About SAFLII
Databases
Search
Terms of Use
RSS Feeds
South Africa: Supreme Court of Appeal
SAFLII
>>
Databases
>>
South Africa: Supreme Court of Appeal
>>
2014
>>
[2014] ZASCA 171
|
|
Commissioner For The South African Revenue Service v Bosch and Another (394/2013) [2014] ZASCA 171; [2015] 1 All SA 1 (SCA); 2015 (2) SA 174 (SCA); 77 SATC 61 (19 November 2014)
Links to summary
THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Reportable
Case
no: 394/2013
In
the matter between:
THE
COMMISSIONER FOR THE
SOUTH
AFRICAN REVENUE
SERVICE
............................................................................
Applicant
and
MARIANA
BOSCH
.....................................................................................................
First
Respondent
IAN
ROBERT
McCLELLAND
..............................................................................
Second
Respondent
Neutral
citation:
Commissioner SARS v Bosch
(394/2013)[2014] ZASCA 171 (19 November
2014)
Coram:
BRAND, SHONGWE, WALLIS and PILLAY JJA and DAMBUZA
AJA.
Heard
:
6 November 2014
Delivered
:
19 November 2014
Summary:
Share option scheme – s 8A(1)
(a)
of the Income Tax Act 58 of 1962 –
employees given option to purchase shares – option to be
exercised within 21 days
– payment for and delivery of shares
to occur in tranches two, four and six years later – whether
date of exercise
of option or date of payment for and receipt of
shares the date for determining any gain to be included in the
taxpayer’s
income – whether contract arising from
exercise of option conditional – whether contracts between
employees and trust
administering scheme simulated transactions
ORDER
On
appeal from:
Western Cape High Court
(Waglay, Davis and Baartman JJ, sitting as court of appeal):
1
Leave to appeal is granted.
2
The appeal is dismissed with costs, such
costs to include the costs of the application for leave to appeal in
the court below and
this court, and those consequent upon the
employment of two counsel.
JUDGMENT
Wallis
JA (Brand, Shongwe and Pillay JJA and Dambuza AJA concurring)
[1]
Many
companies use share option schemes as a means of retaining staff and
providing additional compensation to those staff members
who are
thought to make a significant contribution to the business activities
of the company. Such schemes may take various forms.
This application
for leave to appeal concerns a scheme (the scheme) referred to as a
deferred delivery scheme (a DDS scheme or
schemes). In 1997 the
Foschini Group (Pty) Ltd (Foschini) implemented the scheme. In
2008 the Commissioner for the South
African Revenue Services (the
Commissioner) reviewed it and issued additional assessments to income
tax in relation to 117 employees
and former employees of Foschini.
Appeals were lodged on behalf of the employees and the appeals of two
of them, the respondents,
Ms Bosch and Mr McClelland, were taken as
test cases before the Tax Court. Their appeals were partially
successful before Allie
J and the Commissioner did not pursue a
challenge to those of her findings that were favourable to the
taxpayers. Ms Bosch and
Mr McClelland appealed to the full court of
the Western Cape High Court against the findings that were adverse to
them. Their appeals
succeeded in a judgment by Davis J
[1]
in which Baartman J and, in all save one respect, Waglay J concurred.
Leave to appeal to this Court was refused. On petition the
application for leave to appeal was referred for argument in terms of
s 21(3)
(c)
(ii)
of the Supreme Court Act 59 of 1959. The parties were directed to be
prepared to address the Court on the merits of the dispute
and they
have done so.
[2]
The issues raised in the case are important
and, according to the affidavit on behalf of the Commissioner, may
affect a number of
similar DDS schemes in relation to other companies
and taxpayers. The points raised are reasonably arguable and in the
principal
respect were upheld in the Tax Court. It cannot be said
that there were no reasonable prospects of success and, in any event,
the
fact that the decision had wider implications justified the
Commissioner in seeking to canvass the issues before this Court.
Accordingly
leave to appeal should be granted. The costs of the
application for leave to appeal and the costs of the application for
leave
to appeal to this court are to be costs in the appeal. I turn
to deal with the appeal on its merits.
[3]
Ms
Bosch and Mr McClelland were both senior employees of Foschini
between 1998 and 2005, which is the period relevant to this appeal.
In September 1998 and again in December 1998 they were each given
options to purchase shares in Lewis Foschini Investment Company
Ltd
(Lefic), Foschini’s listed holding company, at a price
determined as the Middle Market Price
[2]
of those shares on the Johannesburg Stock Exchange (the JSE) as
determined on the date of the notice containing the option. The
options had to be exercised within 21 days of the offer and both Ms
Bosch and Mr McClelland exercised them within the stipulated
period.
In terms of the scheme the shares would be delivered in three
tranches on the second, fourth and sixth anniversaries of
the notice
containing the option, subject to certain exceptions to which I will
revert. On delivery the purchase consideration
became payable. The
taxpayers were entitled, instead of taking delivery, to dispose of
the shares and to be paid the balance remaining
after deducting the
costs of sale and the purchase consideration.
[4]
We are not concerned with the first two
tranches of shares to which Ms Bosch and Mr McClelland became
entitled, as the Tax Court
held that the gains on those tranches were
taxed in terms of the practice then prevailing in the offices of SARS
and there was
no appeal against that finding. The final tranches that
are the subject of this appeal were deliverable on 14 August 2004 and
2
December 2004. These two dates are relevant because there was a
potentially relevant amendment to the Income Tax Act 58 of 1962
(the
Act) that came into effect from 26 October 2004. If certain of the
arguments on behalf of the Commissioner were upheld, the
amended
provisions would apply in respect of the shares that fell to be
delivered on the latter date.
[5]
Ms Bosch elected to sell her shares and
receive the proceeds while Mr McClelland elected to take transfer of
the shares and pay
the consideration. The interest of the
Commissioner was aroused by the fact that when this occurred the
value of the shares on
the JSE was considerably higher than the
consideration paid for them. This emerges from the following table
taken from the judgment
of the court below. It shows the date on
which the shares became deliverable; the market value of the shares
on those dates; the
consideration payable by Ms Bosch and Mr
McClelland and the differences between the prices paid and the value
of the shares, realised
in the case of Ms Bosch and notional in the
case of Mr McClelland. These were the amounts on which the
Commissioner levied additional
income tax.
Bosch
14/08/2004
R81 106
R20 007
R61 099
Bosch
02/12/2004
R69 671
R10 607
R59 064
McClelland
14/08/2004
R40 621
10 021
R30 600
McClelland
02/12/2004
R92 494
R14 129
R78 365
[6]
The section of the Act on which the
Commissioner primarily relied in making the additional assessments
was s 8A(1)
(a)
,
which reads as follows:
‘
There
shall be included in the taxpayer’s income for the year of
assessment the amount of any gain made by the taxpayer after
the
first day of June, 1969, by the exercise, cession or release during
such year of any right to acquire any marketable security
(whether
such right be exercised, ceded or released in whole or part), if such
right was obtained by the taxpayer before 26 October
2004 as a
director or former director of any company or in respect of services
rendered or to be rendered by him or her as an employee
to an
employer.’
[7]
The
Commissioner’s main contention was that when the taxpayers paid
the consideration for the shares and received either transfer
or, if
they elected to sell them, the proceeds, that is when ‘the
exercise of the right to acquire the shares’ occurred
in terms
of this section. Accordingly that was when the taxpayers’
incomes were taxable on the difference between the market
value of
the shares and the purchase consideration paid for them. In the
alternative and on various grounds the Commissioner contended
that
the agreements of purchase and sale of the shares concluded in
consequence of the taxpayers exercising the options were conditional
on the taxpayers remaining employees within the group until the date
for delivery of the shares arrived. The argument was that
the sale
agreement arising from the exercise of the option only became
exigible on fulfilment of the conditions at the later date
when the
price fell to be paid and the shares delivered. If that was correct
then in relation to the earlier deliveries they were
taxable under
s 8A(1)
(a)
and in relation to the two later deliveries in December 2004 they
were taxable under s 8C of the Act, which was introduced
to deal
with DDS schemes. Lastly, the Commissioner contended that the
mechanism by which the scheme operated was a simulation and
that,
once the disguise in which it had been concealed was stripped away,
the true exercise of the right to acquire the shares
occurred when
the shares were paid for and delivered.
[3]
[8]
By contrast the taxpayers contended that
when they exercised the options in 1998 they exercised the right to
acquire the shares,
albeit that delivery and payment of the
consideration was postponed in accordance with the provisions of the
scheme. They submitted
that it was at that stage that they acquired
an unconditional right to the shares and became liable to pay income
tax under this
section on any increase in market value of the shares
between the date of the offer and the date on which they exercised
the options
(an inconsequential amount). They said that they were not
liable to tax on the difference between the market price of the
shares
on the date of delivery and the consideration payable at that
time and rejected the notion that there was any simulation in the
scheme or the contracts concluded pursuant thereto.
Interpretation
of s 8A(1)
(a)
[9]
The
primary issue in dispute was whether the two taxpayers exercised a
right to acquire the shares, within the meaning of that expression
in
s 8A(1)
(a)
,
when they exercised the options, or whether they only did so when the
time for payment and delivery arrived. That involves the
proper
construction of the section in accordance with ordinary principles of
statutory construction. The words of the section provide
the starting
point and are considered in the light of their context, the apparent
purpose of the provision and any relevant background
material.
[4]
There may be rare cases where words used in a statute or contract are
only capable of bearing a single meaning, but outside of
that
situation it is pointless to speak of a statutory provision or a
clause in a contract as having a plain meaning. One meaning
may
strike the reader as syntactically and grammatically more plausible
than another, but, as soon as more than one possible meaning
is
available, the determination of the provision’s proper meaning
will depend as much on context, purpose and background
as on
dictionary definitions or what Schreiner JA referred to as ‘excessive
peering at the language to be interpreted without
sufficient
attention to the historical contextual scene’.
[5]
[10]
The
section refers to the exercise by the taxpayer of a right to acquire
any marketable security. It does not refer to the acquisition
of a
marketable security. That suggests that it is concerned with
something prior to the actual acquisition of ownership, which
is
effected by transfer of the marketable security to the taxpayer. It
foreshadows a right that vests in the taxpayer and is capable
of
being exercised so as to bring about the acquisition of the
marketable security. An obvious example of such a right, in the
strict sense of that word, would be an option. An option is an offer
to sell, joined with a binding contractual undertaking to
keep the
offer open for acceptance for a specific period.
[6]
The option holder then has a right to acquire the subject of the
option. If they wish to acquire it, they are said to exercise
the
option, thereby bringing a binding contact of purchase and sale into
existence. This is the very language used in the section
and it is
language apt to describe the situation where a taxpayer has been
given an option to buy shares, or some other form of
marketable
security, and exercises the right to do so. At the time the section
was introduced it was commonplace for companies
to have in place
share option schemes in the form of options to purchase shares
exercisable at a future date at a price determined
when the option
was given.
[11]
Where an offer is made to sell a marketable
security to a taxpayer, not linked to any undertaking to keep the
offer open for a defined
period, the taxpayer has a right to acquire
that marketable security for so long as the offer remains open for
acceptance. Until
it is withdrawn the right vested in the taxpayer is
the same as that created by an option and the exercise of that right
has the
same effect, namely to bring into existence a contract of
purchase and sale in respect of the marketable security. In
each
instance the exercise of the right takes the form of an
agreement to purchase the marketable security on the terms offered.
The
only distinction between the two situations is that in the case
of an option the offeror is obliged to keep the offer open for a
defined period, whereas in the ordinary case the offer will be
revocable at the will of the offeror at any time before acceptance.
[12]
Other possible circumstances giving rise to
a similar right to acquire a marketable security, capable of being
exercised by acceptance,
are the allotment of shares in a company, a
rights issue to existing shareholders or an offer to make a donation
or enter into
an exchange in relation to a marketable security. In
each instance the taxpayer acquires a right to acquire the marketable
security
capable of being brought to fruition by acceptance. In
saying that, one does not need to go beyond the conventional
conception
of rights as legal rights. For so long as it is open to
the taxpayer to accept the allotment, follow the rights or, by
acceptance,
to conclude a contract of donation or exchange, they have
a right to acquire shares capable of being exercised by them.
Linguistically
therefore the section refers naturally to the type of
situation described in this and the preceding paragraphs. The
characteristic
of each of those situations is that they do not
necessarily mean that the exercise of the right brings about the
immediate acquisition
of the marketable security in the sense of
title to it as an asset. When that occurs will depend upon the terms
of the contract
that results from the taxpayer’s exercise of
the right.
[13]
The
alternative construction espoused by the Commissioner fits less
naturally with the wording of the section. It requires not only
the
initial exercise of the right that leads to the entitlement to
acquire the marketable security, but the enforcement of the
resulting
contract thereafter. Cases, in which it has been said that the
ordinary legal meaning of the word ‘acquire’
is to
acquire ownership,
[7]
were cited
to us. However, all that those cases demonstrate is that whether this
is the correct meaning is always dependent upon
context and that the
word may have a broader meaning of the acquisition of the right to
acquire ownership (a
ius
in personam ad rem aquirendam
).
[8]
Thus
s 2
of the
Transfer Duty Act 40 of 1949
imposes transfer duty on
property acquired by any person pursuant to a transaction, but there
is clear authority that this does
not mean the acquisition of
ownership, but merely acquisition of a right to acquire ownership in
due course on fulfilment of the
contractual obligations of the
acquiring party.
[9]
There is
nothing to indicate that
s 8A(1)
(a)
was directed at performance of the contract resulting from a prior
exercise of rights, as opposed to the exercise of a right leading
in
due course, in accordance with the applicable contractual provisions,
to the acquisition of ownership of a marketable security.
[14]
The
Commissioner did not contend that the exercise of an option does not
fall naturally within the language of the section, irrespective
of
when the resulting contract of purchase and sale is to be performed.
That accords with the view of the revenue authorities from
1969 when
s 8A
was incorporated into the Act. There was a suggestion soon
thereafter that the section was confined to the exercise of an option
and did not cover any other situation, but that suggestion was laid
to rest by the decision of the full court in
Secretary
for Inland Revenue v Kirsch
,
[10]
which dealt with an allotment of shares and not an option. It was
argued that the offer to allot shares was a simple offer revocable
at
will and therefore the taxpayer had no ‘right to acquire a
marketable security’ unless the offer was embodied in
an
option. The court rejected this contention. In giving the judgment of
the court Coetzee J held that acceptance of an allotment
of shares
was no different from the exercise of an option and said:
‘
Respondent's
counsel makes the submission (in his heads of argument) that the most
important single difference in the tax consequences
between these two
classes of transactions (options and outright sales) is that, in the
case of an option falling within the provisions
of s 8A, the
liability for tax will arise and be determined not when the employee
or director acquires that right but only when
he exercises the right
and provided that at that date the market value of the shares exceeds
the price which he is obliged to pay
for the shares. By way of
contrast, he says, in the case of a simple offer and acceptance the
gain will be assessable to tax immediately
the contract is concluded.
This exposition is without merit as the postulated difference is
contradicted by his own statement (correct)
that in both cases
liability for tax arises when the offers are accepted, not before.
This "difference" is non-existent.
The only real difference
in law between the two classes is that, in the case of the first, the
offer is irrevocable (usually for
a period) and, in the case of the
second, it is revocable at will. The legal results in all respects,
of acceptance, in both classes
are identical. At that moment the
contract comes into being and only then an obligation to allot the
shares arises.’
[15]
Subsequent cases have accepted the
correctness of
Kirsch
,
as have writers on income tax. It clearly identified the act of
acceptance of the offer in the case of an option, or the acceptance
of the offer to allot shares, as the event that gives rise to a
potential liability to tax, rather than the performance of the
contract. I accept that the problem confronting the court differed
from the present case in that the principal argument was that
the
section was confined in its operation to options and did not cover
other transactions, such as an allotment of shares. Accordingly
the
court was not directly concerned with the possibility of a right
being exercised, giving rise to a contract of purchase and
sale, but
the terms of the contract being such as to delay performance of the
obligations under that contract to a much later date.
It did,
however, recognise that the allotment of shares would not occur
simultaneously with the acceptance of the offer to allot
shares and
cited the example of a rights offer where the acceptance and
performance of the resulting contract occur at different
times.
Nonetheless it identified the acceptance of the offer and the
conclusion of the contract as the event that attracted liability
to
tax under s 8A. That is supportive of the contentions of the
taxpayers.
[16]
The issues in this case appear to have come
to the fore in practical terms when companies and their advisers
started to adopt DDS
schemes, which according to the evidence
occurred in the early to mid 1990s. This led Mr Alberts, then
employed in the law interpretation
division of the revenue services
and, at the time of the hearing in the Tax Court, the Group Executive
for Interpretations and
Rulings at SARS, to prepare and submit to the
legislation committee a memorandum dealing with share option schemes
generally and
DDS schemes in particular. He accepted, in the
memorandum, which was prepared on 6 March 1996, that the exercise of
a right to
acquire a marketable security in the context of a DDS
scheme occurred when the option was accepted and did not suggest that
s 8A(1)
(a)
was
open to the alternative interpretation now advanced on behalf of the
Commissioner in this court. Instead he recommended an amendment
to
the Act to deal with that situation. The practice of SARS until the
issue of the revised assessments in issue in this appeal
was that the
acceptance of the option in a DDS scheme was the time at which the
right to acquire a marketable security was exercised
for the purpose
of determining any taxable gain received by a taxpayer in terms of
s 8A(2)
(a)
of
the Act.
[17]
There
is authority that, in any marginal question of statutory
interpretation, evidence that it has been interpreted in a consistent
way for a substantial period of time by those responsible for the
administration of the legislation is admissible and may be relevant
to tip the balance in favour of that interpretation.
[11]
This is entirely consistent with the approach to statutory
interpretation that examines the words in context and seeks to
determine
the meaning that should reasonably be placed upon those
words. The conduct of those who administer the legislation provides
clear
evidence of how reasonable persons in their position would
understand and construe the provision in question.
[12]
As such it may be a valuable pointer to the correct interpretation.
In the present case the clear evidence that for at least eight
years
the revenue authorities accepted that in a DDS scheme the exercise of
the option and not the delivery of the shares was the
taxable event,
fortifies the taxpayers’ contentions.
[18]
Lastly
on the issue of the proper interpretation of s 8A(1)
(a)
some
weight must attach to the fact that in October 2004 the Act was
amended by the insertion of s 8C, which in part at least
was
enacted in order to render taxable the gains made by beneficiaries of
DDS schemes when they took delivery of shares under these
schemes. It
does this by providing that the critical date for determining a tax
liability is the date of vesting of the shares
in the taxpayer. As
explained in the Explanatory Memorandum accompanying the amending
legislation when it was placed before Parliament,
the existing
provisions of s 8A(1)
(a)
‘fail
to fully capture all the appreciation associated with the marketable
security as ordinary income’. That not only
identifies the
purpose of the amendment,
[13]
but is also a permissible guide to Parliament’s understanding
of the existing section.
[14]
[19]
Weighing all relevant contextual and
background material it points consistently in favour of the
construction of the section in
the manner for which the taxpayers
contend. That reinforces the linguistic analysis. I conclude that
when the section speaks of
the exercise of a right to acquire a
marketable security it is concerned with the action by the taxpayer
that gives rise to a binding
contract under which the taxpayer will
be entitled, subject to compliance with the terms of the contract, to
acquire the marketable
security, whether the acquisition by transfer
to the taxpayer occurs immediately or is postponed to a future date.
The contrary
contention by the Commissioner must therefore be
rejected.
Conditionality
[20]
The
further submissions on behalf of the Commissioner can conveniently be
dealt with under the single heading of conditionality.
The
Commissioner’s submissions around this topic arose in
consequence of a concession on behalf of the taxpayers that
if the
exercise of the option gave rise to a contract subject to a
suspensive condition then s 8A(1)
(a)
would
not be triggered. It is unnecessary to deal with the correctness of
the concession. There were three threads to the Commissioner’s
argument. The first was that the contracts concluded by the taxpayers
when they exercised the options were subject to a suspensive
condition that they remain in the employ of Foschini until the dates
upon which each tranche of shares fell due for delivery. The
second
was that even if the contracts were not subject to such a true
suspensive condition they should for tax purposes be treated
as if
they were. It was contended that the contracts were contingent in the
sense referred to in
Commissioner
for Inland Revenue v Golden Dumps (Pty) Ltd
[15]
and for that reason were to be treated as being subject to what
counsel termed ‘fiscal conditionality’. Lastly it was
contended that the fact that receipt of the shares was subject to a
reciprocal obligation on the part of the taxpayers to pay the
consideration therefor, made the contracts conditional.
[21]
The necessary starting point for a
consideration of these contentions is the scheme itself. It defined
the rights that the taxpayers
acquired pursuant to the options
granted to them. The options did not vary those terms. They merely
set out the number of shares
to be acquired; the consideration
payable therefor; and the dates upon which the shares would in the
ordinary course become deliverable.
This was so even though the
scheme was embodied in a contract between Lefic, Foschini and
Foschini Ltd and, from 1999 (after the
options in this case had been
exercised), was administered by a trust (the Trust). The terms of the
options were such that the
contracts of sale concluded by
participants incorporated the terms of the scheme.
[22]
The stated purpose of the scheme was to
give employees an incentive to promote the continued growth of the
company. From time to
time the Board of Foschini would identify
employees whom it wished to encourage in this way and would offer
them an option to purchase
a specified number of shares in Lefic at
the price determined by the Board. The Foschini Group (Pty) Ltd in
conjunction with Foschini
would grant the option. An employee given
such an option had 21 days from the date of the offer (referred to as
the notice date)
within which to exercise it, failing which it would
lapse. If the option was exercised the employee would not be entitled
to immediate
delivery of the shares, nor would they acquire any of
the ordinary rights attendant upon ownership of shares, such as the
right
to dispose of them, the right to vote at meetings of
shareholders or the right to receive dividends. Subject to certain
qualifications
to which I will revert, they would only become
entitled to delivery of the shares against payment of the price on
the second, fourth
and sixth anniversaries of the notice date.
Although the scheme did not spell this out expressly, in practice,
when payment became
due, this was demanded, but employees were given
the choice to sell the shares and to receive the proceeds less the
costs of sale.
Suspensive
condition
[23]
A
suspensive condition is one that suspends the exigible content of a
contract, either in whole or in part, pending the occurrence
of an
uncertain future event.
[16]
In
contending that the contracts for the purchase of shares concluded by
the taxpayers were subject to a suspensive condition the
Commissioner
needed to identify in what respect the exigible content of the
contract was suspended pending a future uncertain event.
The argument
advanced was that upon conclusion of the contract a participant
acquired no benefit and the sale was not implemented
‘in any
meaningful sense’. The term of the scheme that provided that
the shares would only become deliverable, and
the consideration
therefor payable, on the second, fourth and sixth anniversaries of
the notice date ensured that the benefit to
the participant only
accrued if they were still in employment on those dates. In the
ordinary case, if the participant was dismissed
for misconduct or
poor work performance or resigned before any of those dates their
entitlement to receive the shares would fall
away. The mechanism
whereby this was done would ordinarily be a resale of the outstanding
shares to the trust at the same price
as the taxpayer had purchased
them.
[24]
It was submitted that this automatic
consequence of the participant ceasing to be employed, meant that
until the date for delivery
arrived nothing actually happened in the
performance of the contract. This, so it was said, created an
artificial situation because
the price of the shares on resale was
the same as the price when the option was exercised and the agreement
concluded and was discharged
by set-off against the original
consideration payable by the participant The right to set off was
created by deeming that the consideration
payable by the participant
was due on the date of termination of their employment.
[25]
What
this argument lacked was any articulation of the terms of the
suspensive condition. The scheme itself contained no clause that
could, even remotely, be construed as a suspensive condition. Clause
7.3 which provided for the postponed delivery dates did not
purport
to suspend the operation of the contract until those dates. The
argument therefore required that the proposed suspensive
condition be
inferred by way of a tacit term of the scheme. The test for that is
well established. It was expressed by Nienaber
JA in
Wilkins
NO v Vogel
[17]
in the following terms
‘
A
tacit term, one so self-evident as to go without saying, can be
actual or imputed. It is actual if both parties thought about
a
matter which is pertinent but did not bother to declare their assent.
It is imputed if they would have assented about such a
matter if only
they had thought about it - which they did not do because they
overlooked a present fact or failed to anticipate
a future one. Being
unspoken, a tacit term is invariably a matter of inference. It is an
inference as to what both parties must
or would have had in mind. The
inference must be a necessary one: after all, if several conceivable
terms are all equally plausible,
none of them can be said to be
axiomatic. The inference can be drawn from the express terms and from
admissible evidence of surrounding
circumstances. The onus to prove
the material from which the inference is to be drawn rests on the
party seeking to rely on the
tacit term. The practical test for
determining what the parties would necessarily have agreed on the
issue in dispute is the celebrated
bystander test. Since one may
assume that the parties to a commercial contract are intent on
concluding a contract which functions
efficiently, a term will
readily be imported into a contract if it is necessary to ensure its
business efficacy; conversely, it
is unlikely that the parties would
have been unanimous on both the need for and the content of a term,
not expressed, when such
a term is not necessary to render the
contract fully functional.’
[26]
I
would add only this to that exposition. If a party contends for a
tacit term it is incumbent on them to formulate that term so
as to
give effect to what they say should be imputed to the contracting
parties. The term must be capable of ‘clear and exact’
formulation.
[18]
In doing so
it must be borne in mind that the more complicated the term the less
likely it is that both parties would have readily
expressed assent to
it on the basis that ‘of course, that goes without saying’.
[19]
[27]
Neither before the court below nor in this
court was there any attempt on behalf of the Commissioner to
formulate the term that
was contended for. Eventually, after
prompting from the bench, it was suggested in this court that the
words ‘provided such
Participant is in the employ of the
company at the relevant time’ should be inserted in the
preamble to clause 7.1, so that
it would read as follows:
‘
On
exercise of an Option in respect of any Shares, the Participant
shall, provided such Participant is in the employ of the company
at
the relevant time, become entitled to delivery thereof against
payment of the portion of the Consideration attributable thereto,
on
the following dates …’
[28]
There are a number of difficulties with
this formulation. First, it is by no means clear that it imports
conditionality into the
contract. It is after all couched not as a
condition, but as a proviso. Second, it does not cater for the fact
that the shares
were deliverable in three tranches at different
dates. The effect of the condition, if it be such, is to fragment a
single contract
of purchase and sale into three separate contracts,
each subject to a different suspensive condition, that is, one for
the sale
of one third of the shares subject to the participant
remaining in the employ of Foschini for two years and two others for
the
sale of similar quantities of shares, subject to the participant
remaining in the employ of Foschini for four and six years
respectively.
Third, the proposed condition does not address the
various situations in which delivery of the shares might occur at
other times,
and in different quantities, by virtue of the provisions
of clause 7.1.4 of the scheme.
[29]
Clause 7.1.4 appears after the clauses
dealing with delivery occurring in three tranches and reads as
follows:
‘
provided
that, in the case of a Participant whose service with the Company is
terminated for the reasons set out in 10.1 or if an
Event occurs as
provided for in 8.2 or if the Board at the Participant’s
request in its absolute discretion decides, the
Company shall be
entitled to effect earlier delivery of the Sale Shares to the
Participant against payment of the Consideration
by the Participant
who shall be obliged to effect payment therefor on a date or date
earlier than the aforesaid anniversaries of
the Notice Date as may be
determined by the Board.’
Clause
10.1 provided for acceleration of the delivery dates on the surrender
of the participant’s estate or their sequestration;
or the
termination of their employment on death, or superannuation, or for
reasons of ill-health or any other reason approved by
the Board; or
generally if the Board thought it advisable to do so. Clause 8.2
dealt with a reorganisation of the group of companies
in various
ways.
[30]
It is clear from clause 7.1.4 that
continued employment until each of the three anniversaries of the
notice date was by no means
a requirement for receipt of the shares.
A wide variety of circumstances would entitle the participant to
receive the shares notwithstanding
the fact that they did not remain
in the employ of the company for the full period. Thus a person who
died, or was retrenched,
or retired either in the ordinary course or
on grounds of ill-health, would still be entitled to receive the
shares. In addition
the board had a wide discretion to permit even
someone who resigned or was dismissed to receive all or some of the
shares. All
of these possibilities were inconsistent with the
suggested suspensive condition making entitlement to receipt of
shares dependent
upon continued employment at the date of delivery.
[31]
Apart
from these difficulties the proposed clause would run counter to
other express provisions of the scheme. It would for example
nullify
entirely the clause providing that on termination of employment by
dismissal or resignation the shares would be resold
to Foschini (or
the Trust) at the price originally paid for them. That is dismissed
by the Commissioner, but it overlooks the fact
that as an alternative
to the resale Foschini (or the Trust) was entitled, at its election,
to cancel the sale and an amount payable
by the participant would
then be determined. These two provisions need to be seen alongside
one another. If in the interim the
value of the shares had gone up
the trust would no doubt be satisfied to retain shares having a
higher value than when it had sold
them. However, if the value of the
shares had gone down in the interim, there might be advantages to the
trust in cancelling the
contract and recovering the loss in value
from the former employee. That seems to be why it was given the
option of cancellation
and recovering an amount calculated on a
different basis. Importing a suspensive condition would deprive it of
that right; because,
the effect of non-fulfilment of a suspensive
condition is that the contract comes to an end automatically.
[20]
That follows necessarily from the fact that no action lies to compel
the performance of a suspensive condition.
[21]
If there is no right to compel performance there can be no question
of a breach warranting cancellation of the contract.
[32]
Lastly, I can see no practical reason for
importing the suggested suspensive condition into the contract. It
was perfectly workable
without that term and achieved precisely the
aims of the parties. It recognised that it would operate into the
future over a period
of years and that the individual circumstances
of the participants might alter during that time. That was the reason
for the discretion
in clause 7.1.4 and the fact that employees who
were sequestrated, or were retrenched, or retired in the ordinary
course or who
had good grounds for wising to resign, could
nonetheless take up the shares even though they would not remain in
employment up
to the three critical dates. It also made allowance for
changes in the business circumstances of Lefic. For all those reasons
I
can see no basis for importing the suggested suspensive condition
into the scheme.
Fiscal
conditionality
[33]
Accepting that the contracts in terms of
which the taxpayers purchased shares were not subject to a suspensive
condition, it is
difficult to appreciate on what basis they can be
treated as subject to such a condition for fiscal purposes. In the
heads of argument
counsel explained that the contention was that for
the fiscal purpose of attracting a liability for tax in terms of
s 8A(1)
(a)
and in order to justify the tax consequences of that section, there
must be sufficient certainty at the time that the liability
to tax is
imposed that the shares would be acquired in the future.
[34]
This proposition lacked any foundation in
the text of s 8A(1)
(a)
or in any other provision of the Act. Once the section was held to
apply by virtue of the exercise of an option bringing into existence
a contract of purchase and sale, the tax consequences followed from
the language of the section itself. Any gain realised by the
taxpayer
in the year in which the right was exercised was to be included in
the taxpayer’s income for that year. Leaving
aside situations
where the amount of the gain could be determined in consequence of
the realisation of the shares simultaneously
with the exercise of the
right, s 8A(2)
(a)
provides
that a gain shall be deemed to be made if the market value of the
marketable security at the time the right is exercised
exceeds the
consideration given therefor. The effect of that deeming is to render
the taxpayer liable to pay tax on an amount so
determined
irrespective of whether, at the end of the day, after delivery of the
shares, the taxpayer enjoyed a
de facto
gain. If, at the time the shares became
deliverable in terms of this scheme, they were worth less than the
purchase consideration
and the taxpayer invoked the stop loss
provision in the scheme that entitled them to compel Foschini (or the
Trust) to repurchase
the shares at the price payable by the taxpayer,
any tax already paid would not be recoverable. Nor, if the taxpayer
nonetheless
elected to pay for the shares and have them transferred
into their name, could they recover any tax already paid if their
optimism
that the share price would recover proved unfounded.
[35]
In
advancing this contention counsel relied on the following passage
from the judgment of Nicholas AJA in this court in
Golden
Dumps
:
[22]
‘
There
is no difference in principle between a case where liability is
contingent in the legal sense and one where it is contingent
in the
popular sense. In the field of accounting a contingency is understood
as
“…
a
condition or situation, the ultimate outcome of which, gain or loss,
will be confirmed only on the occurrence, or non-occurrence,
of one
or more uncertain future events”.
(See
Faul
et al Financial Accounting
at 475.)
A
liability is contingent in that sense in a case where there is a
claim which is disputed, at any rate genuinely disputed and not
vexatiously or frivolously for the purposes of delay. In such a case
the ultimate outcome of the situation will be confirmed only
if the
claim is admitted or if it is finally upheld by the decision of a
court or arbitrator. Where, at the end of the tax year
in which a
deduction is claimed, the outcome of the dispute is undetermined, it
cannot be said that a liability has been actually
incurred. The
taxpayer could not properly claim the deduction in that tax year, and
the receiver of revenue could not, in the light
of the onus provision
of s 82 of the Act, properly allow it.’
[36]
The
context in which that statement was made demonstrates that it has no
application in the present situation and provides no warrant
for a
principle that a contract not subject to a suspensive condition can
for fiscal purposes be treated as if it is so subject,
in other words
as an entirely different contract. The case arose from a dispute
between the taxpayer (Golden Dumps) and a former
employee, Mr Nash.
Golden Dumps and Mr Nash concluded a contract under which, on
fulfilment of certain conditions, Mr Nash would
be entitled to
purchase certain shares. When he demanded delivery of the shares and
tendered payment of the price Golden Dumps
disputed his entitlement
to them. The dispute was the subject of lengthy litigation
[23]
where Mr Nash ultimately succeeded with his claim. Golden Dumps then
purchased the shares in the open market in 1985 and received
in
return a considerably lesser sum by way of the purchase price. It
sought to set this off against income in its tax return for
the 1985
year, but the Commissioner disallowed the deduction on the ground
that the liability had arisen in 1981 and the judgment
merely
confirmed the existence of that liability so that for the purposes of
s 11
(a)
of
the Act it was not an expense ‘actually incurred’ in the
production of income in the 1985 year. The passage from
the judgment
of Nicholas AJA, on which the Commissioner relies in the present
case, merely explains why, in view of the liability’s
contingent nature until the court determined the claim against Golden
Dumps, no expense was actually incurred. It has no bearing
on the
construction of either the scheme or s 8A(1)
(a)
of
the Act.
Reciprocity
[37]
The principle the Commissioner sought to
invoke under this head was one common to many contracts, where
performance by the one party
is conditional upon reciprocal
performance by the other. However, it can have no application in
determining when a liability to
pay tax in terms of s 8A(1)
(a)
arises. That is determined by the terms
of the section and the key event is the exercise of the right to
acquire the marketable
security, not performance of the contract
arising from the exercise of that right, The rights obtained by the
taxpayers by the
exercise of the options was unconditional. In order
to enforce performance by delivery of the shares the price needed to
be paid,
but even accepting that this involved reciprocity, so that a
refusal to pay the price would stultify any demand for delivery of
the shares, that would not render the rights acquired by the
taxpayers conditional. Cases that deal with different concepts under
the Act, such as when income accrues, so as to attract a liability
for the payment of tax, or an expense is incurred for the purpose
of
claiming a deduction, are unhelpful in the context of a provisions
such as s 8A(1)
(a)
.
Accordingly all the Commissioner’s arguments under the general
head of conditionality fall to be rejected.
Substance
over form
[38]
The
argument under this head was based on the passage in
NWK
[24]
where Lewis JA said:
‘
If
the purpose of the transaction is only to achieve an object that
allows the evasion of tax, or of a peremptory law, then it will
be
regarded as simulated. And the mere fact that parties do perform in
terms of the contract does not show that it is not simulated:
the
charade of performance is generally meant to give credence to their
simulation.’
[39]
Using that as the foundation the
Commissioner argued that dishonesty is not a requirement for
simulation and that, as the scheme
had clearly been formulated to
enable the participants to avoid any significant tax liability under
s 8A(1)
(a)
,
it should be treated as giving rise to a conditional entitlement to
shares that would only trigger the application of the section
on
payment for and delivery of the shares.
[40]
That
submission involved a misunderstanding of the judgment in
NWK
as
was pointed out in
Roshcon
.
[25]
There I stressed that simulation is a question of the genuineness of
the transaction under consideration. If it is genuine then
it is not
simulated, and if it is simulated then it is a dishonest transaction,
whatever the motives of those who concluded the
transaction. The true
position is that ‘the court examines the transaction as a
whole, including all surrounding circumstances,
any unusual features
of the transaction and the manner in which the parties intend to
implement it, before determining in any particular
case whether a
transaction is simulated.’
[26]
Among those features will be the income tax consequences of the
transaction. Tax evasion is of course impermissible and therefore,
if
a transaction is simulated, it may amount to tax evasion. But there
is nothing impermissible about arranging one’s affairs
so as to
minimise one’s tax liability, in other words, in tax avoidance.
If the revenue authorities regard any particular
form of tax
avoidance as undesirable they are free to amend the Act, as occurs
annually, to close anything they regard as a loophole.
That is what
occurred when s 8C was introduced.
[41]
Once
that is appreciated the argument based on simulation must fail. For
it to succeed, it required the participants in the scheme
to have
intended, when exercising their options to enter into agreements of
purchase and sale of shares, to do so on terms other
than those set
out in the scheme. That is manifestly implausible and was not
suggested to either Ms Bosch or Mr McClelland in evidence.
Their
approach was simply that they were being offered an opportunity to
acquire shares on the terms of the scheme and they accepted
those
offers. As Watermeyer JA said in
Randles
Brothers & Hudson
[27]
in
regard to a contention that certain agreements of purchase and sale
were not genuine ‘there was no material advantage to
be gained
by pretending to enter into a contract of sale which could not be
gained by entering into a real contract of sale.’
Similarly in
this case there was no advantage to the parties in entering into a
conditional contract of purchase and sale when
they were free to
enter into an unconditional contract and postpone performance of the
obligation to pay the purchase price and
deliver the shares. The
Commissioner’s contentions based on the notion of substance
over form must be rejected.
Conclusion
[42]
Leave to appeal is granted but the appeal
is dismissed with costs, such costs to include the costs of the
application for leave
to appeal in the court below and this court and
those consequent upon the employment of two counsel.
M
J D WALLIS
JUDGE
OF APPEAL
Appearances
For
appellant: A R Sholto-Douglas SC (with him M W Janisch and H Cassim)
Instructed
by: State Attorney,
Cape
Town and Bloemfontein
For
respondent: P B Hodes SC (with him P A Solomon SC and AM Breitenbach
SC) `
Instructed
by:
Edward
Nathan Sonnenbergs Inc, Cape Town
Webbers
Attorneys, Bloemfontein.
[1]
Bosch
and Another v Commissioner, South African Revenue Service
2013
(5) SA 130 (WCC).
[2]
The
Middle Market Price was defined in the scheme as the average middle
market price of the shares on the JSC during the previous
five days.
The Board had an option to reduce this price by no more than ten per
cent.
[3]
Relying upon
Commissioner
for the South African Revenue Services v NWK Ltd
2011
(2) SA 67
(SCA) para 55.
[4]
Natal
Joint Municipal Pension Fund v Endumeni Municipality
2012
(4) SA 593
(SCA) para 18;
Bothma-Batho
Transport (Edms) Bpk v S Bothma & Seun Transport (Edms) Bpk
2014 (2) SA 494
(SCA) paras 10-12.
[5]
Jaga
v Dönges NO and Another; Bhana v Dönges NO and Another
1950 (4) SA 653
(A) at 664G – H.
[6]
Hersch
v Nel
1948
(3) SA 686
(A) at 695;
Venter
v Birchholtz
1972
(1) SA 276
(A) at 283D-284B.
[7]
Transvaal
Investment Co Ltd v Springs Municipality
1922
AD 337
at 341, 347 and 358;
Secretary
for Inland Revenue v Hartzenberg
1966
(1) SA 405
(A) at 409A-H.
[8]
Corondimas
and Another v Badat
1946
AD 548
at 558.
[9]
Minister
of Finance v Gin Bros and Goldblatt
1954
(3) SA 7
(O) at 10G-H;
Hartzenberg,
supra,
fn 7.
[10]
Secretary
for Inland Revenue v Kirsch
1978
(3) SA 93
(T) at 95B-E.
[11]
R
v Detody
1926
AD 198
at 202;
Nissan
SA (Pty) Ltd v Commissioner for Inland Revenue
[1998] ZASCA 59
;
1998
(4) SA 860
(SCA) at 870E-H. Similarly in the area of contractual
interpretation there is authority that the manner in which the
contract
has been performed over a period of time may be relevant in
selecting which of two competing constructions is to be preferred.
Shill
v Milner
1937
AD 101
at 110-111;
Shacklock
v Shacklock
1949
(1) SA 91
(A) at 101;
MTK
Saagmeule (Pty) Ltd v Killyman Estates (Pty) Ltd
1980 (3) SA 1
(A) at 12F-H.
[12]
The
same point was made in a contractual context in
Comwezi
Security Services (Pty) Ltd v Cape Empowerment Trust Ltd
[2012]
ZASCA 126
, para 15.
[13]
Westinghouse
Brake & Equipment (Pty) Ltd v Bilger Engineering (Pty) Ltd
1986
(2) SA 555
(A) at 562E-563A.
[14]
Patel
v Minister of the Interior and Another
1955
(2) SA 485
(A) at 493A-D;
National
Education Health and Allied Workers Union v University of Cape Town
and Others
2003
(3) SA 1
(CC) para 66.
[15]
Commissioner
for Inland Revenue v Golden Dumps (Pty) Ltd
[1993] ZASCA 89
;
1993 (4) SA 110
(A) at 118E-G.
[16]
Odendaalsrust
Municipality v New Nigel Estate Gold Mining Co. Ltd
1948 (2) SA 656
(O) at 666;
Design
& Planning Service v Kruger
1974
(1) SA 689
(T) at 695C-F;
Palm
Fifteen (Pty) Ltd v Cotton Tail Homes (Pty) Ltd
1978 (2) SA 872
(A) at 887;
Jurgens
Eiendomsagente v Share
[1990] ZASCA 81
;
1990
(4) SA 664
(A) at 675F-H.
[17]
Wilkins
NO v Voges
[1994] ZASCA 53
;
1994 (3) SA 130
(A) at 136H – 137D. See also 143D–I.
Food
and Allied Workers Union v Ngcobo NO and Another
2014
(1) SA 32
(CC) para 37. Whether one can ever, by way of a tacit
term, render an unconditional contract subject to a suspensive
condition,
is an open question.
Rockbreakers
& Parts (Pty) Ltd v Rolag Property Trading (Pty) Ltd
2010 (2) SA 400
(SCA) para 24.
[18]
Rapp
and Maister v Aronovsky
1943 WLD 68
at 75.
[19]
Desai
and Others v Greyridge Investments (Pty) Ltd
1974 (1) SA 509
(A) at 522H – 523A.
[20]
Design
and Planning Service v Kruger
ante, fn 16.
[21]
Scott
and Another v Poupard and Another
1971
(2) SA 373
(A) at 378H.
[22]
Commissioner
for Inland Revenue v Golden Dumps (Pty) Ltd
[1993] ZASCA 89
;
1993 (4) SA 110
(A) at 118E-H.
[23]
Nash
v Golden Dumps (Pty) Ltd
1985 (3) SA 1 (A).
[24]
NWK
ante
fn 3.
[25]
Roshcon
(Pty) Ltd v Anchor Auto Body Builders CC and Others
2014 (4) SA 319 (SCA).
[26]
Roshcon
para
37.
[27]
Commissioner
of Customs and Excise v Randles Brothers & Hudson Ltd
1941
AD 369
at 402.