Blow to Sars in ruling over shares

Werksmans head of tax Ernest Mazansky says the verdict in the Pretoria High Court is certainly relevant to issues of remuneration.

The appeal court case between the South African Revenue Service (Sars) and Labat Africa dealt with the issuing of shares in exchange for a brand name.

The issue being contested was whether the issuing of the shares had passed the Income Tax Act test. Was it a real expense that could be deducted from the company's taxable income?

The tax court found in Labat's favour that it had indeed been the case and Sars appealed against the decision.

The High Court ratified the tax court's decision. Whether Sars will lodge a further appeal is unknown.

Mazansky says there has always been uncertainty as to whether a company that gives its employees shares can deduct the value from tax.

Now, if properly structured, the answer is yes.

The principle argued in court, which was accepted by the High Court, deals with the assumption of "unconditional legal liability" in the transaction.

If this liability is assumed, it meets the requirement for deductibility.

Mazansky argues that if a company is contractually obliged to compensate someone for services rendered, it may offer shares in exchange for the services.

Sars's reasoning is that the issue of shares cannot be regarded as an expense. This view was accepted in a previous case where the judge determined that issuing shares in no way reduced the company's assets and it was therefore not an expense.

But the tax court pointed out that this finding ignored the fact that the requirement (for deductibility) was that the company had an "unconditional legal liability".

The concept of real expenditure is therefore not dependent on a payment. Mazansky explains that a company that issues shares and does not accept cash in exchange for the shares, incurs a cost. That represents spent cash.

- Sake24.com