Employee Incentivisation Schemes

• Date: 01 December 2021
• Published date: 01 December 2021
• Author: Michael Rudnicki Rudnicki
• Pages: 1-8
• DOI: 10.10520/ejc-btclq_v12_n4_a2

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© Siber ink

Employee Incentivisation

Schemes:

HAS THE SPUR DECISION PUT AN END TO

EMPLOYER FUNDING ARRANGEMENTS?

MICHAEL RUDNICKI*

ABSTRACT

The recent handing down of the Spur judgment has caused much consterna-

tion 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, with the Spur holding

company as the income and capital benef‌iciary, and ii) establishing that the

non-disclosure of information in the Spur’s tax return and the provision of

incorrect answers to various questions in the return was suff‌iciently accept-

able to extend the three-year statute of limitation period.

The article examines the facts of the case as well as setting out the argu-

ments presented by both SARS and the taxpayer. The principal facts centres 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 contribu-

tion 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 deduc-

tion of the contribution of R48m was that the expenditure was incurred

in order to establish and implement an employee share incentive 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. This factor was concluded as the purpose of the expense.

On this basis SARS’s argument was upheld and the deduction of the contribu-

tion 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 facts

of the case, the purpose test is the primary test in judging whether the contri-

bution was incurred ‘in the production of income’. The author suggests, with

respect, that the taxpayer’s purpose of forming a share scheme to incen-

tivise participating employees and funding the scheme with a contribution

supports a suff‌iciently close link between the contribution and the production

* Tax Executive, Bowmans Attorneys.