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[2015] ZASCA 180
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Anglo Platinum Management Services v SARS (20725/2014) [2015] ZASCA 180; 2016 (3) SA 406 (SCA); 78 SATC 73 (30 November 2015)
THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Reportable
Case
No: 20725/2014
In
the matter between:
ANGLO
PLATINUM MANAGEMENT SERVICES (PTY) LTD
APPELLANT
and
THE
COMMISSIONER FOR THE SOUTH
AFRICAN
RESPONDENT
REVENUE
SERVICE
Neutral
Citation:
Anglo
Platinum Management Services v SARS
(20725/2014)
[2015] ZASCA 180
(30 November 2015)
Coram
:
Cachalia, Leach,
Tshiqi, Pillay and Mbha JJA
Heard:
5
November 2015
Delivered:
30 November 2015
Summary:
Income
Tax Act 58 of 1962 – whether valid and binding salary sacrifice
agreement achieved.
ORDER
On
appeal from:
Tax
Court, Johannesburg (Mavundla J sitting with two assessors as court
of first instance):
1
The appeal is upheld with costs, including the costs of two counsel.
2
The order of the Tax Court is set aside and replaced with the
following:
‘
The
appeal is allowed.’
JUDGMENT
Cachalia
JA (Leach, Tshiqi, Pillay and Mbha JJA
concurring)
[1]
This appeal involves a salary sacrifice scheme whereby the appellant,
Anglo Platinum Management Services (Pty) Ltd (the taxpayer),
gave its
employees an opportunity to participate in what it believed, and
still believes, was a legitimate arrangement. The scheme
involved its
employees sacrificing or foregoing a portion of their cash
remuneration ‘packages’ in return for their
use of
company-owned motor vehicles.
[2]
The issue in the appeal is whether, for the years of assessment 2004
to 2008, the use of the motor vehicles ought to be taxed
at a reduced
scale as a taxable benefit under para
(i)
of the definition of ‘gross income’ in s 1 of the Income
Tax Act 58 of 1962 (the Act) read with the Seventh Schedule,
and para
(b)
of the definition of ‘remuneration’ in para 1 of the
Fourth Schedule, as the taxpayer contends it should be, or on
the
normal scale under para
(c)
of the definition instead, which is how the Commissioner assessed the
taxpayer. The Commissioner raised an assessment of R11 543 041
after determining that the amounts the taxpayer allocated to the
motor vehicle scheme did not qualify to be dealt with as a valid
and
binding salary sacrifice agreement as envisaged in para
(i)
.
[3]
It is necessary to set out the legislative framework applicable to
the dispute fully:
Paragraph
(c)
of the definition of ‘gross income’ in s 1 of
the Act, upon which the Commissioner relies, includes:
‘
any
amount, including any voluntary award,
received
or accrued
in respect of services rendered or to be rendered or any amount . . .
received
or accrued
in respect of or by virtue of any employment or the holding of any
office:
Provided
that –
(i)
the provisions
of this paragraph shall not apply in respect of any benefit or
advantage in respect of which the provisions of paragraph
(i) apply.
’
Paragraph
(i)
of the definition of ‘gross income’ includes:
‘
the
cash
equivalent
,
as determined under the provisions of the Seventh Schedule,
of
the value
during
the year of assessment of any benefit or advantage granted in respect
of employment or to the holder of any office, being
a
taxable
benefit
as defined in the said Schedule.’ (My emphasis)
Paragraph
2 of the Seventh Schedule provides as follows:
‘
For
the purposes of this Schedule and of paragraph (i) of the definition
of ‘gross income’ in section 1 of this Act,
a
taxable benefit shall be deemed to have been granted
by an employer to his employee in respect of the employee’s
employment with the employer, if as a benefit or advantage of
or by
virtue of such employment or as a reward for services rendered or to
be rendered by the employee to the employer –
.
. .
(b)
the employee has
been granted the right to use any asset . . . for his or her private
or domestic purposes either free of charge
or for a consideration
payable by the employee which is less than the value of such use,
as
determined . . . under paragraph 7(4) or (7) in the case of a motor
vehicle
.’
(My emphasis)
Paragraphs
3(1) and (2) of the Seventh Schedule provide that:
‘
(1)
The cash equivalent of the value of a taxable benefit shall, for the
purposes of paragraph
(i)
of the definition of ‘gross income’ in section 1 of this
Act, be determined in accordance with the provisions of this
Schedule
by the employer by whom the taxable benefit has been granted.
(2)
The Commissioner may, if such determination appears to him to be
incorrect, re-determine
such cash equivalent upon the assessment of
the liability for normal tax of the employee to whom such taxable
benefit has been
granted.’
Before
para
(b)
of the definition of ‘remuneration’ in
para 1 of the Fourth Schedule, which governed the employers’
liability
to withhold from and to pay employees’ tax to the tax
authority, was amended, it included within its ambit:
‘
any
amount of income which is paid or is payable to any person by way of
any salary, leave pay, wage, overtime pay, bonus, gratuity,
commission, fee, emolument, pension, superannuation allowance,
retiring allowance or stipend, whether in cash or otherwise and
whether or not in respect of services rendered, including –
(a)
any amount referred
to in paragraph . . .
(c)
. . . of the definition of ‘gross income’ in
section one of this Act;
(b)
any amount required
to be included in such person’s gross income under paragraph
(i)
of that definition.’
[4]
For present purposes the effect of these provisions is that where any
amount is received or accrued for services rendered by
virtue of any
employment, it is included in the employee’s gross income under
para
(c)
and is thus fully taxable. However, the proviso in para
(c)
precludes any benefit, in respect of which the provisions of para
(i)
apply, from being dealt with as having been received or accrued for
services in respect of any employment under para
(c)
.
Paragraph
(i)
of the definition of ‘gross income’ includes the ‘cash
equivalent’ as determined under the Seventh Schedule,
of the
value of any benefit or advantage – henceforth referred to
simply as a benefit – granted to the employee as
part of his
employment. As I have indicated, the benefit in issue in this case
was the use of a company-owned motor vehicle.
[5]
So, if the benefit meets the requirements of the definition of ‘gross
income’ in para
(i)
,
it, and not para
(c)
applies. The employer, who grants the benefit to the employee, must
then determine the ‘cash equivalent’ of the value
of the
benefit according to the Seventh Schedule, and having done so, may
withhold and pay employees’ tax on the cash equivalent
as
determined.
[6]
In this matter the taxpayer determined the cash equivalent of the
motor vehicles and paid employees’ tax on this amount.
It is
not an issue in this appeal that this determination was correctly
done. What is in issue is whether the scheme constituted
a valid and
binding salary sacrifice arrangement that gave rise to a cash
equivalent to be determined in accordance with the Seventh
Schedule
under para
(i)
.
[7]
The Tax Court, in which Mavundla J presided, seems to have
misunderstood the taxpayer’s case to be that because it had
devised a legitimate salary sacrifice scheme, which did not attract
liability for income tax under para
(c)
of the definition of ‘gross income’, no tax liability on
its part arose at all. It thus proceeded to adjudicate the
dispute
without considering whether the relevant paragraphs of the Seventh
Schedule, para
(i)
of the definition of ‘gross income’, proviso
(i)
to para
(c)
and para
(b)
of the definition of ‘remuneration’ in the Fourth
Schedule, applied. And, having overlooked these provisions, it seems
to have approached the taxpayer’s evidence on the unarticulated
premise that the scheme was a sham, disguised to conceal
its true
nature. It consequently dismissed the taxpayer’s appeal against
the assessment and ordered the taxpayer to pay the
costs of the
appeal, implicitly finding that its grounds of appeal had been
unreasonable.
[8]
In this court, the Commissioner eschews reliance on the Tax Court’s
judgment. Instead he approaches the matter on a firmer
and proper
foundation that in commercial practice and in the commercial world
employers and employees are entitled to structure
salary packages in
a tax efficient manner. And that salary sacrifice arrangements,
whereby employees sacrifice or forego a portion
of their cash
salaries in return for some quid pro quo or fringe benefit from the
employer that reduces their tax liability, are
perfectly lawful.
[9]
In addition, the Commissioner does not contend that the scheme was a
sham or disguised to appear to be genuine, whereas in truth
it was
not. In other words he does not invoke the substance over form
doctrine. Instead his case is that the taxpayer and its employees
did
not achieve what they purported to achieve, namely, a valid and
binding salary sacrifice agreement. And therefore, that the
use of
the vehicles, was, in reality, a consideration the employees received
as part of their employment and formed part of their
gross
remuneration.
[10]
It is a question of fact in each case whether a salary sacrifice
agreement was achieved. In this regard a court is not concerned
with
the subjective belief of the parties to the agreement – no
matter how genuine this belief may be – but with whether
the
facts, objectively viewed, establish that this result was
attained.
[1]
It must thus
consider the oral and documentary evidence to assess the
probabilities. The taxpayer bears the burden of proving that
the
Commissioner’s decision to disallow its objection to the
assessments was wrong. And where, as in this case, the taxpayer’s
is the only oral evidence, it must be considered carefully in the
light of the available documentary evidence before a court is
able to
conclude whether or not the taxpayer has discharged the onus.
[11]
So, to succeed in this appeal, the taxpayer must establish, on the
evidence of Mr Dolf Broodryk, who testified on its behalf,
and the
documents on which it relies, that a genuine salary sacrifice was
concluded as a matter of fact. It would thus have to
show that the
employees’ remuneration packages were structured in a manner
that they received their remuneration partly by
way of cash and the
balance by way of a fringe benefit; and that the taxpayer
unconditionally assumed liability for payments and
contributions for
the motor vehicles that were part of the scheme, thereby releasing
its employees from any such obligation. In
other words by foregoing
part of their remuneration package in return for the use of a motor
vehicle, the employees divested themselves
of their right to this
amount of money. The implication of such divestment is that the
amount would not have been received or accrued
for services to be
rendered by the employees as contemplated in para
(c)
of the definition of ‘gross income’.
[12]
I now consider the evidence. Mr Broodryk, who devised the scheme for
the taxpayer, was taken through the documents and explained
to the
Tax Court how the scheme worked. The relevant documents are:
Policy
and Procedures of the Motor Vehicle Scheme (‘the policy
document’);
The
Motor Vehicle Use Agreement (‘the MVA’);
The
Notional Instalment Sale Agreement (‘the NISA’);
The
Annual Total Package Allocation Agreement (‘the AA’);
The
Notional Account.
[13]
The employees, he explained, had to complete the AA indicating how
they wished their ‘cost to the company’ remuneration
packages to be structured flexibly as between cash and other
benefits, which included the use of a motor vehicle. This choice was
available to new and to existing employees when they were offered
annual increases.
[14]
Once an employee had chosen to participate in the scheme and had
selected a vehicle of his choice, the taxpayer purchased it,
and paid
the dealer in cash. It then entered the vehicle in its asset
register, and claimed depreciation on it. The vehicle was
registered
in the employee’s name, but the taxpayer owned the vehicle
until the employee had settled the finance obligation
and paid the
related fringe benefit tax on it. The cost of the purchase was
recovered from the employee through a monthly deduction
–
predetermined at the time he elected to participate in the scheme –
from the portion of his salary he had to forego
in return for the use
of the vehicle.
[15]
If this was all there was to the scheme there would have been no
dispute between the taxpayer and the taxing authority regarding
its
efficacy. This is because the cost of the motor vehicle would have
been deducted from each employee’s monthly salary
in return for
its use. Under para 2 of the Seventh Schedule the taxpayer would thus
be deemed to have given a taxable benefit to
the employee. In terms
of para 3(1) of the Seventh Schedule the taxpayer would then have
determined the cash equivalent of the
value of the motor vehicle as
contemplated in para 7 of the Seventh Schedule, for the purposes of
paragraph
(i)
of the definition of ‘gross income’. This was correctly
done in this case.
[16]
It is the manner in which the scheme was implemented: in particular
the entitlement of the employees to claim an amount of
credit in the
notional account, which I discuss below, and their contractual
obligation to pay insurance premiums on the motor
vehicles that lie
at the heart of this dispute. The Commissioner contends that the
entitlement to this credit and the obligation
to pay the premiums are
inconsistent with a genuine salary sacrifice scheme as, in substance,
the employees retain their power
over their salary packages.
[17]
The method used to recover the cost of the motor vehicle, was the
subject of considerable disagreement between the taxpayer
and the
Commissioner. The evidence was that the taxpayer and the relevant
employees entered into a NISA, as envisaged in the policy
document.
This served as a mechanism whereby ‘notional interest’ on
the amount paid to the car-dealer would be calculated
over the period
of the operation of the scheme, for example 48 months.
[18]
In the Tax Court, the Commissioner contended that this agreement
amounted to the taxpayer extending a credit facility to the
employees, which was ultimately deducted from their monthly salary.
But it is important to understand that the interest so calculated
was
not actual interest since the taxpayer had paid for the vehicle in
cash. It was instead a theoretical calculation of what the
vehicle
would have cost the taxpayer had it purchased the vehicle on credit;
hence the description of the interest as ‘notional’.
The
taxpayer added this notional interest to the capital cost of the
motor vehicle. Before us, the Commissioner, correctly in my
view, did
not persist with this contention.
[19]
So, if the taxpayer had financed the vehicle through a finance house,
instead of paying for it in cash, this amount –
capital plus
notional interest – would have been the ‘real’
cost. The taxpayer included this ‘real’
amount in the
calculation of the salary sacrifice it recovered through monthly
deductions from its employees’ salaries.
[20]
Mr Broodryk testified that the taxpayer prepared ‘notional
accounts’ it sent to its employees who chose the taxable
benefit of the use of their motor vehicles. These accounts, which I
have indicated lie at the heart of this dispute, set out the
‘optimal
value’ of the motor vehicle, defined as the ‘theoretical
representation’ of the capital amount
outstanding at the end of
each month determined according to the reducing cap method. This was
part of the methodology used to
determine the actual value of the
motor vehicle, taking into account the finance costs from the NISA.
In addition to being represented
as part of the capital cost of the
motor vehicle, notional interest was recorded separately in the
notional accounts.
[21]
The accounts also detailed actual payments the taxpayer made for
maintenance and running expenses, insurance premiums and licensing
fees. These payments were debited to the notional account, as was the
notional interest. The predetermined monthly deduction from
the
employees’ salary appeared from month to month as a credit in
the notional account.
[22]
The evidence, both documentary and oral, was that, from time to time,
there would be a shortfall in the notional account where
the actual
expenditure plus notional interest exceeded the amounts credited to
an employee through the monthly deduction. Where
this occurred, the
outstanding amounts would be recovered from the employee. Where,
however, the amount credited to the employee
exceeded the
expenditure, the policy allowed the employee to withdraw the money
from the credit available once every quarter. Any
amount so withdrawn
was, subject to normal taxation, part of his gross income.
[23]
What emerges from Mr Broodryk’s evidence is that the notional
accounts were for the taxpayer’s internal recordkeeping
–
to keep track of the cost of providing the taxable benefit to its
employees – and not for any other purpose. Its
aim was to
correlate the amounts that became available through the salary
sacrifice with the taxpayer’s own actual expenditure
plus
notional interest.
[24]
In response to a question from the presiding judge in the Tax Court
as to whether the accounts were fictitious, Mr Broodryk
answered in
the affirmative, which the Tax Court seems to have misconstrued as a
concession that there was something untoward in
their creation and
management. The Commissioner vigorously contests the characterisation
of these accounts as fictitious or notional.
It was submitted on his
behalf that the use of either of these terms was an unjustified gloss
on the true role of both the NISA
and the notional accounts because
they were part and parcel of the exercise of calculating the
actual
amount that the employees – not the taxpayer – were
required to pay each month to cover the costs of the scheme. The
notional accounts, it was contended, therefore recorded real facts –
not fictional amounts.
[25]
Two of the ‘real facts’ so recorded were the insurance
premiums for the vehicles debited to the notional account
and the
monthly amount overspent or underspent for each employee, as
mentioned above. The Commissioner points particularly to these
features of the scheme as being inconsistent with a genuine salary
sacrifice. It is therefore important to properly understand
the
evidence in this regard.
[26]
There appears to be no dispute between the parties that the policy
entitled each employee to withdraw the credit – the
amount
underspent – in the notional account every quarter. If the
amount was not withdrawn it would be rolled over into the
following
month or quarter. At the end of the financial year this amount would
be paid to the employee if there was still a credit
balance subject,
to normal income tax.
[27]
Mr Broodryk’s testimony in this regard was that the employee
could elect whether or not to withdraw the money quarterly.
Under
cross-examination he was pressed to concede that what he referred to
as an election was in truth a contractual right to claim
the credit,
which would be irreconcilable with an antecedent divestment of the
right to the money making up the sacrificed portion.
But Mr Broodryk
stood his ground reiterating that the policy gave the employee an
election, a response counsel for the Commissioner
sought to
stigmatise as being evasive.
[28]
I accept that the employees had a right to claim any credit in
accordance with the policy. The import of Broodryk’s evidence
was simply that they could elect not to claim it quarterly in which
case they could still claim whatever credit remained at the
end of
the financial year. But the fact remains that the amounts that became
available to be claimed quarterly were both unanticipated
and
insignificant simply because it was not possible to predetermine
future running expenses and notional interest for the motor
vehicles.
The running costs varied from month to month and from employee to
employee.
[29]
And, as I have mentioned, when there were small amounts owing by
employees, they paid in the difference, and conversely, they
were
entitled to claim the credit, subject to normal taxation, when such
amounts were owed to them. In this way the taxpayer was
able to
ensure, as Mr Broodryk put it, that the cost of the benefit (to the
taxpayer) was ‘in sync’ with the predetermined
amount
that was allocated to the scheme. So, the fact that these
insignificant and unanticipated amounts could (not would) become
available to the employee in the future because of inevitable future
adjustments to the predetermined cost of the benefit cannot
and does
not detract from the efficacy of the scheme.
[2]
[30]
One may test this by asking what the Commissioner’s response
would have been if the scheme was able to achieve a perfect
symmetry
between the cost of the benefit and the amount the employee gave up,
which is what the scheme in substance sought to achieve?
The answer
is evident; he would have accepted that this was a genuine salary
sacrifice. I see no reason why on the facts of this
case we should
come to a different conclusion.
[31]
So, properly understood, the credit to which an employee became
entitled when he elected to participate in the scheme was not
unconditional. It was a contingent right, exercisable at a later date
and on the occurrence of an uncertain future event: a quarterly
credit balance in the notional account. If the event did not
materialise there was no right to be exercised and until it was
exercised
there could not have been an accrual of this income as
contemplated in para
(c)
of the definition of ‘gross income’. The Commissioner’s
contention that the employees retained their right to
claim such
moneys ‘on demand’ and therefore did not unconditionally
divest themselves of this right rests on the incorrect
premise that
the right had vested when the AA was concluded, whereas it was in
truth a contingent right.
[3]
[32]
Similarly, in regard to the insurance premiums for the motor
vehicles, counsel for the Commissioner attempted to demonstrate,
by
reference to the documents, that payments debited to the notional
account were deducted from the employee’s monthly salary
and
were not part of a salary sacrifice. In this respect the policy
document provided that the employees had to insure their cars
and the
premiums would be reflected as having been deducted from their
notional accounts. The MVA also said that employees would
be liable
for the payment of the premiums.
[33]
But under robust cross-examination Mr Broodryk insisted that the
taxpayer, and not the employees, was liable for the premiums;
the
employees only needed to ensure the premiums were paid. The taxpayer,
he maintained, therefore assumed this obligation and
paid for the
premiums from the salary sacrifice. In this instance too, counsel for
the Commissioner criticised his response harshly
as being at odds
with the documents.
[34]
Again, I think the criticism of Mr Broodryk’s evidence was
unfair: First, the AA, which was the agreement confirming
the
employee’s total package, specifically says that the taxpayer –
not the employee – is liable for insurance
costs. Secondly, Mr
Broodryk’s uncontested testimony was that the taxpayer assumed
this obligation and paid for the premiums
from the amount the
employee had foregone. Thirdly, even though the documents appear to
be equivocal as to whether the taxpayer
or employee had this
obligation, the parties implemented their agreements as Mr Broodryk
explained they had done. In other
words they intended the taxpayer to
be liable for these costs, despite what some of the documents said.
The Commissioner, who is
a stranger to these agreements, cannot
gainsay this evidence.
[4]
[35]
To conclude: the parties sought to fund a taxable benefit from a
salary sacrifice. They were entitled to do so in accordance
with the
relevant provisions of the Act. And they achieved this through the
scheme they agreed on and implemented. The following
features of the
scheme indicate that it was properly designed and implemented: The
taxpayer purchased the motor vehicles, owned
and claimed depreciation
on them. The recovery of their total cost, including their running
expenses was obtained from the salary
sacrifice, not from the
employees. In return for the amount they had foregone the employees
received a taxable benefit; ie, the
use of the vehicles.
[36]
Neither the employees’ right to claim a credit, which the
Commissioner argued was inimical to an antecedent divestment
of a
right, nor the provisions of some of the agreements making the
employees responsible for insurance premiums on the motor vehicles
undermines the efficacy of the scheme. The credit claimable arose
from a small unpredicted and unanticipated future contingency,
and
the insurance premiums were in fact paid for by the taxpayer.
Therefore, the Commissioner’s argument that the use of
the
vehicles was in reality a consideration received by each employee as
part of their employment and thus taxable under para
(c)
of the definition ‘gross income’, as opposed to para
(i)
as a taxable benefit by virtue of a valid salary sacrifice, must
fail.
[37]
In the result the appeal is upheld. The following order is made:
1
The appeal is upheld with costs, including the costs of two counsel.
2
The order of the Tax Court is set aside and replaced with the
following:
‘
The
appeal is allowed.’
___________________
A
CACHALIA
JUDGE
OF APPEAL
APPEARANCES
For
Appellant:
T S Emslie SC
Instructed
by:
Webber
Wentzel, Johannesburg
Honey
Attorneys, Bloemfontein
For
Respondent:
D M Fine SC (with him
H A Mpshe)
Instructed
by:
The
State Attorney, Pretoria
The
State Attorney, Bloemfontein
[1]
Erf 3183/1
Ladysmith (Pty) Ltd & another v Commissioner for Inland Revenue
[1996] ZASCA 35
;
1996 (3) SA 942
(A) at 950I-951C.
[2]
Compare with
ITC
1682
62 SATC 380
at 401E-F.
[3]
See
Family
Benefit Friendly Society v Commissioner for Inland Revenue
1995 (4) SA 120
(T) 125A-C;
Mooi
v Secretary for Inland Revenue
1972 (1) SA 675
(A) 683F-H.
[4]
Rane
Investments Trust v Commissioner, South African Revenue Service
2003
(6) SA 332
(SCA) 346 para 27.