Cape Town Tax Court judgment in favour of taxpayer

Summary of the facts of a recent Cape Town Tax Court judgment in respect of a dispute with SARS over a share incentive scheme.

This briefing has been published by Conor Mcfadden of Fasken, South Africa, who has agreed to Simmons & Simmons making it available to elexica subscribers.

In a unanimous judgment of the Cape Town Tax Court, delivered on 09 May 2018, it was held that a contribution of some R48m by the taxpayer to a trust, used to facilitate a share incentive scheme for the taxpayer’s managerial staff, was deductible by the taxpayer. The pivotal issue in dispute was whether or not the contribution was in fact made in the production of income of the taxpayer, a requirement of the general deduction formula.

The facts of the matter were as follows. The taxpayer is one of a group of companies, a subsidiary of the group’s holding company which is listed on the JSE. In late 2004 the holding company established a discretionary trust which then acquired a shelf company, NewCo. The employees were offered, and took up, ordinary shares in NewCo at their par value. The employees could not dispose of their shares in NewCo for at least seven years otherwise the shares would be forfeited. The trust and the taxpayer then entered into a contribution agreement in terms of which the taxpayer contributed R48m to the trust and the trust subscribed for preference shares in NewCo for the same amount. NewCo used this money to acquire shares in the holding company. The preference shares were redeemable after five years and had a coupon rate attached to them. After five years had lapsed the value of the shares in the holding company had increased to such an extent that their value far exceeded that of the preference share liability. In 2009 the preference shares were redeemed for R48m and dividends accruing on the preference shares, some R22m, were declared to the trust. A dividend of R28m was, at the same time, declared by NewCo. The redemption and payment for the preference share dividends was realised by NewCo by transferring shares in the holding company of equivalent value to the trust. Thereafter the employees were the only shareholders in NewCo and in December of 2009 NewCo disposed of the remaining shares for R16m. The dividend of R28m was then paid to the employees by NewCo. The preference share dividend of R22m vested in the holding company, as sole beneficiary of the trust, but was never paid to the holding company and a loan of the same amount was recorded in the financials as being payable to the holding company. After termination of the scheme NewCo was deregistered in 2012. It was undisputed that the taxpayer was never repaid the contribution of R48m.

The taxpayer claimed the contribution of R48m as a deduction against taxable income, spread over the period of the anticipated benefit (ie 2005 to 2012). Initially SARS allowed the deductions but then raised additional assessments in 2014 and 2015.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.