Stevens v Commissioner for South African Revenue Service (641/05) [2006] ZASCA 117; [2007] 3 All SA 229 (SCA); 2007 (2) SA 554 (SCA) (28 November 2006)

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[2006] ZASCA 117
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Stevens v Commissioner for South African Revenue Service (641/05) [2006] ZASCA 117; [2007] 3 All SA 229 (SCA); 2007 (2) SA 554 (SCA); 69 SATC 1 (28 November 2006)

IN THE SUPREME COURT OF APPEAL
OF SOUTH AFRICA
REPORTABLE
CASE NO 641/05
In the matter between
CHARLES DOUGLAS NEWMAN STEVENS
Appellant
and
COMMISSIONER FOR THE SA REVENUE SERVICE
Respondent
________________________________________________________________________
CORAM: HOWIE P, MTHIYANE, BRAND MAYA JJA et COMBRINCK AJA
________________________________________________________________________
Date Heard: 6 November 2006
Delivered: 28
November 2006
Summary: Para (c) of definition of ‘gross income’ in Income
Tax Act 58 of 1962: whether
ex gratia
payment an amount
received in respect of services or employment.
Neutral citation: This judgment may be referred to as
Stevens v
CSARS
[2006] SCA 145 (RSA)
__________________________­­­­­­­­­______________________________________________
J U D G M E N T
________________________________________________________________________
HOWIE P
HOWIE P
[1] The appellant taxpayer was group
company secretary of Safmarine and Rennies Holdings Limited
(‘Safren’). Under the company’s
share incentive scheme he
acquired the option to buy 51 000 Safren shares at R3.70 per
share. By reason of circumstances referred
to below the option was
rendered worthless. As a result the company’s directors resolved,
in their discretion, to pay all R3.70
option holders 75 cents per
share
ex gratia
. In consequence the appellant received R38
250. That was in the 2001 tax year. The Commissioner took the view
that the receipt fell
within the terms of paragraph (c) of the
definition of ‘gross income’ in s 1 of the Income Tax Act 58 of
1962 and accordingly
assessed the appellant to tax. An objection
and appeal to the Cape Tax Court having failed, the appellant
appeals, with the necessary
leave, to this Court.
[2] Before
the Court below a statement of agreed facts was admitted into the
record and supplemented by evidence from the taxpayer.
The statement
reads as follows:
‘
1. The
appellant is the holder of share options in terms of the Safren
Employees’ Share Incentive Scheme (“the Scheme”).
2. The
ex gratia
payments in question were not made to all holders of
Safren options. They were made only to those participants in the
Scheme who
held options granted on 6 August 1998 at R3.70 per share
(“the R3.70 options”).
3. Holders
of the R3.70 options were in terms of the rules of the Scheme not in
a position to exercise their options by the time a
special dividend
was declared by Safmarine and Rennies Holdings Limited (“Safren”)
on 4 October 1999. This is because clause
5.2 of the rules of the
Scheme precluded option holders from exercising their options for a
period of three years from the date of
the grant of the options. Thus
the R3.70 option holders would not have been able to exercise the
R3.70 options until 5 August 2001,
which was
after
the
declaration of the special dividend on 4 October 1999.
4. At
the time of declaration of the special dividend, ie on 4 October
1999, it was announced that Safren would be voluntarily liquidated.
5. Option
holders who were in a position to exercise their options prior to
4 October 1999 were not offered any
ex gratia
payment
whatsoever.
6. The
ex gratia
payments were offered on 16 February 2000.
7. Acceptance
of the
ex gratia
payment did not affect the position of the
R3.70 option holders in any other way: they continue to hold their
R3.70 options, and
they did not exercise, surrender, cede or release
their R3.70 options.
8. During
the 2001 year of assessment the appellant, as holder of R3.70
options, received an
ex gratia
payment of R38 250 in the
circumstances described above.
9.
The issue for determination is whether or not the said amount of
R38 250 received by the appellant constituted ‘gross income’
in his hands in terms of the relevant provisions of the Income Tax
Act, 58 of 1952, as amended.’
[3] The resolution to make the
ex
gratia
payment reads as follows:
‘
It
was further noted that –
prior
to the declaration of the special dividend of R1 per share on 4
th
October 1999 participants under the scheme who held options over
Safren shares at R3.70 per share, could reasonably have expected
to
have realised a profit on exercising their options prior to the
proposed liquidation of the company when it was at that time
anticipated
that the net realisable value per share would be
approximately R4.45. As the special dividend on shares subject to
unexercised options
accrued to the Trustees and not participants,
holders of options at R3.70 per share had thereby been denied the
realisable profit
which they would otherwise have made, since the net
asset value per share on liquidation had now been estimated at some
R3.55 per
share.
Since
the Board’s resolution of 2
nd
December 1998 to lift the
embargoes on the exercise of options had not become effective and the
holders of the R3.70 option rights
had accordingly been deprived of
the opportunity to realise a profit which they would otherwise have
made, it was RESOLVED that an
ex-gratia payment of 75 cents per share
be made (R4.45-R3.70) to those participants holding options over
Safren shares at R3.70 per
share to compensate for the gain which
they had reasonably expected to make prior to the declaration of the
R1 special dividend.’
[4] The Scheme included the following
provisions which are relevant.
‘
2. PURPOSE
OF THE SCHEME
The
scheme is intended to promote the retention of employees of ability
and expertise who are primarily responsible for the profitability
and
continued growth of Safren and ... by giving them an opportunity to
acquire shares in Safren.
3. ELIGIBILITY
The
persons who may participate in the scheme and to whom the board shall
be entitled to cause to be offered ... options over scheme
shares ...
shall be such employees of Safren ... as the board, in its absolute
discretion, considers play a role in the management
of Safren ... and
contribute to its growth and profitability.’
The board referred to was the board of
directors and participants in the scheme included an option holder’s
heirs. The scheme was
implemented by trustees but it was the board
that decided which employees were to be offered shares or options by
the trustees.
[5] In all there were 125 R3.70 option
holders and the present matter is in the nature of a test case.
Predominantly the option holders
were, in the relevant year, current
employees but some were retired employees and there was one option
holder which was the estate
of a deceased employee. They were all
made an offer of the
ex gratia
payment and all accepted it.
[6] The testimony of the taxpayer
highlighted several features of the case which are important. He said
the option rights were awarded
to people because they were employees
and in recognition of their services rendered or to be rendered . He
went on to say:
‘
The
purpose of a Share Incentive Scheme was for the senior employees of
the company or the group to be given an opportunity to have
a stake
in the company and, if I might add, for the obvious reason that to
have a stake in a company is going to give you a greater
reason to be
committed to the company and to work hard or harder perhaps so that
the results can be good enough or better to result
in the share price
increasing and therefore you to have a capital asset which you can
have in addition to your remuneration’.
[7] As regards the decision to make
the
ex gratia
payments he said:
‘
My
memory of talking to the chairman and attending the board meeting at
the time was that the board had, was concerned that it had
overlooked
the effect it was having on these option holders and, I think, it was
quite a credit to the members of the board that
they felt sympathetic
to such option holders and because the option holders were, I say
this for myself, important members of the
Safren team it was felt
that the decision, you know, was a just one and obviously it could
not be made only to current employees
of Safren who held such
options. It would have to apply to all R3.70 option holders ...’
[8] The taxpayer testified that the
ex
gratia
payment was to make up for the drop in the capital value
of the shares that could have been acquired had the option been
exercisable,
that is to say, the fall from a then market value of
R4.45 to at least the level of the option price of R3.70. In other
words it
was to compensate for the option holders’ loss. He added
it would not necessarily have constituted adequate compensation if,
having
exercised the option, they could have held on until the
eventual distribution on liquidation ‘which might well have been
more than
R4.45 per share’.
[9] It remains to mention his comment
that with liquidation imminent the board, in awarding the
ex
gratia
payment, would not have been particularly concerned about
rewarding services either being rendered or to be rendered.
[10] The question for decision is
whether on the facts of this case the amount received by the taxpayer
fell within the relevant part
of paragraph (c) of the definition of
‘gross income’. That part includes in ‘gross income’:
‘
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 ...’
[11] In passing I should remark that
because the taxpayer’s option was never exercised s 8A of the Act
does not apply, and that
it was accepted by the parties that no other
provisions of the definition of ‘gross income’ applied either.
[12] The Tax Court decided in the
Commissioner’s favour because in its view the taxpayer’s services
and employment were directly
linked to the amount received. Such
services and/or employment, so it held, constituted the reason why
the board exercised the discretion
it did, even in the cases of the
retirees and of the deceased employee’s estate.
[13] Counsel for the appellant
disavowed acceptance of the taxpayer’s reference to compensation
for loss. Counsel argued that the
amount paid was not to compensate
for any loss but for the unfairness which the R3.70 option holders
would have suffered as a result
of the special dividend and its
effect on the value of Safren shares had the
ex gratia
payment
not been made.
[14] Counsel also placed reliance on
the decision of this Court in
CIR v Shell Southern Africa Pension
Fund
1
in contending that, in the language employed in that case, the
taxpayer’s services and employment constituted no more than an
‘historical
antecedent or background feature’
2
and that the legally causative factor in this case was the
declaration of the special dividend and its unforeseen effects on the
R3.70 option holders.
[15] In the
Shell
case the
issue was whether a lump-sum payment from a pension fund to the widow
of a deceased member – payment being in the discretion
of the
fund’s administering committee – was a benefit recoverable ‘in
consequence’ of the death of the member. It was held
that upon the
grant of the pension to the widow, the member’s death ceased to
have any operative effect on the payment. It was
held that the
committee’s decision was an independent, unconnected and extraneous
cause which isolated the death from the payment.
3
[16] It was the declaration of the
special dividend, said the taxpayer’s counsel, which led to the
board’s discretionary decision
and the payments in issue, which
were made to no other option holders. Again in the language used in
Shell
, the special dividend declaration was, he said, an
‘independent, unconnected and extraneous causative factor or
event’.
4
[17] There may have been a shift of
focus in counsel’s approach. The Tax Court records his argument
there (the same counsel appeared
for the taxpayer in both courts) as
being that it was the board’s decision to make the
ex gratia
payments that was the legally causative event, not the board’s
earlier declaration of the special dividend. The advantage to the
taxpayer apparently inherent in focusing on the latter is that, being
a matter essentially between the company and its shareholders,
the
special dividend declaration was not connected to the employment
relationship between the company and its employees. Hence the
opportunity to argue that the employment chain, to call it that for
convenience, was broken by a decision independent of, unconnected
with and extraneous to the employment relationship.
[18] Accordingly, submitted counsel,
the
ex gratia
payment was not aimed at compensating the R3.70
option holders as employees or ex-employees. In other words it was
not intended to
give them that benefit by reason of their services or
their employment. It was meant to compensate only them; it was not
made to
any other option holders, not even those who could have
excised their options before the special dividend declaration but did
not
do so. The R3.70 option holders were singled out not because of
their seniority, prominence or quality of service but because their
option price was below the market value when the special dividend was
declared and it was they who were deprived of a contemplated
profit.
[19] Counsel also sought to make
something of the contention that the supposed benefit inherent in the
options was no more than the
opportunity to benefit in future subject
to many contingencies which might, even adversely, have affected the
market price of the
shares by the time the options were exercisable.
In my opinion this argument ignores the realities. By the time the
special dividend
had lowered the share value, liquidation was in
sight and but for the amount of the special dividend it was tolerably
clear what
shareholders would get on liquidation, and therefore that
the R3.70 option holders had missed out on achieving a capital
benefit
of near enough 75 cents per share. The relevant resolution
recognises as much.
[20] Turning to an evaluation of the
appellant’s argument, there is no material difference between the
expressions ‘in respect
of’’ and ‘by virtue of’ in
paragraph (c).
5
They connote a causal relationship between the amount received and
the taxpayer’s services or employment.
6
[21] There can be no doubt that the
R3.70 option was a benefit directly linked to the taxpayer’s
employment. Options were given
as a benefit to those whose past
services prompted the employer’s wish to secure their future
services. The taxpayer’s counsel
emphasised that the options
remained intact after the declaration of the special dividend, which
was some indication that it could
not have been the board’s
intention to substitute the
ex gratia
payments for the
options, However, the declaration of the special dividend rendered
the R3.70 options (and others with higher option
prices) worthless.
As a result the intended capital benefit which the board had wished
the taxpayer to have was unquestionably lost.
[22] It is true that the effect of the
declaration operated unfairly on the R3.70 option holders and that
the board intended to ameliorate
their position but it seems
unhelpful to argue that the
ex gratia
payment was aimed at
compensating unfairness, not loss. The question which requires
answering is not: what was the factor or event
which prompted the
board to decide to make the
ex gratia
payment? Undoubtedly the
right answer to that question is ‘the effect of the special
dividend declaration’. The question to
answer is rather: why was
the payment made to those who received it? The answer to this
question is that the recipients were employees
(or ex-employees or
the deceased employee’s estate) who had enjoyed a benefit directly
linked to their employment, who had lost
that benefit and who, in the
board’s discretion, were deserving in the particular circumstances
of a substitute
ex gratia
payment. The point is that the
self-same quality of service which motivated the grant of the option
to them in the first place was
still operative in motivating the
award of the
ex gratia
payment to them. That other option
holders were not recipients, whatever their worth as employees, does
not detract from the Commissioner’s
case. Their option prices were
above the relevant market value and they sustained no loss. And those
with lower option prices than
R3.70 had been able to exercise their
options but failed to do so. It was open to the board in any event to
choose one group of employees
as more deserving than another. As long
as the motivation was to give the recipients a benefit in recognition
of their service in
Safren’s employment – as I think the evidence
shows it was – then there was an unbroken causal relationship
between the employment
on the one hand and the receipt on the other.
[23] In the present matter the board’s
decision to make the
ex gratia
payment was made as employer
vis a vis
employee, not, as in the
Shell
case, as some
independent body
vis a vis
a member’s dependant. The
decision to make the
ex gratia
payment did not deprive the
taxpayer’s employment of ‘operative effect’. Payment was made
because the recipients were employees
whose standard of service –
past or current – warranted, in the light of their loss, the
ex
gratia
payment. Even if it be supposed that the employment and
the special dividend declaration were dual causes the former was in
my view
clearly the dominant one.
7
And as pointed out in
De Villiers
, it does not matter that
payment was made gratuitously rather than under an obligation.
8
The amount in issue was therefore received in respect of or by virtue
of employment.
[24] It follows, in my view, that the
decision of the Tax Court was right. In regard to costs, the
Commissioner asked for the costs
of employing senior counsel. That is
a matter for the Taxing master who will, no doubt, tax according to
seniority in any event.
The appeal is dismissed, with costs.
____________________
CT HOWIE
PRESIDENT
SUPREME COURT OF APPEAL
CONCUR:
Mthiyane
JA
Brand
JA
Maya
JA
Combrinck
AJA
1
1984
(1) SA 672
(A).
2
At
679F-G.
3
At
279G-H.
4
At
679G-H.
5
See
De Villiers v Commissioner for Inland Revenue
1929 AD 227
at
232-3; and
Stander v Commissioner for Inland Revenue
1997 (3)
SA 617
(C) at 624I-625B.
6
Mooi v
Secretary for Inland Revenue
1972 (1) SA 675
(A) at 684G-H.
7
Cf.
De Villers
at 230.
8
At
233.