Commissioner, South African Revenue Service v Bosch and Another

• Jurisdiction: South Africa
• Citation: 2015 (2) SA 174 (SCA)

Commissioner, South African Revenue Service v Bosch and Another
2015 (2) SA 174 (SCA)

2015 (2) SA p174

Citation	2015 (2) SA 174 (SCA)
Case No	394/2013; [2014] ZASCA 171
Court	Supreme Court of Appeal
Judge	Brand JA, Shongwe JA, Wallis JA, Pillay JA and Dambuza AJA
Heard	November 6, 2014
Judgment	November 12, 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.

Flynote : Sleutelwoorde B

Revenue — Income tax — Income — Gains made by exercising right to acquire marketable security — Calculation of — Deferred-delivery scheme — Option C to purchase shares at market value as at date of exercising option but payable against future delivery — Whether gain occurring upon exercising option or upon payment and delivery — Conditionality of purchase and sale agreements entered into pursuant to option being exercised — Income Tax Act 58 of 1962, s 8A(1)(a).

Revenue — Income tax — Scheme for avoidance of — Simulation — Test — Question D of genuineness of transaction — Transaction not simulated if genuine — Nothing impermissible about taxpayer (genuinely) arranging affairs so as to minimise tax liability.

Headnote : Kopnota

The taxpayers exercised options, given to them in terms of their employer's E deferred delivery share incentive scheme (the DDS), to purchase shares in their employer's holding company at the middle-market price of the shares as on the date of the notice to exercise such options and payable against deferred delivery of the shares. They could also, instead of taking delivery, dispose of the shares and be paid the balance remaining after deducting the cost of sale and the purchase consideration. One taxpayer elected this F option and the other took delivery of the shares. In the latter case the Commissioner levied additional income tax on the difference between the prices paid and the market value of the shares when they became deliverable, and in the former case on the proceeds of disposal. This was on the basis that (1) the taxpayers had exercised a right to acquire the shares — within the meaning of that expression in s 8A(1)(a) [*] — when the time for G payment and delivery arrived and not when they exercised the options; (2) alternatively, and on various grounds, that the agreements of purchase and sale of the shares — concluded in consequence of the taxpayers exercising the options — were conditional, either as being subject to a suspensive condition that the taxpayers remained employees within the group until the H date for delivery of the shares arrived, or as being contingent in the sense of 'fiscal conditionality', or otherwise rendered conditional by virtue of the reciprocal obligation on the part of the taxpayers to pay consideration therefor; and (3) that the mechanism by which the scheme operated was a simulation as it had been formulated — even if not dishonestly — to enable the participants to avoid any significant tax liability under s 8A(1)(a), and therefore it had to be treated as giving rise to a conditional entitlement to I shares that would only trigger the application of the section on payment for and delivery of the shares.

2015 (2) SA p175

The additional assessments having been successfully challenged in the high A court, this case concerns the Commissioner's application for leave to appeal and his appeal to the Supreme Court of Appeal. Having granted leave to appeal, that court held as follows:

As to (1): Subsection 8A(1)(a) referred to the exercise by the taxpayer of a right to acquire any marketable B security, not to the acquisition of a marketable security itself. That suggested that it was concerned with something prior to the actual acquisition of ownership — the action by the taxpayer that gave rise to a binding contract under which the taxpayer would be entitled, subject to compliance with the terms of the contract, to acquire the marketable security, whether the acquisition by transfer to the taxpayer occurred immediately or was postponed to a future date. The contrary C contention by the Commissioner must therefore be rejected. (Paragraphs [10] and [19] at 180G – 181D and 184F – 185B.)

As to (2): The DDS scheme defined the rights that the taxpayers acquired pursuant to the options granted to them. The options did not vary those terms. The terms of the options were such that the contracts of sale D concluded by participants incorporated the terms of the scheme. The scheme itself contained no clause that could, even remotely, be construed as a suspensive condition, neither could the proposed suspensive condition be inferred by way of a tacit term of the scheme. Once it was accepted that the contracts in terms of which the taxpayers purchased shares were not subject to a suspensive condition, it was difficult to appreciate on what basis E they could be treated as being subject to such a condition for fiscal purposes. This proposition lacked any foundation in the text of s 8A(1)(a) or in any other provision of the Act. And, reciprocity of performance could have no application in determining when a liability to pay tax in terms of s 8A(1)(a) arose. That was determined by the terms of the section and the key event was the exercise of the right to acquire the marketable security, F not performance of the contract arising from the exercise of that right. Accordingly all the Commissioner's arguments under the general head of conditionality fell to be rejected. (Paragraphs [21], [25], [33] and [37] at 185F – H, 186H – 187F, 189G – I and 191D – H.)

As to (3): Simulation was a question of the genuineness of the transaction under G consideration — if genuine then it was not a simulated transaction, and if simulated it was dishonest. In determining in any particular case whether a transaction was simulated, a court first examined the transaction as a whole, including the income-tax consequences of the transaction. There was nothing impermissible about (genuinely) arranging one's affairs so as to minimise one's tax liability, in other words, tax avoidance. Tax evasion was H of course impermissible and therefore, if a transaction were simulated, it may amount to tax evasion. The Commissioner would have had to show that the participants in the scheme 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. Here there was no advantage to the I parties in entering into a conditional contract of purchase and sale when they were free to enter into an unconditional contract and postpone performance of the obligation to pay the purchase price and deliver the shares. The Commissioner's contentions based on the notion of substance over form must therefore be rejected. (Paragraphs [40] – [41] and [42] at 192B – I and 193A – B.) Leave to appeal granted but appeal dismissed. J

2015 (2) SA p176

Cases Considered

Annotations A

Case law

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

Bothma-Batho Transport (Edms) Bpk v S Bothma & Seun Transport (Edms) Bpk 2014 (2) SA 494 (SCA): dictum in paras [10] – [12] applied B

Commissioner for Inland Revenue v Golden Dumps (Pty) Ltd 1993 (4) SA 110 (A): dictum at 118E – H applied

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

Commissioner of Customs and Excise v Randles Bros & Hudson Ltd 1941 AD 369: dictum at 402 applied C

Comwezi Security Services (Pty) Ltd v Cape Empowerment Trust Ltd [2012] ZASCA 126: referred to

Corondimas and Another v Badat 1946 AD 548: dictum at 558 applied

Desai and Others v Greyridge Investments (Pty) Ltd 1974 (1) SA 509 (A): dictum at 522H – 523A applied D

Design and Planning Service v Kruger 1974 (1) SA 689 (T): referred to

Food and Allied Workers Union v Ngcobo NO and Another 2014 (1) SA 32 (CC) (2013 (12) BCLR 1343; [2013] ZACC 36): referred to

Hersch v Nel 1948 (3) SA 686 (A): referred to

Jaga v Dönges NO and Another; Bhana v Dönges NO and Another 1950 (4) SA 653 (A): E dictum at 664G – H applied

Jurgens Eiendomsagente v Share 1990 (4) SA 664 (A): referred to

Minister of Finance v Gin Bros and Goldblatt 1954 (3) SA 7 (O): dictum at 10G – H applied

MTK Saagmeule (Pty) Ltd v Killyman Estates (Pty) Ltd 1980 (3) SA 1 (A): dictum at 12F – H compared

Nash v Golden Dumps (Pty) Ltd 1985 (3) SA 1 (A): referred to F

Natal Joint Municipal Pension Fund v Endumeni Municipality 2012 (4) SA 593 (SCA) ([2012] 2 All SA 262; [2012] ZASCA 13): dictum in para [18] applied

National Education Health and Allied Workers Union v University of Cape Town and Others 2003 (3) SA 1 (CC) ((2003) 24 ILJ 95; 2003 (2) BCLR 154; G [2002] ZACC 27): dictum in para [66] applied

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

Odendaalsrust Municipality v New Nigel Estate Gold Mining Co Ltd 1948 (2) SA 656 (O): referred to

Palm Fifteen (Pty) Ltd v Cotton Tail Homes (Pty) Ltd 1978 (2) SA 872 (A): referred to H

Patel v Minister of the Interior and Another 1955 (2) SA 485 (A): dictum at 493A – D applied

R v Detody 1926 AD 198: dictum at 202 applied

Rapp and Maister v Aronovsky 1943 WLD 68: dictum at 75 applied

Rockbreakers and Parts (Pty) Ltd v Rolag Property Trading (Pty) Ltd 2010 (2) SA 400 (SCA): referred to I

Roshcon (Pty) Ltd v Anchor Auto Body Builders CC and Others 2014 (4) SA 319 (SCA): dictum in para [37] applied

Scott and Another v Poupard and Another 1971 (2) SA 373 (A): dictum at 378H applied

Secretary for Inland Revenue v Hartzenberg 1966 (1) SA 405 (A): dictum at J 409A – H applied

2015 (2) SA p177

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