Page 784 - SAIT Compendium 2016 Volume1

CASE DIGEST 2013–2014
‘[24] There is no merit in the appellant’s argument that the court should take cognisance of the fact that “the food and the accommodation provided by the vendor to its employees were not intended for personal enjoyment”. It was argued furthermore that that was the mischief that the lawgiver sought to cure.
[25] In my view, the legislature intentionally prohibited input tax relating to the provision of food and accommodation as entertainment expenses without categorising the type of food and accommodation as being luxurious or adequate. It will be impractical, unnecessary and tedious exercise to typify food and accommodation as either luxurious or adequate before same is classi ed as entertainment. It is not for the court to run wide imaginations as to the type of food and accommodation that may be considered luxurious and therefore exempted from the prohibition as deductible input tax.
[26] It is trite law that food and accommodation are considered “entertainment” and therefore the input tax levied on them is not deductible. I nd no problems with the interpretation of the applicable section of the Act that may warrant a resort to other canons of interpretation. The de nition of the word “entertainment” is not ambiguous.’
The Tax Court therefore held that the provision of food and accommodation constitutes ‘entertainment’ as de ned in s 1 of the VAT Act and that the deduction of input tax is therefore explicitly denied in terms of s 17 (2) (a) of the VAT Act. The appeal was consequently dismissed.
28. CSARS v Bosch - 394/2014 [2014] ZASCA 171 (19 November 2014)
Introduction
In this appeal by the Commissioner for the South African Revenue Service (‘the Commissioner’), the Supreme Court of Appeal (‘SCA’) had to determine when two employees of the Foschini Group (Pty) Ltd (‘Foschini’) exercised a right to acquire a marketable security, as envisaged by s 8A (1) (a) of the Income Tax Act 58 of 1964 (hereinafter ‘the Act’).
Facts
In 1997 Foschini implemented a deferred delivery (‘DDS’) scheme. Towards the end of 2008, a Ms Bosch and Mr McClellan, senior employees of Foschini at the time, was each given options to purchase shares in Lewis Foschini Investment Company Ltd (Le c), Foschini’s listed holding company. The purchase price would be the ‘Middle Market Price’ of those shares on the Johannesburg Stock Exchange (the JSE) as determined on the date of the notice containing the option. The options had to be exercised within 21 days of the offer and both employees exercised them within the stipulated period. In terms of the scheme the shares would be delivered to the taxpayers in three tranches, at three separate future dates. On delivery of the shares the purchase consideration became payable by the employees. Instead of taking delivery, the employees could alternatively dispose of the shares and be paid the balance remaining after deducting the costs of sale and the purchase consideration.
In 2008 the DDS scheme was reviewed by the Commissioner for the South African Revenue Service (‘the Commissioner’), who then went on to issue additional assessments for income tax in relation to 117 employees and former employees of Foschini. Appeals were lodged on behalf of the employees and the appeals of Ms Bosch and Mr McClelland were taken as test cases before the Tax Court. Their appeals were partially successful. They then successfully appealed to the full court of the Western Cape High Court against the ndings that were adverse to them. The Commissioner then appealed to the Supreme Court of Appeals (SCA). The nal tranches were the subject of the appeal and were deliverable on 14 August 2004 and 2 December 2004.
Ms Bosch elected to sell her shares and receive the proceeds while Mr McClelland elected to take transfer of the shares and pay the consideration. What piqued the Commissioner’s interest was the fact that the market value of the shares on the JSE (on the date of delivery) was much higher than the consideration paid for them. It was on this difference that the Commissioner raised additional assessments, relying on s 8A (1) (a) of the Act, which reads as follow:
‘There shall be included in the taxpayer’s income for the year of assessment the amount of any gain made by the taxpayer ... by the exercise, cession or release during such year of any right to acquire any marketable security (whether such right be exercised, ceded or released in whole or part), if such right was obtained by the taxpayer before 26 October 2004 as a director or former director of any company or in respect of services rendered or to be rendered by him or her as an employee to an employer.’
The Commissioner’s main contention was that when the taxpayers paid the consideration for the shares and received either transfer of the shares or, if they elected to sell them, the proceeds, that is when ‘the exercise of the right to acquire the shares’ occurred in terms of s 8A. Accordingly that was when the taxpayers’ incomes were taxable on the difference between the market value of the shares and the purchase consideration paid for them.
An alternative argument advanced by the Commissioner was that the agreements of purchase and sale of the shares concluded in consequence of the taxpayers exercising the options were conditional on the taxpayers remaining employees within the group until the time the shares were delivered. The argument was that the sale agreement arising from the exercise of the option only became exigible on ful lment of the conditions at the later date when the price fell to be paid and the shares delivered. As such, a true contract of purchase and sale was not entered into at the time the options were exercised and s 8A could not have been applicable at that time.
The Commissioner’s nal contention was that the mechanism by which the scheme operated was a simulation and that the true exercise of the right to acquire the shares occurred when the shares were paid for and delivered.
By contrast the taxpayers contended that the right to acquire the shares was exercised in 1998 (when the options were originally exercised). That, it was submitted, was when they acquired an unconditional right to the shares and became liable to pay income tax under s 8A on any increase in market value of the shares between the date of the offer and the date on which they exercised the options. They further rejected the notion that there was any simulation in the share scheme.
776 SAIT CompendIum oF TAx LegISLATIon VoLume 1