The Commissioner for The South African Revenue Service vs. Spur Group (Pty) Ltd

South Africa

15.10.2021

Direct Taxation

Commissioner is not bound by the three-year period of limitation where full amount of tax chargeable was not assessed due to fraud, misrepresentation, non-disclosure of material facts

The issue for determination before present Court was whether the High Court correctly held that, there was a sufficiently close causal link that existed between the Respondent’s expenditure of a contribution of R48 million and its income producing operations so as to qualify for a deduction under Section 11(a) of the Income Tax Act 58 of 1962 (the ITA), in respect of the Respondent’s 2005 to 2012 years of assessment.

The Respondent, the main operating entity in the Spur Group of companies, is a wholly owned subsidiary of Spur Corporation Limited (Spur HoldCo). In 2004, the Spur Group including the respondent and Spur HoldCo, implemented a share incentive scheme (the scheme), in terms of which the respondent’s 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 respondent. A discretionary trust was then established to implement and regulate the scheme. Spur HoldCo was the sole capital and income beneficiary. In furtherance of the scheme, the trust incorporated Maxshell 72 Investments (Pty) Ltd (NewCo). The participants were then offered the opportunity to acquire ordinary shares in NewCo in proportions determined by Spur HoldCo. The Trust Deed was amended, at a later stage, to permit the participants to benefit from dividends received by the trust. However, Spur HoldCo remained the sole capital beneficiary.

In December 2004, the Respondent 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. The Respondent then claimed the contribution of R48 million, it made to the trust as a deduction against its income in terms of Section 11(a) of the ITA. Initially, the Respondent allowed the claimed deduction. However, following an audit, the Respondent disallowed the deductions, and brought the deductions back into account as additional taxable income.

Section 99(1) of the Tax Administration Act, 2011 (TAA) provides that, the Commissioner may not make an assessment three years after the date of the original assessment by SARS. However, Section 99 (2)(a) of the TAA, provides that, the Commissioner is not bound by the three-year period of limitation where ‘in the case of assessment by SARS, the fact that the full amount of tax chargeable was not assessed, was due to – (i) fraud; (ii) misrepresentation; or (iii) non-disclosure of material facts.’

The basic legal requirement is that, taxpayers must submit an annual return of income in terms of Section 25(1) of the TAA, which return is required by Section 25(2) of the TAA to be ‘full and true’. Furthermore, the return itself requires the public officer to make a declaration, that the information and particulars furnished in the return are true and correct.

The participants neither benefitted directly or indirectly from the making of the contribution. The chief financial officer and director of the respondent had testified that the fact that, the scheme did not permit the participants to share in the R48 million contribution, was known to her as a participant. Furthermore, the Respondent’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. The contribution was not sufficiently closely connected to the business operations of the Respondent such that it would be proper, natural and reasonable to regard the expense as part of the Respondent’s costs in performing such operations.

With regard to the issue of whether the Commissioner was precluded from raising additional assessments due to prescription, the present Court found that, the Respondent had not made truthful disclosures in its return for the 2005 to 2009 years of assessment. As a result, the Commissioner was not alerted to the existence of the contribution of R48 million. The misrepresentations and non-disclosures by the Respondent caused the Commissioner not to assess the Respondent correctly within the three-year period after the original assessments. The present Court therefore made an order upholding the Commissioner’s appeal with costs and confirmed the Commissioner’s assessments against the respondent in respect of the 2005 to 2012 years of assessment.

Tags : Assessment Income Additions

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