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SAFLII Note: Certain personal/private details of parties or witnesses have been redacted from this document in compliance with the law and SAFLII Policy

REPUBLIC OF SOUTH AFRICA

IN THE HIGH COURT OF SOUTH AFRICA

GAUTENG LOCAL DIVISION, JOHANNESBURG

PRETORIA CASE NO:4969/2014

Reportable: No

Of interest to other judges: No

Revised.

11/8/2017

In the matter between

C, J                                                                                                                         Applicant

and

C, L                                                                                                                    Respondent

 

Judgment

 

Van der Linde, J:

 

Introduction

[1] This application was initially issued in the main seat of this division, being Pretoria. Affidavits were exchanged and pleadings closed there. The Judge-President has referred the matter to this court, and the parties have, for reasons of convenience, both submitted to the jurisdiction of this court. To the extent necessary under s.27 of the Superior Courts Act 10 of 2013, I consequently order that the matter be transferred from the main seat of this division in Pretoria to the local seat of this division, Johannesburg. The Pretoria case number will be retained for practical purposes.

[2] In the application the parties are at issue as to the legal consequences that should follow after a particular aspect of their divorce settlement agreement became unstuck because they had made a common mistake about the executability of the manner of payment of one of the amounts owed by the applicant husband to the respondent wife. This led to the respondent issuing a writ of execution against the applicant for a certain amount, and the applicant contending that the writ is unlawful because the amount overstates his indebtedness.

[3] The form of the current process now before this court is an application by the applicant to set aside a writ of execution that the respondent had taken out against him on the basis that the amount that she contends is owed is in fact not owed. She on the other hand counterclaims first for a declaration that the settlement agreement should be read in a particular way that suits her argument; in addition for a rectification of the settlement agreement; for a money judgment in a fixed amount following on the adoption of her interpretation of the settlement agreement; interest; and (as does the applicant) costs.

 

The background

[4] The issue arises in this way. As part of the settlement of the patrimonial consequences of the divorce, the parties identified Mr C's pension investment in two pension funds, and agreed that Mrs C would be entitled to be paid an amount equal to 50% of Mr C's pension interest as defined in the Divorce Act 70 of 1979.[1] This would be paid by a direct transfer from Mr C's identified pension funds of R1,5 m to a pension fund of Mrs C's choice, and the balance by way of a cash payment direct to her.

[5] As to this balance, the parties agreed that Mr C would assume responsibility for any tax liability attaching to it, so as to ensure that Mrs C receives the full as it were untaxed benefit of this balance.

[6] As to the R1,5 m direct payment, nothing expressly was said about any tax obligation; but it may safely be assumed, as was accepted by both counsel at the hearing, that the parties both laboured under the impression and in fact intended that no tax would be payable on this amount, at least not then. Undoubtedly, and this too was accepted by both counsel, when someday down the line Mrs C took those moneys out of her pension fund, she would pay income tax on it.

[7] So, in a sense, other than was the express case regarding the balance payment, the R1,5 m came to her by way of a benefit with (tax) strings attached. Mr C will have enjoyed the tax deduction when he made his pension fund contributions to the pension funds during the course of his career, but that deduction was only by way of an encouragement by the fiscus for him to save, because the fiscus knew that down the line it would exact income tax on these funds, when they got paid out to Mr C when he retired and was paid the moneys from the pension funds.

[8] As it happened, however, Mr C was retrenched just before the divorce was finalised but, unbeknown to both parties, Mr C's retrenchment had had the effect of terminating his pension fund membership before the divorce settlement agreement had been entered into. So the full pension benefit had become payable to him before the parties concluded the settlement agreement, although they did not know this.

[9] In the result the R1,5 m payment can no longer be made in the manner anticipated, certainly not by means of direct transfer from pension fund to pension fund; and the balance payment is also in dispute, because there is now an argument as to whether the capital amount on which Mrs C's 50% is to be calculated, refers to the gross value of Mr C's pension interest or to the value of his pension interest, net of tax.

 

The parties' opposing positions

[10] The applicant argued that the value ought to be the net figure, and relied on a judgment of Tolmay, J in Weideman v Weideman 2010 JDR 0158 (GNP) in support of this proposition. The argument was that that judgment interpreted the notion of "pension interest" in the Divorce Act as being a net of tax amount for the purposes of calculating the accrual of a party's estate.

[11] On this argument the settlement agreement incorporates by reference the definition of "pension Interest" in the statute; that definition deems the extent of the pension interest to be the extent of the member's entitlement if the membership were terminated on the date of the divorce; if that occurred, the member's entitlement would have been net of tax.

[12] Opposing this interpretation of the settlement agreement, the respondent argued that the intention was that she would be unaffected by any tax consideration in the calculation of the value of the pension interest; her only exposure was to payment of income tax some time down the line when in time she would receive from her pension fund the benefit of the R1,5m transferred direct to her pension fund from the applicant's two pension funds.

 

Discussion

[13] It seems to me that the answer is as follows. A convenient starting point, after accepting the well-trodden rule that words and context dictate the interpretation of written instruments, is to go where the parties expressly dealt with the tax liability in respect of the respondent's entitlement to an amount equal to 50% of the applicant's pension interest. That is clause 7.2.2.2,dealing with the balance payment.

[14] It says that on the balance (arrived at by deducting the R1,5m} of the 50% pension interest payable, Mr C will ensure that Mrs C receives the amount net of tax, and that Mr C will assume liability for any tax attaching to it. That implies, it seems to me necessarily so, that the 50% capital amount is reckoned without first deducting any tax liability that might attach to the pension interest. If this were not so, it would have been unnecessary expressly to provide that Mrs C will receive the balance of the 50% net of tax liability, because then the 50% figure would already have been a net of tax figure.

[15] This interpretation also fits the obligation to transfer the R1,5 m direct pension fund to pension fund so as to defer any immediate tax liability. That would have been unnecessary had the capital amount of the pension benefit already been an amount net of tax, because then there would have been no tax liability to defer.

[16] Of course, in respect of the R1,5 m, the parties conceived that Mrs C would take it - into her designated pension fund, to be true - with tax liability attached. She would pay the income tax down the line, when she tapped into that resource.

[17] Thus the conclusion seems to me to be inescapable that the parties intended that the respondent's entitlement to 50% of the value of the applicant's pension interest, would -for purposes of this particular settlement agreement - be calculated with reference to the gross value of the applicant's pension interest, that is to say without first deducting any tax liability attaching to it.

[18] The question is how to apply the parties' agreement now that it appears the R1,5 m cannot be paid direct from pension fund to pension fund in a manner that results in no tax liability on that amount at this time. For Mr C there is the argument that he should not now incur a tax liability which before he did not have; he had agreed to incur a tax liability in respect of the balance payment, but that was the extent of his agreement. Thus he should be entitled, if there is a tax liability on him in respect of the R1,5 m portion, to deduct that liability from the R1,5 m before he pays the net amount over to Mrs C.

[19]For Mrs C the argument is that Mr C had agreed to pay a certain fixed and determined amount of money, being 50% of the value of his pension interest. This was payable in two instalments: R1,5 m direct from pension fund to pension fund; and the balance direct to the respondent. Mr C is able to perform the terms of the settlement; all he needs to do is to pay the R1,5m to a pension fund of Mrs C's designation, irrespective of where he sources the R1,5m.

[20] In my view the correct approach is the following. The starting point is that the entitlement of Mrs C is, in principle, equal to one half of the before tax value of Mr C's pension interest. The entitlement derives from clause 7.2, and it defines the origin and extent of Mr C's obligation to Mrs C on this score. The manner in which this obligation was to be discharged was agreed as being in two tranches: R1,5m by means of direct transfer pension fund to pension fund; and the balance direct to Mrs C.

[21] The inability now to effect payment of the R1,5m by way of transfer direct from pension fund to pension fund, goes not to the existence of the principal liability, but only to the manner of its discharge. If that manner is not available,whether by failed contemporaneous common supposition or by subsequent supervening event, the entire settlement agreement and with it the principal obligation does not collapse.

[22] All that has occurred is that the agreed manner of payment fails; but the obligation is still capable of being discharged by substituted form of performance, by performance per aequipollens.[2] Put differently, if the parties were asked at the time (in the usual way of establishing the presence of a tacit term) whether the entire agreement would collapse if the mere manner of payment were not possible, the likely answer would not have been, "Yes, of course". Rather, the likely answer would have been, "No, of course not".

[23] What is the appropriate form of substituted performance? To this question it is necessary now to turn. Were it not for the unforeseen difficulty, no tax would have been payable immediately on the R1,5m referred to in clause 7.2.2.l; but certainly down the line, when Mrs C took the pension benefit from her pension fund, she would have paid income tax on that very amount. As far as SARS were concerned, therefore, the tax liability on the R1,5m was merely deferred; as far as the parties inter se were concerned,the future tax liability in respect of the R1,5m shifted from Mr C to Mrs C.

[24] As regards the balance payable direct to Mrs C, as provided for in clause 7.2.2.2, Mr C was duty bound to ensure that she received it without any tax liability attached to it; thus he agreed to pay the tax liability in respect of that amount. Of course this has the consequence of concluding that what the parties had envisaged was that Mr C would pay to Mrs C not only 50% of the value of his gross pension interest, but also an additional amount representing the tax on the balance amount payable direct to Mrs C in terms of clause 7.2.2.2.

[25] But Mr C's pension interest always had a tax liability attached to it, and all that occurred upon the parties reaching their settlement agreement, was that Mr C would retain the tax liability in respect of the portion payable directly to Mrs C under clause 7.2.2.2 (i.e. excluding the R1,5m), despite she and not he getting the benefit of those moneys. In the context of a financial settlement upon divorce, that is not an unusual arrangement.

[26] Is it possible to replicate the above position now that it appears the manner of payment to Mrs C of R1,5m her entitlement to the 50% pension interest fails? In my view it is. The starting point is still the gross value of the pension interest. According to Mr C, it amounts to RS 295 795.28, and half of that amount is R2 647 897.64.

[27] Of this amount,R1,5m was to be paid by transfer from pension fund to pension fund, with the future tax liability in respect of this amount also shifting across to Mrs C. The balance, being R1 147 897.64, is payable direct to Mrs C, with Mr C accepting any tax liability that attaches to that amount. Mrs C should therefore, in principle, receive the net amount of R1 147 897.64 in respect of this tranche . This part of the manner of payment remains unaffected by the inability to perform in terms of clause 7.2.2.1. The applicant having paid R194 642.97 of this amount, remains indebted to the respondent in the amount of R953 254.67 in respect of this balance.

[28] As regards the R1,5m referred to in clause 7.2.2.1: this amount is no longer capable of being paid by means of direct transfer from pension fund to pension fund, in a manner that perpetuates the deferred tax liability. The intended deferred tax liability did not eventuate and so remains, at least notionally, a present tax liability. It seems to me though that this fact does not change the financial relationship between the parties: between them, they agreed that Mrs C would be liable for the tax on that amount, if not expressly, then by necessary implication; and - again by necessary implication - if not down the line, then now.

[29] It follows that any liability to SARS in respect of that amount of Rl,5m, is - as between the parties - a liability of Mrs C, not Mr C, irrespective of who as between them is liable to SARS, and irrespective of who as between them actually pays the amount to SARS. If Mr C is liable to SARS, or pays the liability to SARS, he is entitled to recover it from Mrs C, whether by way of deduction from the Rl,5m or otherwise.

 

Conclusion

[30]The application in convention is for the setting aside of the writ for R2 647 897.64. The determined amount of the applicant's indebtedness to the respondent is R953 254.67, plus interest at 10.25% from 25 April 2016. Leaving aside interest, this is less than the amount of the writ by Rl 694 642.97. The applicant still owes the respondent R1,5m, which of itself is less that the amount of the writ, but the tax liability attaching to that amount may yet have to be deducted.

[31] Consequently the application in convention must succeed, and the writ be set aside. Prayer 1of the respondent's application in reconvention is for a declaration that her entitlement is R2 647 897.64. That is correct, in my view; but it does not tell the whole story because, if the applicant is liable to SARS in respect of the tax payable on the amount of R1,5m,then the applicant is entitled to recover that from the respondent, ultimately reducing the amount of the respondent's entitlement to below R2 647 897.64. I do believe a declaration is called for, however, and I make an appropriate order below.

[32] The counter-application for rectification must fail, since no case for it has been established.

[33] The respondent's claim for payment of such amount as has been determined as owing, must succeed. The tax obligation on the R1,5m has not been determined. In view of that fact, I considered referring that issue to a referee in terms of s.38 of the Superior Courts Act. But although both parties agreed in principle to such a course, they were not able to agree a specific referee. Absent such agreement, this court regrettably cannot refer the outstanding issue to a referee.

[34] In the result I make the following order:

(a)  It is declared that:

(i) the calculation of the value of the applicant's pension interest for purposes of clause 7.2 of the settlement agreement between the parties dated 24 February 2016, is to be done without taking account of the applicant's tax liability attaching to his pension interest; and

(ii) the respondent is liable, as between the parties, in respect of any tax liability attaching to the amount of Rl,500 000 referred to in clause 7.2.2.1of the settlement agreement between the parties.

(b)  Judgment is entered against the applicant in favour of the respondent in the amount of R953 254.67, plus interest on this amount at 10,25% from 26 April 2016 to date of payment.

(c)  No order as to costs issues.

 

 

__________________

WHG van der Linde

Judge, High Court

Johannesburg

 

For the applicant: Adv. MA Kruger

Instructed by :Scholtz Attorneys

(c/o JP A Venter Attorneys)

321 Alphine Road

Lynnwood

Pretoria

Ref:J Scholtz/ Charmaine/EOC239

Tel:011 726  1710

 

For the respondent: Adv. LC Haupt

Instructed by: J Brewis Attorneys

Windsor Chambers

625 Windsor Street

Garsfontein

Pretoria

Ref: Mrs Brewis/J1189

Tel: 012 998 2067

 

Date argued: 10 August, 2017

Date judgment: 11August, 2017

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