CSARS v Bosch - 394/2014  ZASCA 171 (19 November 2014)
05 December 2014
Posted by: Author: Lesedi Seforo
Author: Lesedi Seforo (SAIT Technical)
In this appeal by the Commissioner for the South African
Revenue Services (‘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 section 8A(1)(a) of
the Income Tax Act No. 58 of 1964 (hereafter ‘the Act’).
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 (Lefic), 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 findings that were
adverse to them. The Commissioner then appealed to the Supreme Court of Appeals
(SCA). The final 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 section 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 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
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 fulfilment 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 final 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
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 section 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.
The primary issue in dispute was thus whether the two
taxpayers exercised a right to acquire the shares, within the meaning of that expression
in s 8A(1)(a), when they exercised the options, or whether they only did so
when the time for payment and delivery arrived.
The court first pointed out that section 8A does not refer
to the acquisition of a marketable security, but rather the right to acquire
such. The exercise of the option to acquire the security is what brings into
existence a contract of purchase and sale in respect of the marketable
security. Wallis JA went on to state, 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.
Further clarity was provided at par  regarding how
section 8A(1)(a) ought to be interpreted:
‘There is nothing to indicate that s 8A(1)(a) was directed at
performance of the contract resulting from a prior exercise of rights, as
opposed to the exercise of a right leading in due course, in accordance with
the applicable contractual provisions, to the acquisition of ownership of a
interpretation by those responsible for its administration
The Commissioner’s contentions were also viewed unfavourably
by the court because of the fact that SARS had previously held the position that
the acceptance of the option in a DDS scheme was the time at which the right to
acquire a marketable security was exercised for the purpose of determining any
taxable gain received by a taxpayer in terms of s 8A(2)(a) of the Act.
At par  the following was stated (emphasis mine):
‘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. This is entirely consistent with the approach to statutory
interpretation that examines the words in context and seeks to determine the
meaning that should reasonably be placed upon those words. The conduct of
those who administer the legislation provides clear evidence of how reasonable
persons in their position would understand and construe the provision in question.
As such it may be a valuable pointer to the correct interpretation. In the
present case the clear evidence that for at least eight years the revenue
authorities accepted that in a DDS scheme the exercise of the option and not
the delivery of the shares was the taxable event, fortifies the taxpayers’
A detailed analysis of the share scheme revealed no clause
that could be considered to be a suspensive condition. Additionally, the scheme
provided for the shares to still be deliverable to the employee even if
employment were to be terminated. As such, the court held that one could not
consider being employed at the time of delivery to be a suspensive condition of
the contract of purchase of the shares.
The essence of the Commissioner’s argument in this regard
was based on Lewis JA’s dictum in Commissioner
for the South African Revenue Services v NWK Ltd, where it was stated at
"If the purpose of the
transaction is only to achieve an object that allows the evasion of tax…then it
will be regarded as simulated.”
As the scheme had clearly been formulated to enable the
participants to avoid any significant tax under s 8A(1)(a), the Commissioner
was of the opinion that it should be treated as giving rise to a conditional
entitlement to shares that would only trigger the application of s8A(1)(a) on
payment for and delivery of the shares.
The court rejected that assertion, with Wallis JA
highlighting his dictum in Roshcon (Pty) Ltd v Anchor Auto Body
Builders CC and Others 2014 (4) SA 319 (SCA) in which he stressed that
simulation is a question of the genuineness, and that if a transaction is
genuine then it is not simulated. The share scheme was found to be genuine,
with the court finding that there is nothing impermissible about arranging
one’s affairs so as to minimise one’s tax liability. For the Commissioner’s
simulation argument to succeed, "it
required the participants in the scheme to have intended, when exercising their
options to enter into agreements of purchase and sale of shares, to do so on
terms other than those set out in the scheme” . This was found by the
court to be highly improbable.
The appeal was dismissed with costs.
Please click here to access the full judgement.