30 November 2020

International Cases

City Power (SOC) Limited vs. The Commissioner for the South African Revenue Service

South Africa


Direct Taxation

A private company running on commercial lines is not entitled to exemptions under Section 10 Income Tax Act

The Appellant, City Power Soc Limited (City Power), is a state-owned company that is wholly owned by the City of Johannesburg (the City). In 2014, it was issued with income tax assessments in respect of the 2010-2012 years of assessment by the Respondent, the Commissioner for the South African Revenue Service (the Commissioner). City Power took the view that, as a municipal entity, performing functions that would otherwise have been performed by the City of Johannesburg, its receipts and accruals stood to be exempted from normal tax under the Income Tax Act, 1962. It accordingly objected to the assessment and, upon the objection being disallowed, appealed to the Tax Court. This appeal was dismissed. The issue for determination is whether City Power’s receipts and accruals are exempt from normal tax under the Income Tax Act.

City Power did not qualify as a ‘municipality’ as defined in the Income Tax Act. Nevertheless, City Power argued that by discharging constitutional functions which the City was obliged to perform, its receipts and accruals fell to be treated on the same footing as those of a municipality. The SCA rejected this line of reasoning on the basis that, City Power was a private company, to be run along commercial lines, with the object of generating profit through the distribution of electricity. The receipts and accruals were thus those of City Power.

It is not in dispute that, the income from the supply of electricity by City Power is the income of City Power, notwithstanding that the City may have access to such monies. Such income is reflected in City Power’s financial statement. It is not part of the local sphere of government and is thus not located within such sphere. The mere fact that it performs constitutional functions, which would ordinarily have been performed by the City, does not mean that it is part of or located within the local sphere of government.

There is accordingly no merit in the suggestion that City Power falls within the local sphere of government. The fact that City Power performed a public function did not mean that it fell within the local sphere of government. As the receipts and accruals of City Power are not those of ‘the government of the Republic’ in any of the spheres (ie the national, provincial or local spheres), and were at no stage the ‘receipts and accruals of municipalities’, the Section 10(1)(a) and 10(1)(b) of exemptions do not apply in respect of the income in issue. Appeal dismissed.

Tags : Assessments Exemption Applicability

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