SCA decision in CSARS v Spur Group (Pty) Ltd
Taxpayers who have made contributions to, in particular, share incentive trusts and claimed a deduction under section 11(a) of the Income Tax Act, 1962 (“the Act”) on the basis that such payment was, inter alia, aimed at creating a “happy and contented” workforce through the incentivisation of its employees, should take note of the SCA decision released on 15 October 2021 in CSARS v Spur Group (Pty) Ltd.
In the Spur judgement, Spur’s operating company (“Opco”) had made a contribution to a share incentive trust. Spur’s holding company (“S HoldCo”) was appointed as the capital and income beneficiary of the trust for the relevant periods. The share incentive trust used the funds advanced by Opco to acquire preference shares (“Prefs”) in a newly incorporated company (“Newco”), the ordinary shares of which had been acquired by key Opco employees for a nominal value. Newco used the subscription proceeds in respect of the Prefs to acquire shares in S HoldCo. The Prefs were eventually settled by Newco distributing certain of its S Holdco shares to the trust. Newco sold the remaining S Holdco shares and used the proceeds to declare a cash distribution to its ordinary shareholders (Opco employees).
Opco claimed a deduction in terms of section 11(a) of the Act in respect of its contribution to the share incentive trust, which it spread over the vesting period in respect of the Newco shares held by its employees in terms of section 23H of the Act.
After conducting an audit in 2011, SARS issued additional assessments disallowing these deductions claimed by Opco on the basis that “the expenditure was not incurred in the production of [the taxpayer’s] income in that there is no direct, causal link between the contribution and the production of income”, as “S Holdco was the only party to have benefited directly from the contribution” and the “participants were […] not the beneficiaries of the contribution”.
While the Tax Court and High Court found in favour of the taxpayer (Opco), the SCA decision released on Friday upheld SARS’ appeal. The SCA based its findings on the fact that employees were incentivised by, and benefited from, the arrangements implemented by the Spur group via their separate investment in Newco shares, as opposed to the contribution made by Opco to the share incentive trust which funded the Prefs and was always intended to be returned to S Holdco, as the sole beneficiary.
The taxpayer (Opco)’s assertions that SARS was precluded from raising additional assessments for the relevant periods due to prescription were denied, due to various incorrect disclosures in its tax returns for the relevant periods. This included not correctly reflecting the deductions as having been limited by section 23H of the Act.
It should be noted that the facts in relation to the share incentive arrangement differs from more typical incentive arrangements in terms of which, for example, the employees generally have a more direct relationship with the share incentive vehicle to which the contribution is made. Nonetheless, it is important for taxpayers who have claimed deductions in respect of contributions to share incentive vehicles, particularly trusts, to consider the potential impact of this judgment on their incentive arrangements.