Massmart Holdings Limited v The Commissioner for the South African Revenue Services
| Jurisdiction | South Africa |
| Judge | LR Adams J (Accountant Member and Commercial Member concurring): |
| Judgment Date | 17 September 2019 |
| Citation | 2019 JDR 2386 (Tax) |
| Docket Number | 13798; 13931 & 14294 |
| Court | Tax Court |
Adams J (Accountant Member and Commercial Member concurring):
We have before us two appeals by Massmart Holdings Limited ('the taxpayer') against the assessment in terms of the provisions of the Tax Administration Act, Act 28 of 2011 ('the TAA') by the respondent ('the Commissioner') in respect of the taxpayer's tax years of assessment 2007, 2008, 2009, 2010, 2011, 2012 and 2013. In terms of the assessments for these years the Commissioner had disallowed capital losses which allegedly arose in The Massmart Holdings Limited Employee Share Trust ('the Trust'), which is the taxpayer's employee share incentive scheme trust.
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Adams J (Accountant Member and Commercial Member concurring)
To the extent that this appeal involves matters of law, this judgment and the order is my own. To the extent that issues of fact were considered and decided, the learned accountant member and commercial member concur with the findings of this court.
The issue in these appeals relates to the consequences in regard to capital gains tax in the context of an employee share incentive scheme with a trust as the vehicle used in the implementation of the scheme. In the trust losses were incurred, for the account of the taxpayer, arising in essence from the disposal to employees of shares in the capital of the taxpayer. Simply put, the question is whether the capital losses reflected in the books of account of the Trust are in fact capital losses as defined in the Income Tax Act, Act 58 of 1962 ('the Act') and, if so, whether those losses can and should be attributed to the taxpayer. Put another way, the question is whether these capital losses incurred by the Trust are losses which translate into capital losses by the taxpayer for purposes of Capital Gains Tax ('GCT')?
It was alleged by the taxpayer that during the 2007 to 2013 tax years it suffered substantial capital losses as envisaged in the Eighth Schedule of the Act and the Commissioner was requested to take these losses into account in the assessment of the taxpayer's liability for tax in respect of those years. SARS was not prepared to do this. What the Commissioner did do was to assess the taxpayer for income tax for the aforesaid years and in the process disallowed these capital losses claimed by the taxpayer as follows: 2007 – R234 161 613; 2008 –R90 992 505; 2009 – R84 602 796; 2010 – R97 124 960; 2011 – R146 983 885; 2012 – R121 614 885; and 2013 – R122 008 055.
The taxpayer lodged objections to all of the additional assessments, which objections the Commissioner disallowed, and it is against the disallowance of the taxpayer's claims to capital losses and the subsequent disallowance of the objections which the taxpayer appeals.
It may be apposite at this point to briefly refer to the most relevant legislative provisions to place in context the issues which require adjudication.
At the relevant time, section 26A of the Act provided as follows:
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Adams J (Accountant Member and Commercial Member concurring)
'26A Inclusion of taxable capital gain in taxable income – There shall be included in the taxable income of a person for a year of assessment the taxable capital gain of that person for that year of assessment, as determined in terms of the Eighth Schedule'.
Paragraph 2 of the Eight Schedule to the Act ('the Eight Schedule') provided inter alia that the Eighth Schedule applied to the disposal on or after the valuation date of any asset of a resident. The Eighth Schedule therefore applied to assets owned and disposed of by the taxpayer, who is a resident, and paragraph 1 defined 'asset' as including:
property of whatever nature, whether movable or immovable, corporeal or incorporeal, excluding any currency, but including any coin made mainly from gold or platinum; and
a right or interest of whatever nature to or in such property';
Paragraph 11 provides as follows:
'11. Disposals – Subject to subparagraph (2), a disposal is any event, act, forbearance or operation of law which results in the creation, variation, transfer or extinction of an asset,
Paragraph 4 defines a capital loss as follows:
'4. Capital loss – A person's capital loss for a year of assessment in respect of the disposal of an asset—
during that year, is equal to the amount by which the base cost of that asset exceeds the proceeds received or accrued in respect of that disposal.'
As regards the capital losses claimed by the taxpayer for the 2007 to 2012 tax years, the taxpayer had originally alleged that the capital losses arose in the following circumstances. The trust had disposed of shares in its name in the capital of the taxpayer ('the trust shares') to the employees of the taxpayer at a sum less than the base cost of the shares. These shares were owned by the Trust and not by the taxpayer and did not vest, at the relevant time, in the taxpayer. These shares were held by the Trust and were not 'assets' of the taxpayer as defined in paragraph 4 of the Eighth Schedule and consequently did not constitute a disposal by the taxpayer.
2019 JDR 2386 p5
Adams J (Accountant Member and Commercial Member concurring)
The aforegoing facts are common cause between the parties. The taxpayer therefore accepts that it cannot claim capital losses in calculating its taxable capital gain on this basis as these losses arose in the Trust.
Equally true is the fact that the taxpayer, for purposes of CGT, is not a vested beneficiary of the Trust in relation to the trust shares. The taxpayer cannot claim capital losses sustained in the Trust as such losses are not associated with the taxpayer qua beneficiary with vested rights in the assets of the trust. The taxpayer is not a beneficiary of the shares in the Trust. It is only a vested beneficiary, with a vested interest in the shares of the trust, which the taxpayer was not, who are required to account for any capital losses arising from the disposal of the shares. The taxpayer did not acquire a vested right to the assets in the Trust at its inception.
Therefore, applying paragraph 4 of the Eighth Schedule, the taxpayer may not set off the relevant capital losses against the capital gains that it derived for each year of assessment and any losses made on the disposal of the shares owned by the Trust may not be treated as losses made by the taxpayer.
This means that the taxpayer is not entitled to claim a capital loss on the basis of the difference between the 'base price' of the shares and the price at which they were sold to the employees. The taxpayer accepts this and this appears to be common cause between the parties. However, it is the taxpayer's case that it is nevertheless entitled to claim these capital losses for these years, being from the 2007 to 2012 fiscal years, as well as for the 2013 tax year, and they say so for the following reasons.
The taxpayer is entitled to claim capital losses for capital gains tax ('CGT') purposes in circumstances where the Trust granted share options to selected employees of the taxpayer. The Trust was established in order to enable the taxpayer to provide financial assistance to employees of the taxpayer for the acquisition of shares in the taxpayer. This was done and the employee share incentive scheme was structured in the way it was in light of the provisions of section 38 of the Companies Act, which prohibited the giving of
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Adams J (Accountant Member and Commercial Member concurring)
financial assistance by a company for the acquisition of its own shares, but which permitted the use of a trust as a means of providing financial assistance for employees to acquire shares. The Trust was also established in order to satisfy the listing requirements of the Johannesburg Stock Exchange.
It was always understood by all concerned that the Trust would make losses as a result of the granting of share options to selected employees, which losses would be made good by the taxpayer. After all, so it was contended on behalf of the taxpayer, it was the taxpayer who wished to make shares available to its employees as a performance incentive and not the trust, hence the arrangement that the taxpayer would bear any losses resulting from the implementation of the scheme. The taxpayer determined the identity of the employees it wished to incentivise by offering them share options. Thereafter the instruction would be issued by the taxpayer to the trustees of the Trust to offer share options to the relevant employees, which the trustees of the Trust were then obligated to do by virtue of the terms of the Trust Deed. As a result of the instruction received, the trustees would offer share options to the specified employees, entitling them to acquire a specific number of Massmart shares at a specified price ('the strike price').
When the Trust acquired shares in order to be able to deliver shares to employees who exercised their options, the shares were registered in the name of the Trust but were paid for by the taxpayer. The shares were paid for by the taxpayer on behalf of the Trust, which compensated the taxpayer by crediting a loan account in its name for the cost of the shares. When employees exercised their options and paid the strike prices to the Trust (not less than two years after the share options had been granted), these amounts were received by the taxpayer in part settlement of its loan account – and in this way the loan account created by the Trust in favour of the taxpayer when it (the taxpayer) paid for the shares acquired by the Trust was reduced by the strike prices paid by the employees.
Employees of the taxpayer who accepted the options granted to them only exercised their options and paid the strike price if the prevailing market
2019 JDR...
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