About SAFLII
Databases
Search
Terms of Use
RSS Feeds
South Africa: Supreme Court of Appeal
SAFLII
>>
Databases
>>
South Africa: Supreme Court of Appeal
>>
2021
>>
[2021] ZASCA 145
|
|
Commissioner for The South African Revenue Service v Spur Group (Pty) Ltd (320/2020) [2021] ZASCA 145; 84 SATC 1 (15 October 2021)
THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Reportable
Case no:
320/2020
In
the matter between:
THE
COMMISIONER FOR THE SOUTH
AFRICAN
REVENUE
SERVICE
APPELLANT
and
SPUR
GROUP (PTY)
LTD
RESPONDENT
Neutral
Citation:
The
Commissioner for The South African Revenue Service v Spur Group (Pty)
Ltd
(Case
no 320/20)
[2021] ZASCA 145
(15 October 2021)
Coram:
NAVSA ADP and
MBHA, MATHOPO and GORVEN JJA and KGOELE AJA
Heard:
17 August 2021
Delivered:
This judgment
was handed down electronically by circulation to the parties’
legal representatives by email, publication on
the Supreme Court of
Appeal website and release to SAFLII. The date and time for hand-down
is deemed to be have been at 12h00 on
15 October 2021.
Summary:
Tax Law –
Income Tax Act 58 of 1962 (the ITA) – whether there was a
sufficiently close connection between the taxpayer’s
expenditure of a contribution to a trust in respect of the
implementation of an employees’ share incentive scheme and its
income producing operations
so
as to qualify for a deduction under s 11
(a)
of the ITA – the connection between the contribution and the
taxpayer’s production not close or immediate enough to
justify
the deduction – SARS not precluded from raising additional
assessments in respect of the taxpayer’s 2005-2009
years of
assessment by operation of the period of limitations provided in
s 99(1)
of the
Tax Administration Act 28 of 2011
.
ORDER
On
appeal from
:
The Western Cape Division of the High Court, Cape Town (Ndita J,
Salie-Hlophe J and Sher J sitting as court of appeal):
1
The appeal is upheld.
2
The judgment and order of the court
a quo
is set aside in its
entirety and is substituted as follows:
‘
(a)
The appeal is upheld with costs, including the costs of two
Counsel;
(b)
The order of the tax court is set aside and substituted as follows:
‘
The appeal is dismissed
and the additional income tax
assessments raised by the
Commissioner in respect of Spur’s
2005
to
2012
years of assessment
are confirmed.’
3
Spur is ordered to pay the costs of this appeal, such costs to
include those of two
counsel where so employed.
JUDGMENT
Mbha
JA (Navsa ADP and Mathopo and Gorven JJA and Kgoele AJA concurring):
[1]
The central question in this appeal is whether a contribution of
R48 million made by the respondent,
Spur Group (Pty) Ltd (Spur),
to a trust established in furtherance of its employee management
share incentive scheme, is sufficiently
closely connected to Spur’s
income earning operations so as to qualify for a deduction under
s 11
(a)
of the Income Tax Act 58 of 1962 (the ITA), in
respect of Spur’s 2005 to 2012 years of assessment. If it is
found that the
connection is not sufficiently close, a further issue
that must be determined is whether the statutory periods in terms of
s 99(1)
of the Tax Administration Act 28 of 2011 (the TAA),
for the respondent’s 2005 to 2009 years of assessment
have prescribed and whether the Commissioner for the South African
Revenue Service (the Commissioner) is therefore precluded
from
raising additional assessments for those years (the prescription
issue).
[2]
On 29 November 2019, the full court of the Western Cape Division of
the High Court (Ndita J with Sher
J concurring, and Salie-Hlophe J
dissenting), hearing an appeal against a decision of the Tax Court,
held that the R48 million
contribution to the trust was an
expense ‘in the production of income’, and was thus
deductible. In light of this finding,
it was unnecessary for the
majority to make any determination in respect of the prescription
issue. The minority judgment held
that the contribution did not
qualify as expenditure in the production of income for purposes of
the ITA. Furthermore, the Commissioner
was not precluded from raising
the additional assessments on the basis of s 99(
1
)
of the TAA in respect of the taxpayers 2005 to 2009 years of
assessment. This appeal, with leave of this Court, is directed
against
the conclusions reached by the majority. The background
appears hereafter.
[3]
Spur is the main operating entity in the Spur Group of
companies. It is a wholly owned subsidiary
of Spur Corporation
Limited (Spur HoldCo). In 2004, the Spur Group including Spur and
Spur HoldCo, resolved to implement a
new share incentive scheme
(the scheme), in terms of which eligible employees of Spur (the
participants) were afforded the opportunity
of participating in that
scheme. The purpose of the scheme was to promote the continued growth
and profitability of Spur. It is
common cause that the scheme came
into being, after 18 months of planning, which included Spur
obtaining advice in respect
of the tax implications of the scheme.
[4]
On 30 November 2004, in order to implement and regulate the scheme,
Spur HoldCo established the Spur
Management Share Trust (the trust),
a discretionary trust of which, significantly, Spur HoldCo was the
sole capital and income
beneficiary. The Trust Deed was amended on
13 December 2010 to permit the participants to benefit from
dividends received
by the trust. However, Spur HoldCo remained the
sole capital beneficiary.
[5]
The trust, in furtherance of the scheme, incorporated
Maxshell
72 Investments (Pty) Ltd (NewCo). The participants were offered the
opportunity to acquire ordinary shares in NewCo (the
NewCo shares) at
par value (ie 1 cent each) in proportions determined by Spur HoldCo.
The purchase price of the NewCo shares was
settled in cash by each
participant upon the issue of the NewCo shares on 15 December 2004.
The participants were not entitled
to deal freely with the NewCo
shares for a period of at least seven years. Those participants
who left Spur’s employment
during this period forfeited their
shares, which were then re-allocated to other participants.
[6]
On 7 December 2004, Spur concluded a contribution agreement with the
trust in terms of which an amount
of R48 471 714 (R48 million)
was contributed to the trust.
[7]
On 20 December 2004, after NewCo’s share capital had been
altered to create NewCo preference shares,
the trust subscribed for
1000 NewCo preference shares for an amount equal to the aggregate of
the market price of Spur HoldCo shares,
amounting to approximately
R48 471 714 in aggregate , to be acquired by NewCo.
[8]
The ‘dividend rate’ of the NewCo preference shares was
set at 75% per annum of the prime
interest rate. This was a
market-related preference
dividend
rate. The ‘redemption date’ for the NewCo preference
shares was set at five years following their issue.
[9]
On 10 January 2005, the share incentive scheme was formally adopted
by Spur HoldCo, Spur, the trust,
NewCo and Shares Buy-Back (Pty) Ltd
(SBBco). NewCo applied the aggregate of the preference share
subscription price ie R48 million
from the trust, to purchase
8 274 043 ordinary Spur HoldCo shares from SBBco and another
seller. NewCo then ceded in security
and pledged the ordinary Spur
HoldCo shares to the trust until NewCo had complied with all its
obligations to the trust in terms
of clause 11 of the Preference
Share Subscription Agreement concluded between the trustees and NewCo
(the preference share
agreement).
[10]
After the scheme had commenced operating, NewCo received dividends
from time to time through its holding of the
Spur HoldCo shares.
NewCo retained the dividends to assist in meeting its cumulative
preference share obligations towards the trust.
[11]
On 18 December 2009, the directors of NewCo passed a resolution in
terms of which the 1 000 NewCo preference shares,
issued five years
previously on 18 December 2004, were redeemed in accordance with the
preference share agreement for a total consideration
of R48 471
714. In addition, the dividends that had accrued on the preference
shares from the date of issue, or as calculated
in accordance with
the preference share agreement and amounting to R22 562 254,
were to be distributed to the trust .
[12]
The redemption of the preference shares and the payment of the
dividends, as described above, were settled by way
of NewCo
distributing to the trust a total of 6 688 698 Spur HoldCo
ordinary shares. The shares had a total agreed value equal
to the
redemption and preference dividends amount of R48
471 714
and R22 562 254 respectively.
[13]
In terms of the resolution, the directors of NewCo declared a
dividend of R286.27 per ordinary share totalling
R28 627 000,
payable on 22 December 2009 to the ordinary shareholders listed on
NewCo’s share register on 22 December
2009. These were the
participants to the scheme. In order to pay the aforesaid amount,
NewCo disposed of 1 585 345 Spur HoldCo
shares to
SBBco at the ten-day volume weighted average share price calculated
as at close of trade on 17 December 2009. In April 2011,
a
further dividend of approximately R635 000 was declared and paid to
the participants in the scheme.
[14]
The share incentive scheme has since been terminated and NewCo was
deregistered on 10 December 2012. The trust
remains extant and
continues to hold Spur HoldCo shares that were distributed to it by
NewCo.
[15]
The actual cause of the dispute in this matter occurred when Spur
claimed the contribution of R48 million
it made to the trust as
a deduction against its income in terms of s 11
(a)
of the ITA. The claimed deduction was spread over the period of the
anticipated benefit to be derived from the payment, from and
including 2005 to 2012, in terms of s 23H
[1]
of the ITA. The deductions were as follows: R3 462 265 in 2005;
R6 924 531 for the years 2006 to 2011; and R3 462
265 in
2012.
[16]
The Commissioner originally issued assessments allowing the claimed
deduction. However, following an audit, the
Commissioner issued
additional assessments and disallowed the deductions claimed in terms
of the provisions of s 11
(a)
of the ITA, and brought the
deductions back into account as additional taxable income. The basis
of the disallowance was that the
expenditure (i.e. R48 million
contribution) was not incurred in the production of Spur’s
income as required by s 11
(a)
of the ITA, in that ‘.
. . there is no direct, causal link between the contribution and the
production of [Spur’s]
income’.
[17]
In disallowing the deductions, the Commissioner reasoned as follows:
Spur made the contribution to the trust, of
which Spur HoldCo was the
sole beneficiary; Spur HoldCo was the only party to have benefited
directly from the contribution to
the trust in that it would receive
the investment in the NewCo preference shares ie the contribution of
R48 million and the
preference share dividends at the time when
NewCo redeemed the NewCo preference shares; and the trust distributed
the preference
share capital and the preference share dividends to
its beneficiary, Spur HoldCo. The participants, the Commissioner
concluded,
were thus not the beneficiaries of the contribution. The
causal link referred to at the end of the preceding paragraph was
thus
lacking.
[18]
The majority in the court
a quo
was satisfied that Spur had
established a sufficiently close connection between the contribution
and Spur’s income earning
operations. The majority found that
the purpose of the expenditure, ie the contribution of R48 million,
directly served to
incentivise the participants, key managerial
staff, and to promote the continued growth of Spur. As such, it was
expenditure incurred
in the production of the income of Spur.
[19]
In arriving at its finding, the majority relied on the evidence by
Spur’s witnesses, namely, Mr Alan Field
(Mr Field), a
tax practitioner at KPMG, and Ms Ronel van Dyk (Ms van Dyk), the
chief financial officer and a director of Spur,
who testified that
the object and purpose of the scheme was to provide an incentive to
the participants and promote the growth
of Spur. It found that their
evidence unequivocally established that the scheme had achieved its
intended purpose. The majority
in the court
a quo
had regard
to the submission on behalf of SARS that the purpose of the
contribution could just as easily have been to retain the
money
within the Spur Group and rejected it. They held that the dominant
purpose was, as testified to by Mr Field and Ms van Dyk,
in line with
prevailing authority, and that the deduction was therefore justified.
[20]
Before us, the Commissioner submitted that the contribution was not
expenditure incurred in the production of Spur’s
income as
required by s 11
(a)
of the ITA, and that there was only
an indirect and insufficient link between the expenditure and any
benefit arising from the
incentivisation of Spur’s key staff.
Thus, it would not be proper, natural and reasonable to regard the
expense as a justifiable
deduction.
[21]
On the other hand, it was submitted on Spur’s behalf,
inter
alia
, that, on the evidence, the dominant purpose in the
establishment and implementation of the scheme was to protect and
enhance Spur’s
business and its income by motivating its
management employees to be efficient, productive and remain in Spur’s
employ. That
the incentive offered to and in fact received by such
employees was the financial benefits, which would flow from the
success of
Spur’s business and the growth in the value of the
shares in Spur HoldCo, cannot detract from the fact that the
expenditure
was incurred by Spur for the purpose of earning income.
In summary, Spur’s case was that the expenditure made in order
to
establish and implement the scheme was so closely linked to the
acts required to be performed to produce Spur’s income, that
it
constituted part of the cost of performing those income-producing
acts.
[22]
Section 11
(a)
of the ITA provides as follows:
‘
11.
General
deductions allowed in determination of taxable income
For
the purpose of determining the taxable income derived by any person
from carrying on any trade, there shall be allowed as deductions
from
the income of such person so derived –
(a)
expenditure and
losses actually incurred in the production of the income, provided
such expenditure and losses are not of a capital
nature.’
[23]
It was common cause that expenditure was actually incurred and that
it was not of a capital nature. The sole issue
for determination by
this Court is accordingly whether the court
a quo
correctly
held that there was a sufficiently close causal link that existed
between Spur’s expenditure of the contribution
and its income
producing operations.
[24]
The law governing the approach to be adopted when determining whether
an expense was incurred in the production
of income, as contemplated
in s 11
(a)
of the ITA, is clear. In
Port
Elizabeth Electric Tramway Co Ltd v Commissioner for Inland Revenue
(PE Tramway),
[2]
Watermeyer J explained the position as follows:
‘
[I]ncome
is produced by the performance of a series of acts, and attendant
upon them are expenses. Such expenses are deductible
expenses,
provided they are so closely linked to such acts as to be regarded as
part of the cost of performing them.
A
little reflection will show that two questions arise (a) whether the
act, to which the expenditure is attached, is performed in
the
production of income, and (b) whether the expenditure is linked to it
closely enough
.’ (Emphasis added.)
[25]
Clearly, there must be a sufficiently close connection or link
between the expenditure and the income earning operations
of a
taxpayer. The determination of whether the necessary link exists will
require an examination of all the facts of a particular
case. In this
regard, Corbett JA’s
dictum
in
Commissioner for
Inland Revenue v Nemojim (Pty) Ltd,
[3]
is apposite:
‘
It
is correct . . . that in order to determine in a particular case
whether moneys outlaid by the taxpayer constitute expenditure
incurred in the production of income important, sometimes overriding
factors are the purpose of the expenditure and what the expenditure
actually affects.’
Corbett
JA then quoted with approval Schreiner JA’s
dictum
in
Commissioner for
Inland Revenue v Genn and Co (Pty) Ltd,
[4]
where he said the following:
‘
In
deciding how the expenditure should properly be regarded the Court
clearly has to assess the closeness of the connection between
the
expenditure and the income-earning operations, having regard both to
the purpose and to what it actually effects.’
[26]
Importantly, Schreiner JA explained that:
‘
If
I am right in understanding the words “they may be regarded”
as connoting that it would be proper, natural or reasonable
to regard
the expenses as part of the cost of performing the operation this
passage seems to state the approach to such questions
correctly.
Whether the closeness of the connection would properly, naturally or
reasonably lead to such treatment of the expenses
must remain
dependant on the Court’s view of the circumstances of the case
before it.’
[5]
[27]
What can be gleaned from the authorities referred to above is that
the deductibility of expenditure in terms of
s 11
(a)
of
the ITA is dependent upon two criteria that must be considered on the
particular facts of the case. First, the purpose of the
taxpayer in
incurring the expenditure in question, and whether the purpose was to
produce an income. Second, whether a sufficiently
close nexus or link
exists between the expenditure and the ultimate production of income.
These criteria clearly establish that
a mere existence of a nexus or
link between the expenditure and the earning of income is not, on its
own, sufficient to justify
a deduction under s 11
(a)
of
the ITA. A taxpayer must show an adequate closeness between the
expenditure and the production of income.
[28]
It was submitted that the contribution by Spur to the trust effected
this purpose by providing the necessary funds
to the trustees. In the
result, there was a sufficiently close causal link therefore existed
between Spur’s expenditure of
the contribution and its income
producing operations.
[29]
Finally, it was submitted that although Spur foresaw that Spur HoldCo
would potentially also benefit from the redemption
of the NewCo
preference shares, this did not negate Spur’s purpose and
intention. Such purpose and intention, so it was submitted
further,
was actually effected by the scheme insofar as the value of NewCo
shares increased significantly and this benefit, together
with the
dividends declared by NewCo on the remaining Spur HoldCo shares
following the redemption of the preference shares, actually
accrued
to the participants.
[30]
The detail of how the scheme was established and implemented is set
out above. Clearly the contribution of R48 million
by Spur to
the trust was central to the scheme. However, the participants did
not benefit directly, and even indirectly for that
matter, from the
making of the contribution. Ms van Dyk, testifying for Spur,
confirmed as much. She went further in confirming
that as at the date
of hearing in the court below, that ‘[t]he 48 million in the
form of now Spur Corporation shares is still
sitting in the trust
so
directly they [the participants] have not benefited from the
48 million
’. (Emphasis added.)
[31]
The contribution of R48 million was used, wholly, to subscribe for
preference shares in NewCo. Only the trust held
the NewCo preference
shares, and only
it
was entitled to the return of the
R48 million contribution, plus the preference dividend on those
shares. The participants
had no right to any part of the
contribution, nor to the preference dividends that flowed from the
investment thereof. Ms van
Dyk testified that the fact that the
scheme did not permit the participants to share in the R48 million
contribution made
by Spur to the trust, was known to her as a
participant.
[32]
Importantly, in terms of the trust Deed, only Spur HoldCo would, as
capital beneficiary, have any right to the
ultimate delivery of the
R48 million contribution and any yield therefrom. The
participants were neither capital nor income
beneficiaries of the
trust at that stage. It must be noted, however, that they might have
become entitled to dividends accruing
to the trust from 2010 onwards,
following upon an amendment to the trust deed to this effect.
However, this latter fact is irrelevant
as the concern must obviously
be in relation to what was done when the contribution of R48 million
was made in 2004.
[33]
The indisputable factual position therefore is that the participants
benefitted directly from their separate investment,
at par value in
ordinary shares in NewCo. Mr Field confirmed that ‘. . . [t]he
participants benefited through NewCo. There
was no ways they could
directly benefit from the trust. There had to be funding that flowed
through to NewCo, and they would then
benefit in their participation
in NewCo.’
[34]
There was a potential benefit to the participants which lay in the
possibility of growth in the value of the NewCo
ordinary shares. That
would in turn arise to the extent that the value of NewCo’s
assets, namely, the Spur HoldCo shares
in which NewCo invested,
increased above what was required by NewCo to meet its redemption and
preference dividend obligations
to the trust. Furthermore, the
participants were not exposed to the risk of a decrease in the price
of Spur HoldCo shares. NewCo
bore this risk. The participants, who
had only invested nominal amounts for their shares, could not lose
anything more than the
nominal amounts.
[35]
However, as was confirmed by Mr Field in his testimony, the
contribution by Spur was in effect a funding mechanism
for the
scheme, which was to remain in place for most of the duration of the
scheme. The purpose was always for the R48 million
to remain
within the Spur Group and not to transfer it to the benefit of the
participants. As shown above, that is ultimately what
the
contribution achieved, ie the R48 million was returned to the
trust where it still resides, in the form of shares, with
Spur HoldCo
as the sole capital beneficiary.
[36]
In my view the majority erred in finding that the expenditure
directly served the purpose of incentivising the
participants, and
that a sufficiently close nexus existed between the expenditure and
the production of income by Spur. As demonstrated
earlier, the
R48 million contribution did not itself serve to incentivise the
participants. It was an amount that would never
accrue to the
participants. Instead, it ultimately became available for the benefit
of Spur HoldCo as the capital beneficiaries
of the trust.
[37]
In
Solaglass Finance Co
(Pty) Ltd v Commissioner for Inland Revenue,
[6]
this Court made it clear that the deduction of expenditure in
relation to monies spent for the purposes of advancing the interests
of the group of companies to which the taxpayer belongs is precluded.
[38]
Applying
PE Tramway
, I find that the purpose of Spur in
incurring the expenditure was not to produce income, as required by
s 11
(a)
of the ITA, but to provide funding for the
scheme, for the ultimate benefit of Spur HoldCo. There was only an
indirect and insufficient
link between the expenditure and any
benefit arising from the incentivisation of the participants. The
contribution was therefore
not sufficiently closely connected to the
business operations of Spur such that it would be proper, natural and
reasonable to regard
the expense as part of Spur’s costs in
performing such operations.
[39]
It now becomes necessary to deal with the prescription issue. This
relates to additional assessments that the Commissioner
made on 28
July 2015 in respect of Spur’s 2005-2009 years of assessment.
The original assessments were raised on 31 May 2007
(2005), 7 August
2007 (2006), 12 May 2009 (2007), 24 February 2010 (2008) and 16
January 2010 (2009).
[40]
Spur contended that the Commissioner was precluded from issuing the
additional assessments in respect of the 2005-2009
years of
assessment by virtue of the provisions of s 99(1) of the TAA.
The complaint is that the additional assessments were
raised after
the period of three years from the date of the original assessments.
[41]
Section 99(1) of the TAA provides that the Commissioner may not make
an assessment three years after the date of
the original assessment
by SARS. However, s 99 (2)
(a)
of the TAA, provides
that the Commissioner is not bound by the three-year period of
limitation where ‘in the case of assessment
by SARS, the fact
that the full amount of tax chargeable was not assessed, was due to –
(i)
fraud;
(ii)
misrepresentation; or
(iii)
non-disclosure of material facts.’
[42]
The Commissioner avers that the amount of tax chargeable in terms of
the additional assessments were not so assessed
by SARS in the
2005- 2009 years of assessments due to misrepresentation and
non-disclosure of material facts by Spur. This
claim was specifically
formulated as follows in SARS’ finalisation of audit letter
(i.e. the letter of assessment) dated
28 December 2015:
‘
As
a result of the misrepresentation and non-disclosure in the tax
returns the Commissioner was unable to make a full and proper
consideration of the tax consequences of the Contribution and the
share incentive scheme. These misrepresentations and non-disclosures
therefore caused SARS to assess the Taxpayer on a different basis to
what it would have assessed had the facts been properly disclosed
in
the tax years.’
[43]
It is common cause that Spur, in submitting its 2005 income tax
return, (IT14), answered ‘no’ to the
following questions:
‘
Were
any deductions limited in terms of s 23H?;
.
. .
Did
the company make a contribution to a trust?
.
. .
Was
the company party to the formation of a trust during the
year?’
[44]
In the 2006 income tax return, Spur answered ‘no’ to the
question:
‘
Were
any deductions limited in terms of s 23H?’
[45]
Lastly, in each of the 2005-2008 income tax returns, the amount of
deductions claimed in respect of the contribution,
which were limited
by s 23H of the ITA, were disclosed by Spur under the category
‘other deductible items’ and
not under the line item
‘prepaid expenditure (as limited by s 23H)’.
[46]
Spur’s defence to the allegation of misrepresentation and
non- disclosure of material facts was that
the aforesaid
statements were negligently and inadvertently made. Spur also
asserted that the Commissioner failed to establish
the requisite
causal nexus, in that it is unclear how Spur’s inadvertent and
incorrect disclosures would have altered the
basis of the
Commissioner’s assessment in the affected years. Spur submitted
that as the onus to establish a causal nexus
to displace the
statutory immunity conferred by the TAA has not been met, the
additional assessments issued in respect of Spur’s
2005-2009
years of assessment were unlawful, invalid and cannot be confirmed.
[47]
With regard to SARS auditing system, in terms of which a taxpayer’s
return is initially accepted at face
value and an assessment is
issued accordingly, whereafter during the ensuing three years the
return and assessment must be reconciled,
Spur submitted as follows:
No SARS official applied his or her mind to the assessments issued
for the 2005-2009 tax years and no
audit was performed within three
years after the aforesaid assessments had been raised. Had SARS done
so, it would have become
aware of the contribution made in respect of
the scheme and the deduction. Furthermore, it was not the errors made
in response
to the questions raised in the tax return forms which
caused SARS to assess Spur on a different basis and to allow the
deductions
claimed, but rather the decision by SARS not to consider
the tax returns and supporting documents filed, namely, Spur’s
annual
financial statements, and not performing an audit despite
answers to the other questions in the tax returns raising red flags.
[48]
Spur’s assertion that the wrong entries in the tax returns were
negligent and inadvertent is patently false.
Central to this entire
dispute is the contribution of R48 million that Spur made to the
trust in 2005. The answer ‘no’
to the question whether
any contribution was made to a trust or whether the company was party
to the formation of a trust, is,
in my view, plainly false and a
misrepresentation. These were questions pertinently, and for tax
purposes, seriously raised. It
required specific attention and an
honest answer. Strikingly, the answers were repeated.
[49]
In each of the 2005 to 2009 years of assessments, deductions claimed
by Spur were in fact limited in terms of s 23H
of the ITA. It
simply boggles the mind that Spur answered ‘no’ to the
relevant question for each and every subsequent
year from 2005 to
2009. Moreover, Spur’s failure to include the said amounts in a
separate line item which specifically required
a disclosure of
deductions limited by s 23H, and their inclusion in a general
line item, amounts in my view, to a deliberate
misrepresentation and
a non- disclosure of material facts. It simply could not, by any
stretch of imagination, be ascribed
to any inadvertent error.
[50]
Similarly, Spur’s answer ‘no’ to the question
whether a trust had been formed, was also plainly
false and a
misrepresentation. Spur was intimately involved in the
conceptualisation of the share incentive scheme. In its letter
of
objection, under the heading ‘
Background information
’,
on its version it stated that ‘[t]he Spur Group (which, for the
purposes of this objection, includes [Spur]) . .
. resolved, in 2004,
to implement the Spur management incentive share scheme . . .’.
It follows that it cannot be said that
Spur was not involved in the
formation of the trust.
[51]
Spur’s attempt to put the blame for the so-called errors in the
entries on a new accountant, Ms Novos, who
had recently taken over
the role, on the basis that she was not fully appraised of the
details of the scheme, cannot succeed. First,
Ms Novos was never
called to testify in the court
a quo
on this aspect. Second,
Ms van Dyk, as Spur’s public officer, signed off the relevant
tax returns as being correct.
[52]
Spur’s further argument that the Commissioner had all the
relevant and correct facts at his or her disposal
because Spur’s
annual financial statements were submitted together with the tax
returns, and that the correct information
could be distilled from
them, is unhelpful. The mere fact that an astute auditor or assessor
could have been able to ascertain
from supporting documentation the
fact that the return contains a misrepresentation, cannot mean that
there is no misrepresentation
in the first place.
[53]
It is trite that SARS bears the onus to show that the non-assessment
within the requisite three-year period was
the result of the
aforesaid misrepresentation and non-disclosure referred to earlier.
In addressing this issue, it is apposite
to consider SARS’
relevant internal processes in the years in question pertaining to
the making of original and additional
assessments.
[54]
SARS led the evidence of Mr Venai Singh (Mr Singh), a senior manager
in its Large Business Centre. Mr Singh testified
that until 2009,
returns were completed and filed manually which were then captured
into SARS computer system by a data-capturer.
An original assessment
would then be issued on the basis of the captured information. From
2009 onwards, the SARS e-filing system
was introduced and returns are
now filed electronically. The system now assesses the returns
electronically, without any human
intervention.
[55]
It is clear from Mr Singh’s testimony that the making of the
original assessment is not the outcome of anything
more than the
capturing and processing of the information provided by the taxpayer
in its return. The process was one of SARS accepting
such return at
‘face value’, and issuing an original assessment
(IT34). I pause to mention at this stage that
it must be kept in mind
that the basic legal requirement is that taxpayers must submit an
annual return of income in terms of s 25(1)
of the TAA, which
return is required by s 25(2) of the TAA to be ‘full and
true’. Furthermore, the return itself
requires the public
officer to make a declaration,
inter alia
, that the
information and particulars furnished in the return are true and
correct. In this regard, Spur’s returns for the
2005 to 2009
years of assessment, contain a statement just after the signature of
the public officer, that ‘it is a serious
offence to make a
false declaration or fail to render a return within the prescribed
period’.
[56]
The issue of face value assessments was recognised in
Commissioner
for Inland Revenue v Mutual Unit Trust Management Company Ltd
,
[7]
in the context of a defence of a ‘practice generally
prevailing’. The court accepted that the return can thereafter
be reconsidered more thoroughly in the three-year period following
the original assessment.
[57]
Mr Singh testified that only the tax return, and not any supporting
documents or schedules, is taken into account
for purposes of issuing
an original assessment. Clearly, the integrity of the SARS assessment
process depends largely on the correctness
of the information
provided in the return, and on SARS’ ability to conduct audits
of returns in the ensuing three-year period
to ensure a proper tax
treatment.
[58]
Mr Singh further testified that typically in a day, over one hundred
thousand returns would be received at SARS.
As such, it was not
possible for the auditors to perform a manual check of every return
to ensure that it did not contain any errors.
Instead, the tax return
contains various rand value fields and specific questions which
were inserted deliberately. These
questions were so called triggers,
depending on the manner in which the questions were answered by the
taxpayers. Mr Singh explained
how these triggers were activated and
how risks were assessed.
[59]
According to Mr Singh, should a trigger arise when a particular code
is activated, further steps would then be
taken and the matter could
either be resolved at that stage or could proceed to an audit. Thus,
the ‘yes’ or ‘no’
questions included for the
purposes of identifying a specific risk relative to the question
asked.
[60]
The Commissioner submitted that in the present case a ‘yes’
answer to the s 23H question, and
to the question whether a
contribution was made to a trust, are risk factors which, according
to Mr Singh’s testimony, would
have triggered a risk alert for
SARS at the time when the returns were submitted for the relevant
year of assessment. Mr Singh’s
evidence makes perfect
sense. I am satisfied that a ‘no’ answer to these
questions would not, accordingly, have triggered
a risk alert for
SARS.
[61]
SARS was thus not alerted to the existence of the 2004 and 2005 share
scheme transactions and particularly the
contribution of R48 million.
This persisted until the true position was picked up in the course of
an audit, which was only
in respect of the 2011 tax year, but was
extended to the 2010 and 2012 tax years, and later to the 2005 to
2009 tax years. The
audit gave rise to the additional assessments,
which are the subject of this appeal.
[62]
Spur accepted that false statements were contained in the returns.
Against that, it contended that scrutiny of
the financial statements
and a more alert auditing process would and should have ensured a
proper assessment within the prescribed
period. It overlooked the
face value assessment process understandably undertaken by SARS.
Audits are implemented because of triggers
caused by specific answers
in tax returns. If the questions that would give rise to the triggers
are wrongly answered, as happened
in this case, the matter may not
come before an auditor within the three-year period, and the
clarification questions will therefore
never be asked.
[63]
I should also add that as a matter of policy, a court would be loath
to come to the assistance of a taxpayer that
has made improper or
untruthful disclosures in a return. Clearly, this would offend
against the statutory imperative of having
to make a full and proper
disclosure in a tax return.
[64]
In light of what I have stated above, I therefore find that the
misrepresentations and non-disclosures by Spur
caused the
Commissioner not to assess Spur correctly within the three-year
period after the original statements. I accordingly
make the
following order:
1
The appeal is upheld.
2
The judgment and order of the court
a quo
is set aside in its
entirety and is substituted as follows:
‘
(a)
The appeal is upheld with costs, including the costs of two
Counsel;
(b) The order of the tax court is
set aside and substituted as follows:
‘
The appeal is dismissed
and the additional income tax
assessments raised by the
Commissioner in respect of Spur’s
2005 to 2012 years of assessment
are confirmed.’
3
Spur is ordered to pay the costs of this appeal, such costs to
include those of two
counsel where so employed.
B
H Mbha
Judge
of Appeal
APPEARANCES:
For
appellant:
M W Janisch SC (with H Cassim)
Instructed
by:
The State Attorney, Cape Town
The State Attorney, Bloemfontein
For
respondent:
N D G Maritz SC
Instructed
by:
MacRobert Inc, Cape Town
Claude Reid Attorneys,
Bloemfontein.
[1]
Section 23H refers to prepaid expenses. It limits
the deduction of an expense where none of the benefits (or part of
the benefits)
arise in the years of assessment. The general rule is
that one cannot prepay business expenses for a future year and
deduct them
from the current year’s taxes.
[2]
Port Elizabeth Electric Tramway Co Ltd v Commissioner for Inland
Revenue
(PE Tramway)
8
SATC 13
at 16.
[3]
Commissioner for Inland Revenue v Nemojim (Pty) Ltd
1983
(4) SA 935
(A) at 947F-H;
45 SATC 241
at 254.
[4]
Commissioner for Inland Revenue v Genn and Co (Pty) Ltd
1955
(3) SA 293
(A) at 299G;
[1955] 3 All SA 382
(A) at 386; see also A
de Koker
et al
Silke on South African Income Tax
vol 1 para 7.8.
[5]
Commissioner for Inland Revenue v Genn and Co (Pty) Ltd
fn
4 above
at 299C-D1. To rank as a
deduction, the expenditure must not only have been incurred for the
purpose of earning income as defined,
but there must be a
sufficiently distinct and direct relationship or link between the
expenditure incurred and the actual earning
of the income. These
restrictive tests result in the disallowance of a vast number of
business expenses that are necessarily
incurred in carrying on
business but fail to satisfy a requirement that they be laid out for
purposes of earning income.
[6]
Solaglass Finance Co (Pty) Ltd v Commissioner for Inland Revenue
[1990] ZASCA 157
;
1991 (2) SA 257
(A);
[1991] 1 All SA 339
(A); See also
Warner
Lambert SA (Pty) Ltd v Commissioner, South African Revenue Service
2003 (5) SA 344
(SCA) para 11.
[7]
Commissioner for Inland Revenue v SA Mutual Unit Trust Management
Company Ltd
[1990] ZASCA 76
;
1990 (4) SA 529
(A);
52 SATC 205.