Supreme Court slaps Spur over tax deduction claims

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The Supreme Court of Appeal (SCA) last week overturned a Western High Court ruling that a contribution of Rand 48 million to a Spur employee shareholding trust was an expense in generating income and was therefore deductible .

In 2004, Spur launched a stock incentive plan for employees, with Spur Holding Company (HoldCo) being the sole beneficiary of capital and income. In December of the same year, an amount of R48.4 million was paid to the trust by Spur. The trust deed was amended in 2010 to allow participants to benefit from dividends received by the trust, although Spur HoldCo remained the sole beneficiary of the capital.

“The purpose of the program was to promote the continued growth and profitability of Spur,” according to SCA judgement.

Participants in the program received ordinary shares of an entity (NewCo) and were prevented from freely trading those shares for a period of seven years.

Shortly thereafter, the share capital of NewCo was changed to create NewCo preferred shares. The trust acquired 1,000 preferred shares of NewCo, with an agreement that dividends would be paid at 75% per annum of the prime interest rate, to be repaid five years later – in December 2009.

Upon the arrival of 2009, the preferred shares were repurchased at the rate of R48.4 million as previously agreed, while dividends in the amount of R22.5 million were to be distributed to the trust.

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The repurchase of the preferred shares and the payment of dividends were settled through the distribution by NewCo to the trust of a total of 6.7 million common shares of Spur HoldCo.

In December 2009, NewCo declared a dividend of R 286.27 per ordinary share totaling R 28.6 million to the ordinary shareholders of NewCo.

The stock incentive plan was terminated and NewCo was delisted on December 10, 2012, although the trust continues to hold shares of Spur HoldCo which were distributed to it by NewCo.

Claimed deductions

A dispute arose with the South African Revenue Service (Sars) when Spur claimed the contribution of R48.4 million that it had made to the trust as a deduction from its income under section 11 (a) of the law on income tax, with the deductions spread over the period 2005 to 2012.

Spur claimed deductions of Rand 3.46 million in 2005; 6.92 million rand for the years 2006 to 2011; and Rand 3.46 million for 2012.

According to the SCA decision, Sars initially allowed the deductions claimed, but overturned that decision following an audit. The basis for the denial was that the R48.4 million contribution had not been committed to generating Spur’s income during the period.

Sars felt that Spur HoldCo was the only party to benefit from the contribution to the trust.

The participants in the contribution were not beneficiaries, and this was confirmed by a witness for Spur who confirmed that the R48 million in shares of Spur Corporation is still in the trust, which means that the participants did not directly benefit from the contribution.

“False statements and non-disclosures”

“It is clear that there must be a link or a sufficiently close link between the expenses and the income-generating activities of a taxpayer. Determining the existence of the necessary connection will require an examination of all the facts of a particular case, ”the judgment read.

“In light of what I have stated above, I therefore conclude that Spur’s misrepresentation and non-disclosure caused the Commissioner [of Sars] failing to properly assess Spur within three years of initial reporting.

Although Article 99 (1) of the Tax Administration Act does not authorize Sars to make an assessment three years after the initial assessment, this limited period does not apply in the event of fraud, misrepresentation or non-disclosure of material facts.

Sars’ appeal against the earlier Western Cape High Court ruling in favor of Spur was upheld by the SCA, and Spur was ordered to pay the costs of the appeal.

Spur posted an announcement to Sens on Monday morning in response to the SCA’s decision, saying it was considering its legal rights, which could include challenging the SCA’s decision to the Constitutional Court.

In light of the judgment, the financial statements for the previous year will be adjusted.

“As a result of the SCA decision, the tax claim of Rand 22.034 million, recognized as an asset in the Consolidated Statement of Financial Position of Spur Corporations as at June 30, 2021, will be charged to net income as income tax and additional interest charge. », Indicates the announcement of Sens.

Spur’s share price traded down half a percent on Monday morning at R20.08.


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