The Commissioner for the South African Revenue Service v Spur Group (Pty) Ltd

Spur Group (Pty) Ltd implemented an employee management share incentive scheme in 2004 aimed at promoting growth and profitability. As part of the scheme, Spur contributed approximately R48 million to a trust established by its holding company, Spur Corporation Ltd. The trust used the funds to subscribe for preference shares in a special purpose vehicle (NewCo), which in turn acquired shares in Spur Corporation. Eligible employees acquired ordinary shares in NewCo at nominal value, but they had no entitlement to the R48 million contribution or to the preference dividends, which ultimately accrued to Spur Corporation as sole capital beneficiary of the trust. Spur claimed deductions of the R48 million contribution under s 11(a) of the Income Tax Act 58 of 1962, spread over 2005–2012 under s 23H. SARS initially allowed the deductions but later issued additional assessments disallowing them, and Spur challenged both the deductibility and the legality of additional assessments for 2005–2009 on prescription grounds.

The appeal by SARS was upheld. The judgment of the Western Cape High Court was set aside and replaced with an order dismissing Spur’s appeal. The additional income tax assessments raised by SARS for Spur’s 2005 to 2012 years of assessment were confirmed. Spur was ordered to pay the costs of the appeal, including the costs of two counsel.

The case clarifies the application of s 11(a) of the Income Tax Act to employee share incentive schemes, emphasising that expenditure must have a sufficiently close and direct connection to the taxpayer’s own income-producing operations. It confirms that funding arrangements benefiting a corporate group or holding company are not deductible merely because they form part of an incentive scheme. The judgment also reinforces SARS’s powers under s 99(2) of the Tax Administration Act to reopen assessments where misrepresentation or non-disclosure is present.