Mariana Bosch and Ian McClelland v CSARS A94/2012
29 November 2012
Posted by: SAIT Technical
Author: SAIT Technical
The Western Cape High Court delivered it judgment in the matter between Mariana Bosch & Ian McClelland and the Commissioner of SARS on 20 November 2012. The matter was an appeal from the Tax Court.
Bosch and McClelland ("the appellants”) were employees of the Foschini Group. The appellants participated in a deferred delivery employee share incentive scheme. In 2008, SARS raised additional assessments against the appellants and sought to tax them in terms of section 8A of the Income Tax Act.
Under the scheme, options were granted for a short period and had to be exercised within 21 days. Delivery and payment of the shares were deferred and would take place in tranches over a number of years. Prior to delivery, the shares could not be disposed and did not carry dividends or voting rights.
If, upon delivery, the market value of the shares was less than the consideration payable, employees were entitled to sell the shares back to Foschini for the same price for which they were purchased. When an employee's employment was terminated, that employee was obliged to sell his or her shares back to Foschini for the same amount payable on delivery.
The tax consequences of the scheme were that only gains made during the short exercise period were taxable in the hands of the employees. Gains made until delivery did not fall within the ambit of section 8A and were therefore not gross income in the employees' hands.
SARS argued that the deferred delivery share incentive scheme was a simulated transaction and that no unconditional sale occurred at the time of the exercise of the option. SARS argued that the intention was that the transaction be subject to the suspensive condition that employees remain in Foschini's employment until the delivery date. This was achieved by the obligation to sell shares back to Foschini in the event that employment is ended.
Was the transaction simulated as argued by SARS?
Did the delivery of the scheme shares to the appellants constitute an exercise of a right to acquire the shares for the purposes of section 8A?
SARS relied on the judgment in CSARS v NWK Ltd 2011 (2) SA 67 delivered by the Supreme Court of Appeal in 2011.
In the NWK case, the parties had concluded a set of interrelated contracts in terms of which a subsidiary of FNB had lend R96.4 million to NWK repayable upon the delivery of a specified quantity of grain over a period of five years. NWK claimed interest deductions on the loan principal of R96.4 million. SARS contended that the true substance of the arrangement was that NWK had only borrowed R50m which was the actual cash flow and that a series of offsetting maize transactions between FNB, its subsidiary and NWK had been introduced to give the appearance of the loan of R96.4 million so as the increase the interest deduction available to NWK.
Davis J noted that the court was faced with what was clearly a simulated transaction in the NWK case. The test in respect of simulation as laid out in the NWK case is that the commercial sense of a transaction needs to be examined. Where the form of a transaction attempts to present a commercial rationale, but there is no commercial rationale, and the sole purpose of the transaction is to avoid tax, then the approach taken as in NWK is correct. The mere fact that a transaction aims to achieve the avoidance of tax does not as such make it a simulated transaction.
The NWK judgment departed from previous judgments but did not provide reasons for doing so. Davis J noted that the NWK judgment has to be read within the context of previous decisions on simulation to ensure that "the body of precedent is read coherently rather than NWK as being an unexplained rupture from more than a century of jurisprudence."
In a separate judgment, Wagley J held that the NWK judgment does depart from the case law on simulation but does not set a binding precedent for lower courts since judgments have to be clear and unequivocal in order to do so.
The simulation argument put forward by SARS was therefore rejected. It was also held that the delivery of the scheme shares to the appellants did not constitute an exercise by him or her of a right to acquire the shares for the purposes of section 8A.
The appeal was upheld with costs and the additional assessments raised by SARS were set aside.
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