Commissioner, South African Revenue Service v Bosch and Another

• Jurisdiction: South Africa
• Judge: Brand JA, Shongwe JA, Wallis JA, Pillay JA and Dambuza AJA
• Judgment Date: 12 November 2014
• Citation: 2015 (2) SA 174 (SCA)
• Docket Number: 394/2013 [2014] ZASCA 171
• Hearing Date: 06 November 2014
• Counsel: AR Sholto-Douglas SC (with MW Janisch and H Cassim) for the appellant. PB Hodes SC (with PA Solomon SC and AM Breitenbach SC) for the respondents.
• Court: Supreme Court of Appeal

Wallis JA (Brand JA, Shongwe JA, Pillay JA and Dambuza AJA concurring): F

[1] Many companies use share-option schemes as a means of retaining staff and providing additional compensation to those staff members who are thought to make a significant contribution to the business activities of the company. Such schemes may take various forms. This application for leave to appeal concerns a scheme (the scheme) referred to as a G deferred delivery scheme (a DDS scheme or schemes). In 1997 the Foschini Group (Pty) Ltd (Foschini) implemented the scheme. In 2008 the Commissioner for the South African Revenue Service (the Commissioner) reviewed it and issued additional assessments to income tax in relation to 117 employees and former employees of Foschini. H Appeals were lodged on behalf of the employees, and the appeals of two of them, the respondents, Ms Bosch and Mr McClelland, were taken as test cases before the tax court. Their appeals were partially successful before Allie J, and the Commissioner did not pursue a challenge to those of her findings that were favourable to the taxpayers. Ms Bosch and Mr McClelland appealed to the full court of the Western Cape High Court I against the findings that were adverse to them. Their appeals succeeded in a judgment by Davis J [1] in which Baartman J and, in all save

Wallis JA (Brand JA, Shongwe JA, Pillay JA and Dambuza AJA concurring)

A one respect, Waglay J, concurred. Leave to appeal to this court was refused. On petition the application for leave to appeal was referred for argument in terms of s 21(3)(c)(ii) of the Supreme Court Act 59 of 1959. The parties were directed to be prepared to address the court on the merits of the dispute and they have done so.

B [2] The issues raised in the case are important and, according to the affidavit on behalf of the Commissioner, may affect a number of similar DDS schemes in relation to other companies and taxpayers. The points raised are reasonably arguable and in the principal respect were upheld in the tax court. It cannot be said that there were no reasonable prospects C of success and, in any event, the fact that the decision had wider implications justified the Commissioner in seeking to canvass the issues before this court. Accordingly leave to appeal should be granted. The costs of the application for leave to appeal and the costs of the application for leave to appeal to this court are to be costs in the appeal. D I turn to deal with the appeal on its merits.

[3] Ms Bosch and Mr McClelland were both senior employees of Foschini between 1998 and 2005, which is the period relevant to this appeal. In September 1998 and again in December 1998 they were each given options to purchase shares in Lewis Foschini Investment Company Ltd E (Lefic), Foschini's listed holding company, at a price determined as the middle-market price [2] 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 Ms Bosch and Mr McClelland exercised them within the stipulated F period. In terms of the scheme the shares would be delivered in three tranches on the second, fourth and sixth anniversaries of the notice containing the option, subject to certain exceptions to which I will revert. On delivery the purchase consideration became payable. The taxpayers were entitled, instead of taking delivery, to dispose of the shares and to be paid the balance remaining after deducting the costs of sale and the G purchase consideration.

[4] We are not concerned with the first two tranches of shares to which Ms Bosch and Mr McClelland became entitled, as the tax court held that the gains on those tranches were taxed in terms of the practice then H prevailing in the offices of SARS and there was no appeal against that finding. The final tranches that are the subject of this appeal were deliverable on 14 August 2004 and 2 December 2004. These two dates are relevant because there was a potentially relevant amendment to the Income Tax Act 58 of 1962 (the Act) that came into effect from 26 October 2004. If certain of the arguments on behalf of the Commissioner I were upheld, the amended provisions would apply in respect of the shares that fell to be delivered on the latter date.

Wallis JA (Brand JA, Shongwe JA, Pillay JA and Dambuza AJA concurring)

[5] Ms Bosch elected to sell her shares and receive the proceeds while A Mr McClelland elected to take transfer of his shares and pay the consideration. The interest of the Commissioner was aroused by the fact that when this occurred the value of the shares on the JSE was considerably higher than the consideration paid for them. This emerges from the following table taken from the judgment of the court below. It B shows the date on which the shares became deliverable; the market value of the shares on those dates; the consideration payable by Ms Bosch and Mr McClelland; and the differences between the prices paid and the value of the shares, realised in the case of Ms Bosch and notional in the case of Mr McClelland. These were the amounts on which the Commissioner levied additional income tax. C

Bosch	14/08/2004	R81 106	R20 007	R61 099
Bosch	02/12/2004	R69 671	R10 607	R59 064
McClelland	14/08/2004	R40 621	R10 021	R30 600
McClelland	02/12/2004	R92 494	R14 129	R78 365 D

[6] The section of the Act on which the Commissioner primarily relied in making the additional assessments was s 8A(1)(a), which reads as follows:

'There shall be included in the taxpayer's income for the year of E assessment the amount of any gain made by the taxpayer after the first day of June, 1969, 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 F him or her as an employee to an employer.'

[7] The Commissioner's main contention was that, when the taxpayers paid the consideration for the shares and received either transfer or, if they elected to sell them, the proceeds, that was when 'the exercise of the G right to acquire the shares' occurred in terms of this section. 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. In the alternative and on various grounds the Commissioner contended that the agreements of purchase and sale H of the shares concluded in consequence of the taxpayers exercising the options were conditional on the taxpayers remaining employees within the group until the date for delivery of the shares arrived. 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 I price fell to be paid and the shares delivered. If that was correct, then in relation to the earlier deliveries they were taxable under s 8A(1)(a) and in relation to the two later deliveries in December 2004 they were taxable under s 8C of the Act, which was introduced to deal with DDS schemes. Lastly, the Commissioner contended that the mechanism by which the scheme operated was a simulation and that, once the disguise in which J

Wallis JA (Brand JA, Shongwe JA, Pillay JA and Dambuza AJA concurring)

A it had been concealed was stripped away, the true exercise of the right to acquire the shares occurred when the shares were paid for and delivered. [3]

[8] By contrast the taxpayers contended that when they exercised the options in 1998 they exercised the right to acquire the shares, albeit that B delivery and payment of the consideration was postponed in accordance with the provisions of the scheme. They submitted that it was at that stage that they acquired an unconditional right to the shares and became liable to pay income tax under this section on any increase in market value of the shares between the date of the offer and the date on which C they exercised the options (an inconsequential amount). They said that they were not liable to tax on the difference between the market price of the shares on the date of delivery and the consideration payable at that time and rejected the notion that there was any simulation in the scheme or the contracts concluded pursuant thereto.

Interpretation of s 8A(1)(a) D

[9] The primary issue in dispute was 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. That involves the E proper construction of the section in accordance with ordinary principles of statutory construction. The words of the section provide the starting point and are considered in the light of their context, the apparent purpose of the provision and any relevant background material. [4] There may be rare cases where words used in a statute or contract are only capable of bearing a single meaning, but outside of that situation it is F pointless to speak of a statutory provision or a clause in a contract as having a plain meaning. One meaning may strike the reader as syntactically and grammatically more plausible than another, but, as soon as more than one possible meaning is available, the determination of the provision's proper meaning will depend as much on context, purpose G and background as on dictionary definitions or what Schreiner JA referred to as 'excessive peering at the...