In line with many corporations, the Foschini Group rewards top executives with share options from time to time. In one such scheme, offered in 1997, staff were given an option to take up shares at a certain price and the shares could then be bought and transferred to those staff members who took up the option in tranches two, four and six years after award of the option. The purchase price was payable on delivery of the shares.
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This is known as a ‘deferred delivery scheme’. It is hoped that these employees will then direct their energies to increasing the share price, which will, in turn, benefit the company. Share price rises afford the option holders an increase because the option price is lower than the value of the shares allocated to the executives at date of transfer.
Dates contested
SARS challenged the scheme, claiming that the date of the transfer was when the tax effect, provided for in terms of Section 8A(1) (a) of the Income Tax Act, came into play. The taxpayers contended that the tax effect of the transaction came into being at the time of the exercise of the option – in other words, when they accepted the option to purchase the shares at a later date. The share price was lower at this stage.
Interpretation of words
At the time this matter was brought before the Court, the wording used in Section 8A(1) (a) did not support the interpretation SARS proffered. Furthermore, the legal officer of SARS, who heads up the interpretation unit, had not in the past interpreted the section in the manner in which SARS now sought to do.
After taking these and other factors into consideration, the Court found that the wording of the section in question favoured the following interpretation: when the section describes 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 offered by SARS was therefore rejected.
Judgement and amendment
The judgement was handed down by the Supreme Court of Appeal on 19 November 2014, in case number 394/2013, Commissioner SARS v Bosch (394/2013)[2014] ZASCA 171. The dispute in this matter arose prior to an amendment to the Income Tax Act. This now limits the benefits obtainable though the Foschini-type of employee benefit plan. The amendment is contained within Section 8C of the Act.
In the above matter useful guidance is again given in this judgement in terms of the interpretation of tax statutes. These guidelines are certain to be helpful to taxpayers and tax practitioners.
