An unnamed taxpayer had understatement penalties of R2.27 million imposed by SA Revenue Services reversed, but lost two other appeals for disallowed certain capital losses accumulated in an employee share incentive scheme. The taxpayer claimed to have suffered substantial capital losses in the scheme between 2007 and 2013, but these losses were disallowed by Sars. The Tax Court ruled that the taxpayer is not entitled to claim a capital loss on the basis of the difference between the ‘base price’ of the shares and the price at which they were sold to the employees. There was no dispute about this.
The taxpayer claimed it was entitled to claim capital losses for capital gains tax (CGT) purposes in circumstances where the Trust granted share options to selected employees of the taxpayer. The Trust was established in order to enable the taxpayer to provide financial assistance to employees of the taxpayer for the acquisition of shares in the taxpayer. This was done and the employee share incentive scheme was structured in the way it was in light of the provisions of section 38 of the Companies Act, which prohibited the giving of financial assistance by a company for the acquisition of its own shares, but which permitted the use of a trust as a means of providing financial assistance for employees to acquire shares. The Trust was also established in order to satisfy the listing requirements of the Johannesburg Stock Exchange.
It was always understood by all concerned that the Trust would make losses as a result of the granting of share options to selected employees, which losses would be made good by the taxpayer. After all, so it was contended on behalf of the taxpayer, it was the taxpayer who wished to make shares available to its employees as a performance incentive and not the trust, hence the arrangement that the taxpayer would bear any losses resulting from the implementation of the scheme. The taxpayer determined the identity of the employees it wished to incentivise by offering them share options. Thereafter the instruction would be issued by the taxpayer to the trustees of the Trust to offer share options to the relevant employees, which the trustees of the Trust were then obligated to do by virtue of the terms of the Trust Deed.