Was a contribution of R48 million made by the Spur Group (Pty) Ltd (“Spur”) to an employee share incentive scheme trust sufficiently closely connected to Spur’s income earning operations to qualify for a deduction under section 11(a) of the Income Tax Act? If not, was SARS precluded from raising additional assessments due to prescription? These were the questions the Supreme Court of Appeal (“SCA”) had to address in CSARS v Spur Group (Pty) Ltd.
Spur established the employees trust in 2004. Initially its holding company (“HoldCo”) was the only capital and income beneficiary of the trust. The trust was later amended to allow qualifying employees to benefit from dividends received, but HoldCo remained the only capital beneficiary. Spur contributed R48 million to the trust which amount was claimed as a deduction in terms of s11(a) against its taxable income over seven years. The contribution was ultimately utilised for acquiring shares in HoldCo to the value of the R48 million.
The deduction was disallowed by SARS on the basis that the contribution was not incurred in the production of Spur’s income. The High Court had previously found that the contribution was deductible, the purpose of the scheme being to incentivise employees and to promote the growth of Spur. The SCA, reversing the High Court’s decision, held that the employees did not directly or indirectly benefit from the contribution. The employees had no right to the contribution as HoldCo remained the capital beneficiary of the trust. Therefore, there was not a sufficiently close link between the expenditure and the production of income by Spur.
Spur further contended that SARS was precluded from issuing additional assessments for the years 2005 to 2009 because more than three years had elapsed since its original assessments. SARS argued that it was not bound by the three years prescription period because it does not apply when tax was not assessed due to either fraud, misrepresentation, or a non-disclosure of material facts. When submitting its tax return, Spur had answered “no” to the question whether any contributions had been made to a trust, or whether the company was party to the formation of a trust. This, the SCA held, was plainly false and a misrepresentation.
Due to the misrepresentation and non-disclosure prescription did not apply. SARS appeal was therefore upheld, and its assessments confirmed.