Editorial

• Date: 01 December 2021
• Published date: 01 December 2021
• Pages: v-vii
• DOI: 10.10520/ejc-btclq_v12_n4_a1
• Author: Michael Rudnicki Rudnicki

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Editorial

MICHAEL RUDNICKI

The last issue for the 2021 series of articles considers a recent Supreme

Court of Appeal decision in relation to the tax deductibility of contribu-

tions to trusts to fund employee share schemes, the complex law relating

to ‘Controlled Foreign Companies’ and recent judicial precedent relating

to the interpretation of contracts and the impact of the common-law ‘parol

evidence’ rule.

The f‌irst article considers the contents of the recent handing down of

the Spur judgment. The judgment has caused much consternation among

taxpayers who have funded trusts with cash contributions as part of the

implementation of employee share schemes. The case centres around (i)

the deduction of a contribution of R48m to a trust by Spur, the operating

entity in the Spur group, with the Spur holding company as the income

and capital benef‌iciary, and (ii) establishing that the non-disclosure of

information in Spur’s tax return and the provision of incorrect answers to

various questions in the return was suff‌iciently acceptable to extend the

three-year statute of limitation period.

The article examines the facts of the case and sets out the arguments

presented by both SARS and the taxpayer. The principal facts centre on a

contribution of R48m by Spur to a trust, established to form a share scheme

to benef‌it participating employees of Spur. The benef‌its to participants

were awarded in the form of shares issued by a special purpose company

whose value was determined as an amount in excess of the amount of the

contribution plus a commensurate, market-related return which accrued to

Spur’s holding company, a listed company.

The key arguments presented by the taxpayer in support of the tax

deduction of the contribution of R48m was that the expenditure was

incurred in order to establish and implement an employee share incen-

tive scheme, and the expenditure was suff‌iciently closely linked to the acts

required to be performed to produce taxable income. In other words, the

expenditure incurred was suff‌iciently closely linked to and was incurred for

the purpose of producing taxable income. SARS argued, which the court

accepted, that the link between the contribution and the production of

taxable income was indirect and insuff‌icient, as the benef‌it in respect of

the contribution, and a commensurate return, accrued to the benef‌iciary of

the trust, namely Spur’s holding company. It was was concluded that this

factor was the purpose of the expense. On this basis SARS’s argument was

upheld and the deduction of the contribution denied.

The article examines the facts and various case law relating to the ‘in

the production of income’ test. The article concludes that in relation to the