S.Africa: Landmark judgment in Supreme Court of Appeal upholds deferred delivery share scheme

Landmark judgment in Supreme Court of Appeal upholds deferred delivery share scheme

Commissioner SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... v Bosch (394/2013) [2014] ZASCA 171 (19 November 2014)
Share option scheme – s 8A(1)(a) of the Income TaxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... Act 58 of 1962 – employees given option to purchase shares – option to be exercised within 21 days – payment for and delivery of shares to occur in tranches two, four and six years later – whether date of exercise of option or date of payment for and receipt of shares the date for determining any gain to be included in the taxpayer’s income – whether contract arising from exercise of option conditional – whether contracts between employees and trustA comprehensive look at trusts in international tax law, including definitions, practical examples, key cases, and synonyms. administering scheme simulated transactions. 

Here is the link to the full judgment: http://www.justice.gov.za/sca/judgments/sca_2014/sca2014-171.pdf

In its first and much anticipated judgement in relation to the interpretation of section 8A of the Income TaxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... Act, and to Deferred Delivery Share Schemes, a full bench of the Supreme Court of Appeal unanimously upheld the taxpayers’ contentions as to the tax effects of a so-called Deferred Delivery Share Scheme.

In this test case, the Court rejected the main contentions by the South African Revenue ServiceThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... (“SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently...”), that the share scheme was subject to various conditions, or alternatively that it was a simulation. The taxpayers’ argument that the exercise of an option agreement constituted the sole point at which tax could be levied in terms of the then applicable tax lawTax laws form the backbone of any nation’s revenue system, setting the rules that govern how individuals and corporations contribute financially to support government functions. These laws define the types of taxes, the applicable rates, and the regulations regarding payment and compliance. They also outline the rights and obligations of taxpayers, ensuring a balanced and fair approach to funding public..., was upheld. This confirms the interpretation which had been accorded to section 8A of the Income TaxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... Act by many tax practitionersA Tax Advisor is a professional who provides specialised advice to individuals, businesses, and organisations on various tax-related matters. They play a crucial role in guiding clients through complex tax laws and ensuring compliance with the latest regulations while identifying opportunities for tax efficiency. Tax Advisors must stay updated on legislative changes and understand the impact of international tax treaties,... over the years as well as (until recently) SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... itself.

The Court further delivered a clear and succinct summation of the application of the “sham” or “substance over form” doctrine saying:

“Simulation is a question of the genuineness of the transaction under consideration. If it is genuine then it is not simulated, and if it is simulated then it is a dishonest transaction…Tax evasionTax Evasion refers to illegal activities or practices undertaken by individuals or businesses to avoid paying taxes. It involves intentionally misrepresenting or concealing income, inflating deductions, or underreporting earnings to reduce tax liability unlawfully. Unlike tax avoidance, which uses legal methods to minimize tax obligations, tax evasion is a criminal offence that carries significant penalties, including fines, imprisonment, and asset... is of course impermissible and therefore if a transaction is simulated, it may amount to tax evasionTax Evasion refers to illegal activities or practices undertaken by individuals or businesses to avoid paying taxes. It involves intentionally misrepresenting or concealing income, inflating deductions, or underreporting earnings to reduce tax liability unlawfully. Unlike tax avoidance, which uses legal methods to minimize tax obligations, tax evasion is a criminal offence that carries significant penalties, including fines, imprisonment, and asset.... But there is nothing impermissible about arranging one’s affairs so as to minimise one’s tax liabilityTax liability represents the total amount of tax owed by an individual or business to a tax authority, whether local, national, or international. This obligation arises through various forms of income, profits, or transactions subject to taxation laws and regulations. Understanding tax liability is essential for compliance and efficient financial management for corporations and individuals. It influences how businesses structure..., in other words, in tax avoidanceTax avoidance refers to the practice of legally structuring financial activities to minimise tax liability, reducing the amount of tax owed without violating laws. Unlike tax evasion, which is illegal and involves concealing income or misreporting, tax avoidance operates within the framework of the law. Multinational enterprises (MNEs) and individuals often engage in tax planning strategies that reduce tax liabilities...”.

The Court confirmed that the parties’ intention in exercising their options was not to do so on terms other than those set out in the scheme, and therefore there was no simulation or “sham” involved.

The Commissioner’s appeal was dismissed with costs, with the judgement of the Court being delivered by Wallis JA. The taxpayers were represented by Advocates P. Hodes SC, P. Solomon SC and A. Breitenbach SC instructed by ENSafrica. Advocates A. Sholto-Douglas SC, M. Janisch and H.Cassim appeared for the Commissioner.

by Robert Gad

director | tax

ENSAfrica