P had operated an illegal pyramid scheme for some years, commencing in 1998. He had persuaded gullible ‘investors’ to part with their money by promising them irresistible returns on various forms of investment. He paid the returns for a while to some investors and then the scheme finally collapsed – owing many millions. It had been conducted by way of successively creating legal entities, both incorporated and unincorporated. They were all eventually insolvent, and the High Court ordered on 4 February 2002 that these entities, for ease of administration and legal practicality, be consolidated into a single entity named MP Finance Group CC (in liquidation).
The Commissioner, SARS, presumably pursuant to this order, regarded the CC as a taxpayer liable for the taxes due by the original entities. Accordingly, he assessed the CC for tax in respect of the tax years 2000, 2001 and 2002. The liquidators objected on behalf of the CC, contending that the investment amounts or ‘deposits’ were not ‘received’ within the meaning of ‘gross income’ as defined in the Income Tax Act 58 of 1962. The Commissioner disallowed the objection, whereupon the CC appealed to the Tax Court. The appeal was dismissed and a further appeal was lodged to the Supreme Court of Appeal. The liquidators main argument was that the investors’ deposits were in fact loans which were illegal and therefore void. Thus the pyramid scheme was liable in law to refund the deposits to the investors immediately, with the result that there was no basis on which it could be said that the deposits were ‘ received’ within the meaning of the Income Tax Act.
This appeal was also dismissed. The Court pointed out that in s 1 of the Income Tax Act ‘gross income’ means the total amount ‘received by or accrued to or in favour’ of a taxpayer during a tax year. The entities run by P had made their money by swindling the public. That was their income. It followed therefore that the amounts that were paid to the entities were ‘received’ by them within the meaning of the Income Tax Act. The funds had been accepted by P with the intention of retaining the money for his own benefit. It thus constituted receipts within the meaning of the Act, notwithstanding the fact that in law it was immediately repayable to investors. The assessments had therefore been correctly raised by the Commissioner.
MP Finance Group CC v Commissioner, SARS 2007 (3) SA 521 (SCA)