Page 797 - SAIT Compendium 2016 Volume1

CASE DIGEST 2014-2015
what it covered. The court held that the Housing Subsidy Scheme was not de ned and that it would have to rely on all the factors cited in Natal Joint Municipal Pension Fund v Edumeni municipality 2012 (4) SA 593 (SCA), including that a sensible meaning is preferred which does not undermine the purpose of the document. The court also applied the contra scum principle by citing the following from Badenhorst v CIR 1955 (2) SA 207 (N) 215:
“In the case of ambiguity arising during the interpretation of scal legislation, the contra scum rule will be applicable. Should a taxing statutory provision reveal an ambiguity, the ambiguous provision must be interpreted in a manner that favours a taxpayer. When a taxing provision is reasonably capable of two constructions, the court will adopt the construction that imposes a smaller burden on the taxpayer.”
17. Commissioner, South African Revenue Service v Bosch and Another [2014] ZASCA 171; 2015 (2) SA 174 (SCA); SCA Case No: (394/2013) (12 November 2014)
Issue
Share option scheme – section 8A(1)(a) of the Income Tax Act 58 of 1962. At issue was whether section 8A(1)(a) of the Income Tax Act is applicable when (a) the option to acquire shares is exercised or (b) the shares are delivered to a taxpayer.
Posture
This case is before the Supreme Court of Appeal with the Commissioner appealing the decision of the Western Cape High Court.
Facts
In 1997 Foschini implemented a deferred delivery (‘DDS’) scheme. Towards the end of 1998, a Ms Bosch and Mr McClellan, senior employees of Foschini at the time, were each given options to purchase shares in Lewis Foschini Investment Company Ltd (Le c), Foschini’s listed holding company, at a price determined as 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 Services (‘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.
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 section 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 section 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.
Outcome
The appeal was dismissed with costs.
Reasoning
The Court held that the exercise of the option to acquire a marketable security is what brings into existence a contract of purchase and sale in respect of that marketable security. Wallis JA cautioned, however, that this does not necessarily mean that the exercise of the right brings about the immediate acquisition of the marketable security in the sense of title to it as an asset. Moreover, the Commissioner had for many years held the position that in a so-called ‘deferred delivery share scheme’, the date when an option was exercised by an employee/director was interpreted to be the time at which the right to acquire a marketable security was exercised for section 8A purposes. This counted against the Commissioner, as the court held at par [17]:
‘‘There is authority that, in any marginal question of statutory interpretation, evidence that it has been interpreted in a consistent way for a substantial period of time by those responsible for the administration of the legislation is admissible and may be relevant to tip the balance in favour of that interpretation.”
SAIT CompendIum oF TAx LegISLATIon VoLume 1 789
CASE DIGEST 2014-2015