Bosch and Another v Commissioner, South African Revenue Service

• Jurisdiction: South Africa
• Judge: Davis J, Waglay J and Baartman J
• Judgment Date: 20 November 2012
• Citation: 2013 (5) SA 130 (WCC)
• Docket Number: A 94/2012
• Hearing Date: 27 July 2012
• Counsel: P Hodes SC (with PA Solomon SC and AM Breitenbach SC) for the appellants. O Rogers SC (with M Janisch and N Cassim) for the respondent.
• Court: Western Cape High Court, Cape Town

Bosch and Another v Commissioner, South African Revenue Service
2013 (5) SA 130 (WCC)

2013 (5) SA p130

Citation	2013 (5) SA 130 (WCC)
Case No	A 94/2012
Court	Western Cape High Court, Cape Town
Judge	Davis J, Waglay J and Baartman J
Heard	July 27, 2012
Judgment	November 20, 2012
Counsel	P Hodes SC (with PA Solomon SC and AM Breitenbach SC) for the appellants.; O Rogers SC (with M Janisch and N Cassim) for the respondent.

Flynote : Sleutelwoorde B

Contract — Consensus — Simulation — Test — Supreme Court of Appeal's decision in NWK case discussed — Intention in NWK not to depart from well-established common-law principles regarding simulation but to direct C enquiry to whether transaction making commercial sense — In present case terms of agreement revealing clear commercial purpose — No simulation established.

Revenue — Income tax — Income — Gains made by exercising right to acquire marketable security — Employees granted options to purchase shares payable against deferred delivery, subject to agreed terms — Whether D scheme conferred unconditional entitlement to acquire shares upon exercising option, or only upon deferred delivery — Income Tax Act 58 of 1962, s 8A.

Headnote : Kopnota

The taxpayers, employees of a group of companies, participated in the group's E 'deferred delivery share incentive scheme' in terms of which they were granted options to purchase shares. These had to be exercised by notice to that effect within 21 days of being granted, the shares concerned to be bought at a purchase price equal to their market value as at such notice dates and payable against deferred delivery thereof. Other relevant features of the scheme were a 'stop-loss mechanism' and a 'continuous employment F provision'. The former provided for the company to buy the shares back from a participant if, at the deferred delivery date, their market price was lower than their purchase price; the latter that, should a participant's employment be terminated after exercising an option to purchase but before the delivery date, such participant would be obliged to sell the shares back to the company, who would be obliged to buy the shares back at the G purchase price.

The scheme was specifically structured so that notice to exercise the options would constitute an unconditional 'exercise . . . of any right to acquire any marketable security' as contemplated in s 8A(1)(a) of the Act, [*] thus limiting the employee's taxable gains to the market value of the shares as at the notice date. The Commissioner, however, contended the right was only H exercised upon deferred delivery since the scheme's stop-loss and continued employment provisions constituted suspensive conditions which rendered the entitlement only determinable then. This remained the main issue in the present case, an appeal against the tax court's confirmation of

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some of the Commissioner's additional assessments. The other issue that A arose for consideration by the full bench was the Commissioner's alternative contention, that the scheme was in any event a simulated transaction formulated to disguise the true substance of the agreement (ie that a suspensive condition of continued employment had been created) to justify avoiding tax in terms of s 8A. In this regard the Commissioner relied principally on the NWK case. [†] B

Held: The meaning of the word 'right' in the phrase 'right to acquire' in s 8A of the Act was better analysed as a privilege given to an employee. Whereas a right had a correlative duty, the correlative of a privilege was a no-right. It followed that the (Commissioner's) contention that any rights which might have been enjoyed by the participants were conditional upon performance C of his or her own obligations, was not applicable to the participants — who enjoyed a privilege. Section 8A did not carry the meaning that 'acquire' only took place once a participant fulfilled his or her obligations. (Paragraphs [57] and [61] at 146E and 147F.)

It could not be contended that the agreement failed in circumstances where a D participant left the employ of the group — which would be the case if the clause could be construed as imposing a suspensive condition. The very terms of the agreement provided for the rights and obligations of the parties in these circumstances, which was distinct from an agreement failing. Viewed in this fashion, it could not be suggested that the continued employment provision suspended the very operation of the rights and E obligations as a whole. Implementation of the terms of the contract did take place, albeit within the specific terms of its framework. Unconditional sales of shares took place upon the exercise of the participant's option, albeit that the method of payment would differ depending upon which clause was triggered. As for the stop-loss mechanism, it only operated when a participant decided to invoke it, ie it was 'entirely dependent on the will of F any of the parties' and therefore not a 'condition in the true sense'. (Paragraphs [65] – [68] at 148A – 148B.)

NWK did not alter the fundamental common-law principle that a taxpayer was entitled to arrange his or her affairs so as to remain outside of the provisions of the Act. The context in which the dictum relied on by the Commissioner G had to be read was how the enquiry into the determination of a simulated transaction for the purposes of tax had been framed in case law; the intention (of the dictum) to point out the direction the mandated enquiry needed to take — namely to examine the real commercial sense of the transaction. None of the clauses cited by the Commissioner were drafted to disguise the true intention of the parties; all were consistent with an H intention to conclude various agreements in accordance with their terms and revealed a clear commercial purpose. (Paragraphs [72], [84] – [85] and [89] at 149H, 153I – 154D and 155F – I.)

2013 (5) SA p132

Cases Considered

Annotations A

Case law

Commissioner for Inland Revenue v Conhage (Pty) Ltd (formerly Tycon (Pty) Ltd) 1999 (4) SA 1149 (SCA) (1999 (12) JTLR 337): referred to

B Commissioner for the South African Revenue Service v NWK Ltd 2011 (2) SA 67 (SCA) ([2011] 2 All SA 347; [2010] ZASCA 168): dictum in para [55] explained and applied

Commissioner of Customs and Excise v Randles, Brothers & Hudson Ltd 1941 AD 369: dictum at 395 – 396 applied

Erf 3183/1 Ladysmith (Pty) Ltd and Another v Commissioner for Inland Revenue 1996 (3) SA 942 (A): dictum at 952B applied

C Ese Financial Services (Pty) Ltd v Cramer 1973 (2) SA 805 (C): distinguished

Grey Global Group Inc v Khumalo [2011] ZASCA 161 (SCA): dictum in para [14] applied

ITC 1444 (1989) 51 SATC 35: distinguished

ITC 1493 (1991) 53 SATC 187: dictum at 201 applied

D MacKay v Fey NO and Another 2006 (3) SA 182 (SCA) ([2005] 4 All SA 615): dictum in para [26] applied

Nissan SA (Pty) Ltd v Commissioner for Inland Revenue 1998 (4) SA 860 (SCA): dictum at 870F applied

Secretary for Inland Revenue v Kirsch 1978 (3) SA 93 (T): dictum at 94B – 95B applied

E Zandberg v Van Zyl 1910 AD 302: dictum at 309 applied.

Statutes Considered

Statutes

The Income Tax Act 58 of 1962, s 8A: see Juta's Statutes of South Africa 2012/13 vol 3 at 1-428.

Case Information

P Hodes SC (with PA Solomon SC and AM Breitenbach SC) for the appellants. F

O Rogers SC (with M Janisch and N Cassim) for the respondent.

An appeal against an order of the income tax court in regard to additional tax assessments. The order is in para [96].

Judgment

Davis J (Baartman J concurring): G

Introduction

[1] This is an appeal against an order of the income tax court which was delivered on 14 September 2011, pursuant to an appeal confirming the H taxation of gains received by or which accrued to certain participants in the Foschini 1997 Share Option Scheme (the 1997 scheme).

[2] In 2008 respondent raised additional assessments against the appellants, together with some 115 other employees and ex-employees of the Foschini group of companies (the I Foschini Group), who were participants in the 1997 scheme and sought to tax these participants in terms of s 8A of the Income Tax Act 58 of 1962 (the Act) in respect of various years of assessment. The additional assessments were raised upon the difference between the cost of the shares of each of the appellants on the dates when each of them exercised options under the scheme (the strike J price) and the market value of these shares on the second, fourth and

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Davis J (Baartman J concurring)

sixth anniversaries of the dates of the granting of the options. A These were the dates, set out in terms of the scheme, whereby the shares would be delivered to the appellants in equal tranches against payment.

[3] In respondent's amended statement of the grounds of assessment in respect of the first appellant and the statement of the grounds of B assessment in respect of second appellant, respondent invoked para 2(a) of sch 7 to the Act as an alternative ground for a liability in respect of shares delivered prior to 26 October 2004. In these statements, which set out the grounds of assessment, respondent also invoked s 8C of the Act as an alternative basis for liability in respect of shares delivered after 26 October 2004 and raised para 2(a) of sch 7 as a further alternative basis in respect of these shares. C

[4] The first appellant was assessed in respect of the 2001, 2003, 2005 and 2006 years of assessment, all of which assessments were adjudicated upon by the court a quo. Second appellant was assessed in respect of the 2001, 2003, 2004, 2005 and 2006 years of assessment. D However, in this case, it was agreed that only the additional assessment issued in respect of 2005 would be adjudicated upon by the court a quo. The two...