Most Read Contributor in South Africa, September 2016
In its first and much anticipated judgement in
relation to the interpretation of section 8A of the Income Tax Act,
and to Deferred Delivery Share Schemes, a full bench of the Supreme
Court of Appeal unanimously upheld the taxpayers' contentions
as to the tax effects of a so-called Deferred Delivery Share
In this test case, the Court rejected the main contentions by
the South African Revenue Service ("SARS"), that the
share scheme was subject to various conditions, or alternatively
that it was a simulation. The taxpayers'
argument that the exercise of an option agreement constituted the
sole point at which tax could be levied in terms of the then
applicable tax law, was upheld. This confirms the
interpretation which had been accorded to section
8A of the Income Tax Act by many tax practitioners over
the years as well as (until recently) SARS itself.
The Court further delivered a clear and succinct summation of
the application of the "sham" or "substance over
form" doctrine saying:
"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...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
The Court confirmed that the parties' intention in
exercising their options was not to do so on terms other than those
set out in the scheme, and therefore there was no simulation or
The Commissioner's appeal was dismissed with costs, with the
judgement of the Court being delivered by Wallis JA. The taxpayers
were represented by Advocates P. Hodes SC, P. Solomon SC and A.
Breitenbach SC instructed by ENSafrica. Advocates A. Sholto-Douglas
SC, M. Janisch and H.Cassim appeared for the Commissioner.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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