The Commissioner for the South African Revenue Service v Reunert Ltd

Reunert held 40% of shares in Nokia Siemens Networks South Africa (Pty) Ltd (NSN-SA), with NSN Group holding 60%. In November 2007, when NSN Group changed its business model and decided to stop conducting African business through NSN-SA, Reunert was concerned this would diminish its dividend stream from NSN-SA. To persuade Reunert to remain as shareholder, NSN Group concluded a Sales Promoter Agreement (SPA) that would top-up dividends if they fell below historical levels. The SPA provided that commission would be calculated under clause 4.1 as a percentage of NSN's sales revenue but was expressly made "subject to" clause 4.9. Clause 4.9 provided that if Reunert received a dividend from NSN-SA, the commission payable would be reduced by the "grossed-up" (pre-tax) value of that dividend. Commission was payable twice yearly (31 July and 31 January). SARS assessed Reunert on the gross commission calculated under clause 4.1 for tax years 2008 and 2009, amounting to R26,856,859 and R53,143,142 respectively. Reunert disputed this, arguing only the net commission after dividend deduction had accrued to it.

• Whether Reunert acquired an unconditional right to gross commission calculated under clause 4.1 of the SPA, thereby incurring liability for income tax on that amount
• What is the proper interpretation of clauses 4.1 and 4.9 of the SPA read together
• Whether the commission accrued to Reunert for tax purposes monthly as sales were made, or only at the end of each six-month period after deduction of dividends
• Whether the manner in which the parties implemented the agreement and the evidence regarding their intentions supported Reunert's or SARS' interpretation
• What weight should be given to notes in annual financial statements that appeared inconsistent with other evidence of the parties' implementation of the agreement

The appeal was dismissed with costs, including the costs of two counsel where so employed. The Tax Court's order upholding Reunert's appeal against the additional tax assessments was confirmed.

When interpreting a contract to determine when income accrues for tax purposes, the court must consider the language, context, purpose and background of the agreement, and prefer an interpretation that yields a commercially sensible result. Where a contract provision calculating an amount is expressly made "subject to" another provision, the words "subject to" constitute subordinating language meaning the first provision is subordinated to the second. A taxpayer does not acquire an unconditional right to income (and thus does not incur a tax liability for it accruing) when the right to receive that income remains contingent on future events until a specified calculation date. In this case, Reunert's right to commission remained contingent on what dividends it might receive from NSN-SA up until each payment date; only the net commission determined after deducting the grossed-up value of dividends constituted income that accrued to Reunert for tax purposes. A payment cannot be characterized as both a dividend and a commission payment simultaneously - it can only be one or the other.

The Court noted that SARS' interpretation - that dividend payments by a company to its shareholder simultaneously constituted commission payments - had no apparent commercial rationale and carried the implication that a dividend paid by a company to its shareholder was simultaneously being treated as payment of a debt owed to the shareholder, which makes no commercial sense. The Court also observed that while the notes in Reunert's annual financial statements were inconsistent with the taxpayer's case, and while it weighed against Reunert that it did not call the persons responsible for preparing those statements to explain the error, this was insufficient to overcome the weight of other evidence including: the undisputed testimony of witnesses, the documentary evidence of how the agreement was implemented, SARS' own receipt treating a payment as dividend rather than commission, and the proper interpretation of the contractual clauses themselves. The Court remarked that clause 4.10, which enabled monthly conversion of sales revenue from Euros to Rands, had no bearing on when Reunert's entitlement to commission arose, contrary to SARS' submission.

This case is significant for establishing principles of contractual interpretation in the context of tax law, particularly: (1) the proper approach to interpreting commercial agreements for determining when income accrues for tax purposes; (2) the meaning and effect of "subject to" language in contracts as subordinating one clause to another; (3) the importance of considering the commercial purpose and background of an agreement in interpretation; (4) that a commercially sensible interpretation should be preferred over one that lacks commercial rationale; (5) the evidentiary weight to be given to how parties actually implemented an agreement versus potentially inconsistent accounting descriptions in financial statements; and (6) that a payment cannot simultaneously be characterized as both a dividend and commission payment - it must be one or the other. The case reinforces the Supreme Court of Appeal's approach to contractual interpretation established in Natal Joint Municipal Pension Fund v Endumeni Municipality, requiring consideration of language, context, purpose and background to achieve a sensible commercial result.