Employee share schemes: Spur restaurants suffer a blow

In October 2021, the Supreme Court of Appeal (SCA) handed down judgment upholding the Commissioner for the South African Revenue Service’s appeal against an earlier decision in the Western Cape High Court in favour of Spur Group in relation to employee share schemes.

The issue for determination by the SCA was whether the high court correctly held that there was a sufficiently close causal link that existed between Spur Group’s expenditure of a contribution of R48 million and its income-producing operations to qualify for a deduction under section 11(a) of the Income Tax Act 58 of 1962 (the ITA), in respect of Spur Group’s 2005 to 2012 years of assessment.

In 2004, the Spur Group implemented a share incentive scheme (the scheme), in terms of which its eligible employees (the participants) would be afforded the opportunity of participating in that scheme. The purpose of the scheme was to promote the continued growth and profitability of the Spur Group. A discretionary trust was then established to implement and regulate the scheme. Spur Group was the sole capital and income beneficiary. In furtherance of the scheme, the trust incorporated a new company (NewCo). The participants were then offered the opportunity to acquire ordinary shares in NewCo in proportions determined by Spur Group. At a later stage, the Trust Deed was amended, to permit the participants to benefit from dividends received by the trust. However, Spur Group remained the sole capital beneficiary. In December 2004, the company contributed R48 million to the trust. In that same month, the trust subscribed for NewCo preference shares, amounting to approximately R48 million in aggregate, to be acquired by NewCo. Spur Group then claimed the contribution of R48 million it made to the trust as a deduction against its income in terms of section 11(a).

Initially, SARS allowed the claimed deduction. However, following an audit, it disallowed the deductions and brought them back into account as additional taxable income. Before the SCA, the Commissioner argued that the contribution was not expenditure incurred in the production of the Spur Group’s income as required by section 11(a) of the ITA and that there was only an indirect and insufficient link between the expenditure and any benefit arising from the incentivisation of staff.

The SCA found that the participants neither benefitted directly or indirectly from the making of the contribution. Spur’s chief financial officer and director testified that the scheme did not permit the participants to share in the R48 million contribution, which was known to her as a participant.

Furthermore, Spur Group’s tax practitioner confirmed that the purpose was always for the R48 million to remain within the Spur Group and not to transfer it to the participants. As a result, the SCA held that the contribution was not sufficiently closely connected to Spur Group’s business operations such that it would be proper, natural, and reasonable to regard the expense as part of the respondent’s costs in performing such operations.

When it comes to what qualifies as a tax-deductible expense in your business, there are many considerations to be made that often are not as straightforward as Spur Group may have believed their situation was. Always speak to your tax adviser before you make any major decisions that could have an impact on your income tax.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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IC Marais

Professional experience:

IC Marais is a certified CA (SA) with public sector and private sector technical knowledge based on 5 years’ Public Sector accounting, auditing and financial management experience and 5 years audit, tax and accounting experience. Detailed knowledge of private and public sector accounting and auditing standards (GRAP, IPSAS, IFRS, IAS, ISA) and public sector financial legislation (MFMA, etc.)

He enjoys the outdoors, hunting and fishing.



Professional experience:

In 1995, Schalk started as a trainee at Warner and Newton (which became Moores Rowland in 1997 and then Mazars Moores Rowland in 2007) in Bloemfontein. In 1998, Schalk was appointed as manager at Moores Rowland, where he became a partner in 2003. Schalk received his Postgraduate Certificate in Advanced Taxation in 2006 and in 2009 he received his Certificate in the Administration of Estates.



Professional experience:

Cedric started as a trainee at Warner and Newton (which became Moores Rowland in 1997 and Mazars Moores Rowland in 2007), Bloemfontein, in 1986. After completion of his articles, he joined the Special Investigations Division of the Department of Finance (SA Revenue Services) as a senior inspector from 1990 to 1991.



Professional experience:

Lucha started her career as a tax inspector at the Inland Revenue Department of New Zealand. After this she worked in commerce in Canada, Mexico and the United States.

On her return to South Africa, she completed her CA training contract with us and has been with Newtons ever since. She became a Partner in 2012.

Apart from her CA(SA) qualification she also holds a postgraduate certificate in Advanced Taxation (2005) and has the overall responsibility for training as our Training Officer.