free loans
between shareholders and their companies and between companies within the same
group of companies would therefore not necessarily be affected by the Brummeria
case since these interest-free loans may be granted in a capital context.
However, a borrower that has provided any goods, services or other benefits to the
lender in exchange for the use of an interest-free loan, must value the right to use that
loan and include the amount in that borrower’s gross income.
Each right to the use of an interest-free loan granted in this context must therefore be
considered and evaluated against the background of its own facts and circumstances
and intention of the parties to the interest-free loan to determine whether the amount
is of a capital nature or not and whether its value must be included in the borrower’s
gross income.
6.3 Receipts or accruals in a form other than money in any other context
The value of a receipt or accrual in a form other than money would usually not have to
be included in gross income if the receipt or accrual did not take place in exchange for
goods supplied or services rendered. The reason for this is that such a receipt or
accrual would probably be of a capital nature. However, each and every transaction
will have to be evaluated on its own merits and against the background of its own facts
and the intention of the parties.
7. Binding General Ruling (Income Tax) No. 8 (issue 3) “Application of the
principles enunciated by the Brummeria case”
BGR 8 (issue 3) has been issued to prescribe in which year of assessment the right to
use the interest-free loan should be included in the taxpayer’s gross income as well as
the method to calculate the value of such right.
For ease of reference the ruling is set out below.
Ruling
Agreements in the retirement industry are frequently structured in such a way that one
person (the owner of a unit) grants a lifelong right of occupation over that unit to another
person (the life-right holder). As compensation the life-right holder advances the owner
an interest-free loan for the duration of the period of occupation.
Only amounts received by or accrued to a taxpayer during a particular year of
assessment must be included in that taxpayer’s gross income for that year of
assessment. 6 The value of a right that accrues to a taxpayer in a particular year of
assessment must be determined in that year. 7
In calculating the monetary value of the right to use an interest-free loan in the year in
which it is granted, it should be taken into account that the owner of the unit has given
something in exchange to the life-right holders. The quid pro quo is the granting of the
lifelong right of occupation of the unit. The owner is therefore left only with the bare
dominium of the unit for the full period of the loan. Only when the loan is repaid and
the life right is re-united with the bare dominium, will the owner be in a position to deal
freely with the complete ownership of the unit.
The value of this quid pro quo given by the owner of the unit to the life-right holder
should therefore be determined and taken into account in the valuation of the right to
use the interest-free loan.
The right to use an interest-free loan granted by an occupant in a retirement village to
the owner of that unit in exchange for the granting of a life right of occupation in respect
of that unit usually does not relate to a fixed period. Instead, the period over which the
right to the use of the loan is to be enjoyed depends on the life expectancy of the life-
right holder and certain other contractually agreed contingencies (such as the
possibility that the life-right holder may cancel the loan before his or her death).
In view of the above, it may be accepted that the value of the right to use the interest-
free loan should be calculated in the year that the loan is granted using the following
formula:
A = (B × C × D) − E × (B × C × D)
with reference to the following factors:
A = The monetary value of the right of use of the interest-free loan which must
be included in gross income
B = The amount of the interest-free loan
C = The present value of R1 a year over the life expectancy of the life-right
holder*, or in the case of more than one life-right holder, the youngest of
them
D = The weighted-average prime overdraft rate for banks relating to the relevant
year of assessment
6 Definition of “gross income” in section 1(1).
7 CIR v People’s Stores (Walvis Bay) (Pty) Ltd 1990 (2) SA 353 (A), 52 SATC 9.
E = 93,1% (The percentage to be allocated to the monetary value of the life right
of a unit, as opposed to the value of the complete ownership of the unit. This
average percentage has been determined actuarially and is acceptable to
SARS for all life rights granted.) SARS has accepted this method as a basis
for calculating the amount to be included in gross income. This deduction
accommodates the owner of the unit who gives a right to occupy the unit as
a quid pro quo for the right to use an interest-free loan.
* The life expectancy of the life-right holder and the present value of R1 a year for
the life of the life-right holder may be determined by using the life-expectancy table
issued under Government Notice No. R1942 of 23 September 1977 under
section 29 of the Estate Duty Act No. 45 of 1955 (see Annexure).
The monetary value of the right to use the interest-free loan in the year in which it is
granted and paid must be determined by multiplying the amount of the loan by the
present value of R1 a year for the lifetime of the life-right holder and the weighted-
average prime overdraft rate determined for the relevant year of assessment. The
amount so calculated is then reduced by 93,1%. Note: This is a once-off calculation of
the amount to be included in the gross income of the borrower in the year of
assessment in which the borrower becomes entitled to the right to use the loan. The
amount is therefore not re-calculated and included in the borrower’s gross income in
each subsequent year until the loan is repaid (see 6.1.2).
Example 1 – Calculation of the monetary value to be included in gross income
Facts:
A retirement village is held under sectional title by the owner. The scheme is governed
by the Housing Development Schemes for Retired Persons Act No. 65 of 1988. On
1 June 2020 the owner enters into an agreement, under which the owner grants a life
right of occupation over a sectional title unit in the village to a person aged 75.
Under the agreement, the 75-year-old person and that person’s spouse will be entitled
to occupy the unit in exchange for the grant to the owner of the use of an interest-free
loan of R400 000. The life-right holder advanced the loan on 1 July 2020.
The person turned 75 on 16 February 2020.
According to the life-expectancy table (see Annexure) the present value of R1 a year
for the life of the 75-year-old male is 4,59354 (age next birthday = 76).
The interest-free loan is repayable by the owner of the village to –
● the life-right holder upon cancellation of the agreement under various
circumstances, which include the life-right holder falling ill and requiring full-
time medical care; or
● his or her estate when he or she dies.
The weighted-average prime overdraft rate for banks during the relevant year of
assessment is 7,71%.
The financial year of the owner of the retirement village commences on 1 March 2020
and ends on 28 February 2021.
Result:
The monetary value of the right to the use of the interest-free loan is calculated as
follows:
A = (B × C × D) – E × (B × C × D)
= (R400 000 × 4,59354 × 7,71%) − 93,1% × (R400 000 × 4,59354 × 7,71%)
= R141 664,77 − R131 748,23
= R9 916,54
An owner that is obligated to refund only a portion of the loan on death or cancellation
of the agreement must include the amount not refundable in gross income in the year
of assessment in which the loan is granted and paid by the person acquiring the life
right.
Example 2 – Full loan amount not refundable
Facts:
The agreement between the owner and the life-right holder provides that only 80% of
the interest-free loan of R900 000 is refundable on death.
Result:
The owner must include R180 000 (20% × R900 000) in gross income in the year of
assessment in which the loan is granted and paid by the life-right holder.
In addition, an amount equal to the monetary value, calculated in respect of the right
to use the interest-free loan, must be included in the owner’s gross income in the year
of assessment in which the loan is granted and paid.
Note: For purposes of calculating the monetary value, symbol “B” in the formula is
80% × R900 000 = R720 000.
In the case of an interest-free loan, the benefit to retain and use the interest-free loan
will accrue to the owner on the date the loan has been granted and paid by the person
acquiring the life right.
Example 3 – Date of accrual of an interest-free loan
Facts:
B retired on 30 March 2020 and entered into an agreement with a retirement village
owner. Under the agreement, B will be entitled to occupy a particular unit in exchange
for the grant of the use of an interest-free loan of R400 000. The agreement is
concluded on 15 February 2020. B undertook to pay the R400 000 on receipt of his
lump sum benefit from his pension fund. He paid over the R400 000 to the retirement
village owner on 12 June 2020. The year of assessment of the owner ends on
31 December 2020.
Result:
The date of accrual for purposes of calculating the monetary value of the right to use
the interest-free loan is 12 June 2020.
Period for which this ruling is valid
This ruling is effective from the commencement of years of assessment ending on or
after 31 December 2008 and will apply for an indefinite period.
8. Loans at nominal interest rates
Some arrangements make provision for loans at nominal interest rates and a
corresponding nominal rental to be paid. It is SARS’s view that this will not change the
impact of the Brummeria case. The value of the benefit received must be calculated in
the same manner as above, but the weighted-average prime overdraft rate (symbol
“D” in the formula) must be reduced by the interest rate payable.
9. Capital gains tax implications
A developer granting life rights over units in a retirement village to occupiers in
exchange for the right to use loan capital granted interest-free by those occupiers to
the developer for as long as they occupy the units, will not be subject to capital gains
tax on these transactions. 8
10. Conclusion
The Brummeria case is clearly not authority for the general conclusion that the value
of the right to use an interest-free loan should in each and every case be included in
the borrower’s gross income. The value of a receipt or accrual in a form other than
money would usually not have to be included in gross income if the receipt or accrual
did not take place in exchange for goods supplied or services rendered. The reason
for this is that such a receipt or accrual would probably be of a capital nature. However,
each and every transaction will have to be evaluated on its own merits and against the
background of its own facts and the intentions of the parties.
As a general rule all amounts received by or accrued to a taxpayer (in cash or
otherwise) that are not of a capital nature and are capable of being valued, should be
included in the taxpayer’s gross income and are therefore subject to income tax. The
principles from the judgment (see 4) should, however, be applied with due regard to
the specific facts and circumstances of each and every matter involving an accrual or
receipt in a form other than money (including the right to retain and use an interest-
free loan).
Leveraged Legal Products
SOUTH AFRICAN REVENUE SERVICE
Date of 1st issue : 30 June 2010
Date of 2nd issue : 4 October 2012
8 See paragraphs 20(3)(a) and 35(3)(a) of the Eighth Schedule to the Act.
Annexure
THE EXPECTATION OF LIFE AND THE PRESENT VALUE OF R1 PER ANNUM FOR LIFE CAPITALISED
AT 12 PER CENT OVER THE EXPECTATION OF LIFE OF MALES AND FEMALES OF VARIOUS AGES
Expectation of life Present value of R1 per annum for life
Age Age
Male Female Male Female
0 64,74 72,36 8,32791 8,33105 0
1 65,37 72,74 8,32828 8,33114 1
2 64,50 71,87 8,32776 8,33091 2
3 63,57 70,93 8,32714 8,33064 3
4 62,63 69,97 8,32644 8,33033 4
5 61,69 69,02 8,32567 8,32999 5
6 60,74 68,06 8,32480 8,32961 6
7 59,78 67,09 8,32381 8,32918 7
8 58,81 66,11 8,32271 8,32869 8
9 57,83 65,14 8,32146 8,32815 9
10 56,85 64,15 8,32007 8,32753 10
11 55,86 63,16 8,31849 8,32684 11
12 54,87 62,18 8,31673 8,32608 12
13 53,90 61,19 8,31480 8,32522 13
14 52,93 60,21 8,31265 8,32427 14
15 51,98 59,23 8,31029 8,32320 15
16 51,04 58,26 8,30770 8,32203 16
17 50,12 57,29 8,30489 8,32071 17
18 49,21 56,33 8,30180 8,31926 18
19 48,31 55,37 8,29841 8,31764 19
20 47,42 54,41 8,29471 8,31584 20
21 46,53 53,45 8,29061 8,31383 21
22 45,65 52,50 8,28613 8,31161 22
23 44,77 51,54 8,28117 8,30912 23
24 43,88 50,58 8,27564 8,30633 24
25 43,00 49,63 8,26959 8,30326 25
26 42,10 48,67 8,26274 8,29981 26
27 41,20 47,71 8,25516 8,29595 27
28 40,30 46,76 8,24677 8,29171 28
29 39,39 45,81 8,23737 8,28697 29
30 38,48 44,86 8,22694 8,28170 30
31 37,57 43,91 8,21538 8,27583 31
32 36,66 42,96 8,20257 8,26930 32
33 35,75 42,02 8,18836 8,26210 33
34 34,84 41,07 8,17262 8,25400 34
35 33,94 40,13 8,15536 8,24509 35
36 33,05 39,19 8,13647 8,23517 36
37 32,16 38,26 8,11558 8,22426 37
38 31,28 37,32 8,09274 8,21199 38
39 30,41 36,40 8,06781 8,19866 39
40 29,54 35,48 8,04030 8,18386 40
41 28,69 34,57 8,01067 8,16762 41
42 27,85 33,67 7,97844 8,14983 42
43 27,02 32,77 7,94344 8,13012 43
44 26,20 31,89 7,90547 8,10881 44
45 25,38 31,01 7,86380 8,08527 45
46 24,58 30,14 7,81924 8,05956 46
Expectation of life Present value of R1 per annum for life
Age Age
Male Female Male Female
47 23,79 29,27 7,77109 8,03119 47
48 23,00 28,41 7,71843 8,00026 48
49 22,23 27,55 7,66236 7,96617 49
50 21,47 26,71 7,60201 7,92950 50
51 20,72 25,88 7,53713 7,88967 51
52 19,98 25,06 7,46748 7,84646 52
53 19,26 24,25 7,39387 7,79965 53
54 18,56 23,44 7,31631 7,74834 54
55 17,86 22,65 7,23234 7,69355 55
56 17,18 21,86 7,14414 7,63363 56
57 16,52 21,08 7,05178 7,56896 57
58 15,86 20,31 6,95225 7,49927 58
59 15,23 19,54 6,85004 7,42321 59
60 14,61 18,78 6,74206 7,34135 60
61 14,01 18,04 6,63010 7,25457 61
62 13,42 17,30 6,51232 7,16020 62
63 12,86 16,58 6,39301 7,06046 63
64 12,31 15,88 6,26822 6,95537 64
65 11,77 15,18 6,13789 6,84161 65
66 11,26 14,51 6,00726 6,72393 66
67 10,76 13,85 5,87165 6,59893 67
68 10,28 13,20 5,73403 6,46635 68
69 9,81 12,57 5,59182 6,32818 69
70 9,37 11,96 5,45165 6,18466 70
71 8,94 11,37 5,30775 6,03607 71
72 8,54 10,80 5,16744 5,88278 72
73 8,15 10,24 5,02437 5,72222 73
74 7,77 9,70 4,87876 5,55743 74
75 7,41 9,18 4,73490 5,38893 75
76 7,07 8,68 4,59354 5,21727 76
77 6,73 8,21 4,44663 5,04679 77
78 6,41 7,75 4,30309 4,87092 78
79 6,10 7,31 4,15898 4,69389 79
80 5,82 6,89 4,02440 4,51647 80
81 5,55 6,50 3,89051 4,34399 81
82 5,31 6,13 3,76802 4,17315 82
83 5,09 5,78 3,65276 4,00482 83
84 4,89 5,45 3,54546 3,83988 84
85 4,72 5,14 3,45232 3,67921 85
86 4,57 4,85 3,36864 3,52371 86
87 4,45 4,58 3,30066 3,37426 87
88 4,36 4,33 3,24907 3,23175 88
89 4,32 4,11 3,22597 3,10296 89
90 4,30 3,92 3,21438 2,98912 90
Diamond Export Levy Act, 2007
