Commissioner for Inland Revenue v Pick 'n Pay Employee Share Purchase Trust

• Jurisdiction: South Africa
• Judge: Hoexter JA, Smalberger JA, Goldstone JA, Nicholas AJA and Howie AJA
• Judgment Date: 22 May 1992
• Citation: 1992 (4) SA 39 (A)
• Hearing Date: 02 March 1992
• Court: Appellate Division

A Nicholas AJA:

This is an appeal by the Commissioner for Inland Revenue ('the Commissioner') against a decision of the Cape Income Tax Special Court. The case concerned the liability to normal tax of profits made by Pick 'n Pay Employee Share Purchase Trust ('the Trust'). This was established by the Pick 'n Pay group of companies pursuant to the B provisions of s 38(2)(b) of the Companies Act 61 of 1973 to administer a share purchase scheme for the benefit of employees of the group.

In his determinations of the Trust's liability for normal tax in respect of the 1982-1984 years of assessment, the Commissioner included the following profits on the sale of shares, namely,

C Year of assessment	Profit
1982	R28 006
1983	R31 699
1984	R39 782

and in respect of the 1985 year of assessment he allowed a loss of R70 619 incurred on the sale of shares, and on this basis issued assessments on D the Trust.

The Trust lodged objection against these assessments on the ground

'. . . that the proceeds arising upon the disposal of shares by the Trust (constitute) amounts of a capital nature which are accordingly excluded from "gross income" in terms of the definition of that expression in schedule 1 of the Income Tax Act.

E The Trust was created and maintained to enable employees to purchase shares in Pick 'n Pay, their (employer) company. The Trust does not acquire shares with the intention of reselling them at a profit in a scheme of profit-making. It purchases shares in order to make them available to employees entitled to them in terms of its rules, and in terms of its constitution is compelled to repurchase shares from employees who are required to forfeit their holdings.

F Accordingly, all gains or losses constitute fortuitous gains or losses of a capital nature and the Trust does not intend to claim as a deduction the R70 619 loss suffered on the reissue of shares in the 1985 year.'

The Commissioner disallowed the objection and the Trust appealed to the Special Court.

G In the judgment of the Special Court (in which Tebbutt J presided), it was held that any receipts or accruals to the Trust were of a capital nature and not liable to tax. An order was made upholding the appeal and setting aside 'the Commissioner's decision to assess the Trust on the basis that its profits and losses constitute gross income'.

H Leave having been granted by Tebbutt J, the Commissioner now appeals directly to this Court.

The question was not res nova in the Cape Special Court. A similar question had been considered in the judgment of Grosskopf J, presiding in the Cape Special Court in a case reported as ITC 1413 (1986) 48 SATC 167. The Court's finding there was that the appellant had not proved that the I surplus on the sale, by a trust created to implement a share purchase scheme for employees, of quoted shares in the employer company, was a receipt or accrual of a capital nature. The appeal was dismissed and the assessments confirmed. Tebbutt J concluded in the judgment under appeal that ITC 1413 was distinguishable on the facts, and that in any event it J was incorrect and should not be followed. Tebbutt J's judgment

Nicholas AJA

A has not been reported but an abridged version is to be found in a note in the November 1987 issue of (36) The Taxpayer 206 at 211 ff).

The question arose again in a case heard in the Natal Special Court which is reported as ITC 1450 (1989) 51 SATC 70. In the judgment the President, Friedman J, agreed substantially with the reasoning of Tebbutt J. B

The facts

The only witness in the proceedings before the Special Court was Mr Christopher Hurst, who has been for many years the financial director of the Pick 'n Pay group. Although not himself a trustee, he administered the Trust. C

He gave a brief description of the structure of the Pick 'n Pay group. It is headed by Pick 'n Pay Holdings Ltd, a company listed on the Johannesburg Stock Exchange. It has a majority holding in Pick 'n Pay Stores Ltd ('Stores'), which is also a listed company. Stores was the D holding company until about 1981, when Pick 'n Pay Holdings Ltd was formed upon the restructuring of the group. Stores has a number of wholly-owned subsidiaries, including Pick 'n Pay Retailers (Pty) Ltd ('Retailers'), through which all the group's retail operations are conducted. The participants in the scheme administered by the Trust are mainly employees of Retailers.

E It is unnecessary to detail all the provisions of the scheme. I shall refer to them only in their main outlines and to the extent that it is necessary to do so for the purpose of this judgment.

The scheme, entitled 'Pick 'n Pay Stores Limited Employee Share Purchase Scheme', was adopted at a general meeting of Stores held on 8 November 1977, and the trustees accepted appointment as such on the same day. Its F purpose was set out in the first paragraph:

'1.1

This scheme is adopted to enable the Company to provide its employees and the employees of its subsidiaries, including directors holding salaried employment or office, with the opportunity of acquiring interests in the share capital of the Company, to provide such employees G with incentives to advance the Company's interests, and to promote an identity of interests between such employees and the shareholders of the Company.''The Company' was defined as Pick 'n Pay Stores Ltd, but after the formation of Pick 'n Pay Holdings Ltd the employees and shares of the latter were also treated as falling within the scheme. It was part of the duties of the trustees, inter alia, to subscribe for or purchase shares in the capital of Stores in accordance with the provisions of the scheme; to seek applications from eligible applicants for the purchase of such shares and to sell them to such applicants; and to administer the scheme in order to achieve and maintain the objects stated in para 1.1. The price payable by participants for scheme shares was in practice the middle market price on the Johannesburg Stock Exchange at the time of acceptance of the application concerned. The purchase or subscription price of shares acquired by the Trust was to be met out of loans to be made to the Trust by the companies in the group by which participants were employed. In the ordinary course payment to the Trust for shares by participants was to be made by not later than the

Nicholas AJA

A tenth anniversary of the date of purchase ('the initial date'), and could, at the option of participants, be made between the fifth and tenth anniversaries of such date. Special provision was made in regard to participants whose employment with the group was terminated prior to the fifth anniversary of the initial date, or at any time on the grounds of B dishonest or fraudulent conduct. In such event the Trust was entitled and obliged to purchase and appropriate the relevant shares as the property of the Trust at an amount equal to the amount then owing by the participant in respect of his shares ('the share debt').

Hurst described the operation of the scheme. After an initial allotment of shares by Stores, the Trust acquired scheme shares in one of three ways:

(1)

C from members of staff who had paid for their shares and wished to realise their holdings;

(2)

as a result of the forfeiture of shares by employees who left the group within five years of the initial purchase or were dismissed for fraud or dishonesty;

(3)

D by purchase on the open market when the Trust did not have available, for issue to applicants for shares under the scheme, sufficient shares acquired under methods (1) and (2).

The price payable for shares under method (1) was the then current middle market price. The price payable for shares under method (2) was the amount E of the share debt owed by the employee concerned.

Hurst handed in as exh B, a document entitled 'Share Movement Analysis - 1982 to 1985'. It is divided into two main sections: one devoted to Stores, the other to Pick 'n Pay Holdings Ltd. The first column in each section is headed 'Date', which, Hurst explained, is the date on which the F relevant entry was made in the books of the Trust, and is not necessarily the date of any particular transaction. And an entry could relate to a number of transactions which were lumped together. The next column is headed 'Average Acquiring Price', which is the average price of shares purchased. Then there is a column 'Shares Acquired', with three G sub-columns: 'Forfeits', 'Ex Staff' and 'On Market'. 'Forfeits' are shares forfeited in terms of the scheme; 'Ex Staff' and 'On Market' are self-explanatory. There is then a column headed 'Issues' which relates to sales of shares to participants, followed by 'Average Selling Price' and 'Share Balance'.

In the case of Stores, the first date given is 31 May 1981 and the last H 20 February 1985. There is a total of 120 dates recorded. Entries under 'Forfeits' total 39, 'Ex Staff' total 50, and 'On Market' total 12. There are 25 entries under 'Issues'.

In the case of Pick 'n Pay Holdings Ltd, the first date given is 10 June 1982 and the last 26 February 1985. There is a total of 98 dates recorded. I Entries under 'Forfeits' total 9, 'Ex Staff' 56, and 'On Market' total 5. There are 36 entries under 'Issues'.

The schedule records a continuous series of share-dealing activities by the Trust during the four years of assessment. The results of these operations are shown on exh C, which is an analysis of profits earned (and J losses sustained) on 'reissues', ie the sale of shares to participants:

Nicholas AJA

A Analysis of profits earned on reissue of shares

	On Forfeits	On Purchases	Total
1982	R 97 335	-R 67 553	R 29 782
1983	R 28 231	-R 2 085	R 26 146
1984	R 46 638	-R 11...