THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT

Reportable
Case no: 394/2013

In the matter between:
THE COMMISSIONER FOR THE
SOUTH AFRICAN REVENUE SERVICE

Applicant
and
MARIANA BOSCH

First Respondent
IAN ROBERT McCLELLAND

Second Respondent

Neutral citation: Commissioner SARS v Bosch (394/2013)[2014]
ZASCA 171 (19 November 2014)
Coram:
BRAND, SHONGWE, WALLIS and PILLAY JJA and
DAMBUZA AJA.
Heard:
6 November 2014
Delivered: 19 November 2014
Summary: Share option scheme – s 8A(1)(a) of the Income Tax Act 58
of 1962 – employees given option to purchase shares – option to be
exercised within 21 days – payment for and delivery of shares to occur in
tranches two, four and six years later – whether date of exercise of option
or date of payment for and receipt of shares the date for determining any
gain to be included in the taxpayer‟s income – whether contract arising

from exercise of option conditional – whether contracts between
employees and trust administering scheme simulated transactions

ORDER

On appeal from: Western Cape High Court (Waglay, Davis and
Baartman JJ, sitting as court of appeal):
Leave to appeal is granted.
The appeal is dismissed with costs, such costs to include the costs
of the application for leave to appeal in the court below and this
court, and those consequent upon the employment of two counsel.

JUDGMENT

Wallis JA (Brand, Shongwe and Pillay JJA and Dambuza AJA
concurring)
[1] Many companies use share option schemes as a means of retaining
staff and providing additional compensation to those staff members who
are thought to make a significant contribution to the business activities of
the company. Such schemes may take various forms. This application for
leave to appeal concerns a scheme (the scheme) referred to as a deferred
delivery scheme (a DDS scheme or schemes). In 1997 the Foschini Group
(Pty) Ltd (Foschini) implemented the scheme. In  2008 the Commissioner
for the South African Revenue Services (the Commissioner) reviewed it
and issued additional assessments to income tax in relation to 117
employees and former employees of Foschini. Appeals were lodged on
behalf of the employees and the appeals of two of them, the respondents,

Ms Bosch and Mr McClelland, were taken as test cases before the Tax
Court. Their appeals were partially successful before Allie J and the
Commissioner did not pursue a challenge to those of her findings that
were favourable to the taxpayers. Ms Bosch and Mr McClelland appealed
to the full court of the Western Cape High Court against the findings that
were adverse to them. Their appeals succeeded in a judgment by Davis J1
in which Baartman J and, in all save one respect, Waglay J concurred.
Leave to appeal to this Court was refused. On petition the application for
leave to appeal was referred for argument in terms of s 21(3)(c)(ii) of the
Supreme Court Act 59 of 1959. The parties were directed to be prepared
to address the Court on the merits of the dispute and they have done so.

[2] The issues raised in the case are important and, according to the
affidavit on behalf of the Commissioner, may affect a number of similar
DDS schemes in relation to other companies and taxpayers. The points
raised are reasonably arguable and in the principal respect were upheld in
the Tax Court. It cannot be said that there were no reasonable prospects
of success and, in any event, the fact that the decision had wider
implications justified the Commissioner in seeking to canvass the issues
before this Court. Accordingly leave to appeal should be granted. The
costs of the application for leave to appeal and the costs of the application
for leave to appeal to this court are to be costs in the appeal. I turn to deal
with the appeal on its merits.

[3] Ms Bosch and Mr McClelland were both senior employees of
Foschini between 1998 and 2005, which is the period relevant to this
appeal. In September 1998 and again in December 1998 they were each
given options to purchase shares in Lewis Foschini Investment Company

1 Bosch and Another v Commissioner, South African Revenue Service 2013 (5) SA 130 (WCC).

Ltd (Lefic), Foschini‟s listed holding company, at a price determined as
the Middle Market Price2 of those shares on the Johannesburg Stock
Exchange (the JSE) as determined on the date of the notice containing the
option. The options had to be exercised within 21 days of the offer and
both Ms Bosch and Mr McClelland exercised them within the stipulated
period. In terms of the scheme the shares would be delivered in three
tranches on the second, fourth and sixth anniversaries of the notice
containing the option, subject to certain exceptions to which I will revert.
On delivery the purchase consideration became payable. The taxpayers
were entitled, instead of taking delivery, to dispose of the shares and to be
paid the balance remaining after deducting the costs of sale and the
purchase consideration.

[4] We are not concerned with the first two tranches of shares to
which Ms Bosch and Mr McClelland became entitled, as the Tax Court
held that the gains on those tranches were taxed in terms of the practice
then prevailing in the offices of SARS and there was no appeal against
that finding. The final tranches that are the subject of this appeal were
deliverable on 14 August 2004 and 2 December 2004. These two dates
are relevant because there was a potentially relevant amendment to the
Income Tax Act 58 of 1962 (the Act) that came into effect from 26
October 2004. If certain of the arguments on behalf of the Commissioner
were upheld, the amended provisions would apply in respect of the shares
that fell to be delivered on the latter date.

[5] Ms Bosch elected to sell her shares and receive the proceeds while
Mr McClelland elected to take transfer of the shares and pay the

2 The Middle Market Price was defined in the scheme as the average middle market price of the shares
on the JSC during the previous five days. The Board had an option to reduce this price by no more than
ten per cent.

consideration. The interest of the Commissioner was aroused by the fact
that when this occurred the value of the shares on the JSE was
considerably higher than the consideration paid for them. This emerges
from the following table taken from the judgment of the court below. It
shows the date on which the shares became deliverable; the market value
of the shares on those dates; the consideration payable by Ms Bosch and
Mr McClelland and the differences between the prices paid and the value
of the shares, realised in the case of Ms Bosch and notional in the case of
Mr McClelland. These were the amounts on which the Commissioner
levied additional income tax.
Bosch
14/08/2004
R81 106
R20 007
R61 099
Bosch
02/12/2004
R69 671
R10 607
R59 064
McClelland
14/08/2004
R40 621
10 021
R30 600
McClelland
02/12/2004
R92 494
R14 129
R78 365

[6] The section of the Act on which the Commissioner primarily relied
in making the additional assessments was s 8A(1)(a), which reads as
follows:
„There shall be included in the taxpayer‟s income for the year of assessment the
amount of any gain made by the taxpayer after the first day of June, 1969, by the
exercise, cession or release during such year of any right to acquire any marketable
security (whether such right be exercised, ceded or released in whole or part), if such
right was obtained by the taxpayer before 26 October 2004 as a director or former
director of any company or in respect of services rendered or to be rendered by him or
her as an employee to an employer.‟

[7] The Commissioner‟s main contention was that when the taxpayers
paid the consideration for the shares and received either transfer or, if
they elected to sell them, the proceeds, that is when „the exercise of the
right to acquire the shares‟ occurred in terms of this section. Accordingly

that was when the taxpayers‟ incomes were taxable on the difference
between the market value of the shares and the purchase consideration
paid for them. In the alternative and on various grounds the
Commissioner contended that the agreements of purchase and sale of the
shares concluded in consequence of the taxpayers exercising the options
were conditional on the taxpayers remaining employees within the group
until the date for delivery of the shares arrived. The argument was that the
sale agreement arising from the exercise of the option only became
exigible on fulfilment of the conditions at the later date when the price
fell to be paid and the shares delivered. If that was correct then in relation
to the earlier deliveries they were taxable under s 8A(1)(a) and in relation
to the two later deliveries in December 2004 they were taxable under
s 8C of the Act, which was introduced to deal with DDS schemes. Lastly,
the Commissioner contended that the mechanism by which the scheme
operated was a simulation and that, once the disguise in which it had been
concealed was stripped away, the true exercise of the right to acquire the
shares occurred when the shares were paid for and delivered.3

[8] By contrast the taxpayers contended that when they exercised the
options in 1998 they exercised the right to acquire the shares, albeit that
delivery and payment of the consideration was postponed in accordance
with the provisions of the scheme. They submitted that it was at that stage
that they acquired an unconditional right to the shares and became liable
to pay income tax under this section on any increase in market value of
the shares between the date of the offer and the date on which they
exercised the options (an inconsequential amount). They said that they
were not liable to tax on the difference between the market price of the

3 Relying upon Commissioner for the South African Revenue Services v NWK Ltd 2011 (2) SA 67
(SCA) para 55.

shares on the date of delivery and the consideration payable at that time
and rejected the notion that there was any simulation in the scheme or the
contracts concluded pursuant thereto.

Interpretation of s 8A(1)(a)
[9] The primary issue in dispute was whether the two taxpayers
exercised a right to acquire the shares, within the meaning of that
expression in s 8A(1)(a), when they exercised the options, or whether
they only did so when the time for payment and delivery arrived. That
involves the proper construction of the section in accordance with
ordinary principles of statutory construction. The words of the section
provide the starting point and are considered in the light of their context,
the apparent purpose of the provision and any relevant background
material.4 There may be rare cases where words used in a statute or
contract are only capable of bearing a single meaning, but outside of that
situation it is pointless to speak of a statutory provision or a clause in a
contract as having a plain meaning. One meaning may strike the reader as
syntactically and grammatically more plausible than another, but, as soon
as more than one possible meaning is available, the determination of the
provision‟s proper meaning will depend as much on context, purpose and
background as on dictionary definitions or what Schreiner JA referred to
as „excessive peering at the language to be interpreted without sufficient
attention to the historical contextual scene‟.5

[10] The section refers to the exercise by the taxpayer of a right to
acquire any marketable security. It does not refer to the acquisition of a

4 Natal Joint Municipal Pension Fund v Endumeni Municipality 2012 (4) SA 593 (SCA) para 18;
Bothma-Batho Transport (Edms) Bpk v S Bothma & Seun Transport (Edms) Bpk 2014 (2) SA 494
(SCA) paras 10-12.
5 Jaga v Dönges NO and Another; Bhana v Dönges NO and Another 1950 (4) SA 653 (A) at 664G – H.

marketable security. That suggests that it is concerned with something
prior to the actual acquisition of ownership, which is effected by transfer
of the marketable security to the taxpayer. It foreshadows a right that
vests in the taxpayer and is capable of being exercised so as to bring
about the acquisition of the marketable security. An obvious example of
such a right, in the strict sense of that word, would be an option. An
option is an offer to sell, joined with a binding contractual undertaking to
keep the offer open for acceptance for a specific period.6 The option
holder then has a right to acquire the subject of the option. If they wish to
acquire it, they are said to exercise the option, thereby bringing a binding
contact of purchase and sale into existence. This is the very language
used in the section and it is language apt to describe the situation where a
taxpayer has been given an option to buy shares, or some other form of
marketable security, and exercises the right to do so. At the time the
section was introduced it was commonplace for companies to have in
place share option schemes in the form of options to purchase shares
exercisable at a future date at a price determined when the option was
given.

[11] Where an offer is made to sell a marketable security to a taxpayer,
not linked to any undertaking to keep the offer open for a defined period,
the taxpayer has a right to acquire that marketable security for so long as
the offer remains open for acceptance. Until it is withdrawn the right
vested in the taxpayer is the same as that created by an option and the
exercise of that right has the same effect, namely to bring into existence a
contract of purchase and sale in respect of the marketable security.  In
each instance the exercise of the right takes the form of an agreement to
purchase the marketable security on the terms offered. The only

6 Hersch v Nel 1948 (3) SA 686 (A) at 695; Venter v Birchholtz 1972 (1) SA 276 (A) at 283D-284B.

distinction between the two situations is that in the case of an option the
offeror is obliged to keep the offer open for a defined period, whereas in
the ordinary case the offer will be revocable at the will of the offeror at
any time before acceptance.

[12]  Other possible circumstances giving rise to a similar right to
acquire a marketable security, capable of being exercised by acceptance,
are the allotment of shares in a company, a rights issue to existing
shareholders or an offer to make a donation or enter into an exchange in
relation to a marketable security. In each instance the taxpayer acquires a
right to acquire the marketable security capable of being brought to
fruition by acceptance. In saying that, one does not need to go beyond the
conventional conception of rights as legal rights. For so long as it is open
to the taxpayer to accept the allotment, follow the rights or, by
acceptance, to conclude a contract of donation or exchange, they have a
right to acquire shares capable of being exercised by them. Linguistically
therefore the section refers naturally to the type of situation described in
this and the preceding paragraphs. The characteristic of each of those
situations is that they do not necessarily mean that the exercise of the
right brings about the immediate acquisition of the marketable security in
the sense of title to it as an asset. When that occurs will depend upon the
terms of the contract that results from the taxpayer‟s exercise of the right.

[13]  The alternative construction espoused by the Commissioner fits
less naturally with the wording of the section. It requires not only the
initial exercise of the right that leads to the entitlement to acquire the
marketable security, but the enforcement of the resulting contract
thereafter. Cases, in which it has been said that the ordinary legal

meaning of the word „acquire‟ is to acquire ownership,7 were cited to us.
However, all that those cases demonstrate is that whether this is the
correct meaning is always dependent upon context and that the word may
have a broader meaning of the acquisition of the right to acquire
ownership (a ius in personam ad rem aquirendam).8 Thus s 2 of the
Transfer Duty Act 40 of 1949 imposes transfer duty on property acquired
by any person pursuant to a transaction, but there is clear authority that
this does not mean the acquisition of ownership, but merely acquisition of
a right to acquire ownership in due course on fulfilment of the contractual
obligations of the acquiring party.9 There is nothing to indicate that
s 8A(1)(a) was directed at performance of the contract resulting from a
prior exercise of rights, as opposed to the exercise of a right leading in
due course, in accordance with the applicable contractual provisions, to
the acquisition of ownership of a marketable security.

[14] The Commissioner did not contend that the exercise of an option
does not fall naturally within the language of the section, irrespective of
when the resulting contract of purchase and sale is to be performed. That
accords with the view of the revenue authorities from 1969 when s 8A
was incorporated into the Act. There was a suggestion soon thereafter that
the section was confined to the exercise of an option and did not cover
any other situation, but that suggestion was laid to rest by the decision of
the full court in Secretary for Inland Revenue v Kirsch,10 which dealt with
an allotment of shares and not an option. It was argued that the offer to
allot shares was a simple offer revocable at will and therefore the

7 Transvaal Investment Co Ltd v Springs Municipality 1922 AD 337 at 341, 347 and 358; Secretary for
Inland Revenue v Hartzenberg 1966 (1) SA 405 (A) at 409A-H.
8 Corondimas and Another v Badat 1946 AD 548 at 558.
9 Minister of Finance v Gin Bros and Goldblatt  1954 (3) SA 7 (O) at 10G-H; Hartzenberg, supra, fn 7.
10 Secretary for Inland Revenue v Kirsch 1978 (3) SA 93 (T) at 95B-E.

taxpayer had no „right to acquire a marketable security‟ unless the offer
was embodied in an option. The court rejected this contention. In giving
the judgment of the court Coetzee J held that acceptance of an allotment
of shares was no different from the exercise of an option and said:
„Respondent's counsel makes the submission (in his heads of argument) that the most
important single difference in the tax consequences between these two classes of
transactions (options and outright sales) is that, in the case of an option falling within
the provisions of s 8A, the liability for tax will arise and be determined not when the
employee or director acquires that right but only when he exercises the right and
provided that at that date the market value of the shares exceeds the price which he is
obliged to pay for the shares. By way of contrast, he says, in the case of a simple offer
and acceptance the gain will be assessable to tax immediately the contract is
concluded. This exposition is without merit as the postulated difference is
contradicted by his own statement (correct) that in both cases liability for tax arises
when the offers are accepted, not before. This "difference" is non-existent. The only
real difference in law between the two classes is that, in the case of the first, the offer
is irrevocable (usually for a period) and, in the case of the second, it is revocable at
will. The legal results in all respects, of acceptance, in both classes are identical. At
that moment the contract comes into being and only then an obligation to allot the
shares arises.‟

[15] Subsequent cases have accepted the correctness of Kirsch, as have
writers on income tax. It clearly identified the act of acceptance of the
offer in the case of an option, or the acceptance of the offer to allot
shares, as the event that gives rise to a potential liability to tax, rather than
the performance of the contract. I accept that the problem confronting the
court differed from the present case in that the principal argument was
that the section was confined in its operation to options and did not cover
other transactions, such as an allotment of shares. Accordingly the court
was not directly concerned with the possibility of a right being exercised,

giving rise to a contract of purchase and sale, but the terms of the contract
being such as to delay performance of the obligations under that contract
to a much later date. It did, however, recognise that the allotment of
shares would not occur simultaneously with the acceptance of the offer to
allot shares and cited the example of a rights offer where the acceptance
and performance of the resulting contract occur at different times.
Nonetheless it identified the acceptance of the offer and the conclusion of
the contract as the event that attracted liability to tax under s 8A. That is
supportive of the contentions of the taxpayers.

[16]  The issues in this case appear to have come to the fore in practical
terms when companies and their advisers started to adopt DDS schemes,
which according to the evidence occurred in the early to mid 1990s. This
led Mr Alberts, then employed in the law interpretation division of the
revenue services and, at the time of the hearing in the Tax Court, the
Group Executive for Interpretations and Rulings at SARS, to prepare and
submit to the legislation committee a memorandum dealing with share
option schemes generally and DDS schemes in particular. He accepted, in
the memorandum, which was prepared on 6 March 1996, that the exercise
of a right to acquire a marketable security in the context of a DDS scheme
occurred when the option was accepted and did not suggest that
s 8A(1)(a) was open to the alternative interpretation now advanced on
behalf of the Commissioner in this court. Instead he recommended an
amendment to the Act to deal with that situation. The practice of SARS
until the issue of the revised assessments in issue in this appeal was that
the acceptance of the option in a DDS scheme was the time at which the
right to acquire a marketable security was exercised for the purpose of

determining any taxable gain received by a taxpayer in terms of
s 8A(2)(a) of the Act.

[17]   There is authority that, in any marginal question of statutory
interpretation, evidence that it has been interpreted in a consistent way for
a substantial period of time by those responsible for the administration of
the legislation is admissible and may be relevant to tip the balance in
favour of that interpretation.11 This is entirely consistent with the
approach to statutory interpretation that examines the words in context
and seeks to determine the meaning that should reasonably be placed
upon those words. The conduct of those who administer the legislation
provides clear evidence of how reasonable persons in their position would
understand and construe the provision in question.12 As such it may be a
valuable pointer to the correct interpretation. In the present case the clear
evidence that for at least eight years the revenue authorities accepted that
in a DDS scheme the exercise of the option and not the delivery of the
shares was the taxable event, fortifies the taxpayers‟ contentions.

[18] Lastly on the issue of the proper interpretation of s 8A(1)(a) some
weight must attach to the fact that in October 2004 the Act was amended
by the insertion of s 8C, which in part at least was enacted in order to
render taxable the gains made by beneficiaries of DDS schemes when

11 R v Detody 1926 AD 198 at 202; Nissan SA (Pty) Ltd v Commissioner for Inland Revenue 1998 (4)
SA 860 (SCA) at 870E-H. Similarly in the area of contractual interpretation there is authority that the
manner in which the contract has been performed over a period of time may be relevant in selecting
which of two competing constructions is to be preferred. Shill v Milner 1937 AD 101 at 110-111;
Shacklock v Shacklock 1949 (1) SA 91 (A) at 101; MTK Saagmeule (Pty) Ltd v Killyman Estates (Pty)
Ltd 1980 (3) SA 1 (A) at 12F-H.
12 The same point was made in a contractual context in Comwezi Security Services (Pty) Ltd v Cape
Empowerment Trust Ltd  [2012] ZASCA 126, para 15.

they took delivery of shares under these schemes. It does this by
providing that the critical date for determining a tax liability is the date of
vesting of the shares in the taxpayer. As explained in the Explanatory
Memorandum accompanying the amending legislation when it was
placed before Parliament, the existing provisions of s 8A(1)(a) „fail to
fully capture all the appreciation associated with the marketable security
as ordinary income‟. That not only identifies the purpose of the
amendment,13 but is also a permissible guide to Parliament‟s
understanding of the existing section.14

[19] Weighing all relevant contextual and background material it points
consistently in favour of the construction of the section in the manner for
which the taxpayers contend. That reinforces the linguistic analysis. I
conclude that when the section speaks of the exercise of a right to acquire
a marketable security it is concerned with the action by the taxpayer that
gives rise to a binding contract under which the taxpayer will be entitled,
subject to compliance with the terms of the contract, to acquire the
marketable security, whether the acquisition by transfer to the taxpayer
occurs immediately or is postponed to a future date. The contrary
contention by the Commissioner must therefore be rejected.

Conditionality
[20] The further submissions on behalf of the Commissioner can
conveniently be dealt with under the single heading of conditionality.

13 Westinghouse Brake & Equipment (Pty) Ltd v Bilger Engineering (Pty) Ltd 1986 (2) SA 555 (A) at
562E-563A.
14 Patel v Minister of the Interior and Another 1955 (2) SA 485 (A) at 493A-D; National Education
Health and Allied Workers Union v University of Cape Town and Others 2003 (3) SA 1 (CC) para 66.

The Commissioner‟s submissions around this topic arose in consequence
of a concession on behalf of the taxpayers that if the exercise of the
option gave rise to a contract subject to a suspensive condition then
s 8A(1)(a) would not be triggered. It is unnecessary to deal with the
correctness of the concession. There were three threads to the
Commissioner‟s argument. The first was that the contracts concluded by
the taxpayers when they exercised the options were subject to a
suspensive condition that they remain in the employ of Foschini until the
dates upon which each tranche of shares fell due for delivery. The second
was that even if the contracts were not subject to such a true suspensive
condition they should for tax purposes be treated as if they were. It was
contended that the contracts were contingent in the sense referred to in
Commissioner for Inland Revenue v Golden Dumps (Pty) Ltd15 and for
that reason were to be treated as being subject to what counsel termed
„fiscal conditionality‟. Lastly it was contended that the fact that receipt of
the shares was subject to a reciprocal obligation on the part of the
taxpayers to pay the consideration therefor, made the contracts
conditional.

[21]  The necessary starting point for a consideration of these
contentions is the scheme itself. It defined the rights that the taxpayers
acquired pursuant to the options granted to them. The options did not
vary those terms. They merely set out the number of shares to be
acquired; the consideration payable therefor; and the dates upon which
the shares would in the ordinary course become deliverable. This was so
even though the scheme was embodied in a contract between Lefic,
Foschini and Foschini Ltd and, from 1999 (after the options in this case
had been exercised), was administered by a trust (the Trust). The terms of

15 Commissioner for Inland Revenue v Golden Dumps (Pty) Ltd 1993 (4) SA 110 (A) at 118E-G.

the options were such that the contracts of sale concluded by participants
incorporated the terms of the scheme.

[22] The stated purpose of the scheme was to give employees an
incentive to promote the continued growth of the company. From time to
time the Board of Foschini would identify employees whom it wished to
encourage in this way and would offer them an option to purchase a
specified number of shares in Lefic at the price determined by the Board.
The Foschini Group (Pty) Ltd in conjunction with Foschini would grant
the option. An employee given such an option had 21 days from the date
of the offer (referred to as the notice date) within which to exercise it,
failing which it would lapse. If the option was exercised the employee
would not be entitled to immediate delivery of the shares, nor would they
acquire any of the ordinary rights attendant upon ownership of shares,
such as the right to dispose of them, the right to vote at meetings of
shareholders or the right to receive dividends. Subject to certain
qualifications to which I will revert, they would only become entitled to
delivery of the shares against payment of the price on the second, fourth
and sixth anniversaries of the notice date. Although the scheme did not
spell this out expressly, in practice, when payment became due, this was
demanded, but employees were given the choice to sell the shares and to
receive the proceeds less the costs of sale.

Suspensive condition
[23] A suspensive condition is one that suspends the exigible content of
a contract, either in whole or in part, pending the occurrence of an
uncertain future event.16 In contending that the contracts for the purchase

16 Odendaalsrust Municipality v New Nigel Estate Gold Mining Co. Ltd 1948 (2) SA 656 (O) at 666;
Design & Planning Service v Kruger 1974 (1) SA 689 (T) at 695C-F; Palm Fifteen (Pty) Ltd v Cotton

of shares concluded by the taxpayers were subject to a suspensive
condition the Commissioner needed to identify in what respect the
exigible content of the contract was suspended pending a future uncertain
event. The argument advanced was that upon conclusion of the contract a
participant acquired no benefit and the sale was not implemented „in any
meaningful sense‟. The term of the scheme that provided that the shares
would only become deliverable, and the consideration therefor payable,
on the second, fourth and sixth anniversaries of the notice date ensured
that the benefit to the participant only accrued if they were still in
employment on those dates. In the ordinary case, if the participant was
dismissed for misconduct or poor work performance or resigned before
any of those dates their entitlement to receive the shares would fall away.
The mechanism whereby this was done would ordinarily be a resale of
the outstanding shares to the trust at the same price as the taxpayer had
purchased them.

[24] It was submitted that this automatic consequence of the participant
ceasing to be employed, meant that until the date for delivery arrived
nothing actually happened in the performance of the contract. This, so it
was said, created an artificial situation because the price of the shares on
resale was the same as the price when the option was exercised and the
agreement concluded and was discharged by set-off against the original
consideration payable by the participant The right to set off was created
by deeming that the consideration payable by the participant was due on
the date of termination of their employment.

Tail Homes (Pty) Ltd 1978 (2) SA 872 (A) at 887; Jurgens Eiendomsagente v Share 1990 (4) SA 664
(A) at 675F-H.

[25] What this argument lacked was any articulation of the terms of the
suspensive condition. The scheme itself contained no clause that could,
even remotely, be construed as a suspensive condition. Clause 7.3 which
provided for the postponed delivery dates did not purport to suspend the
operation of the contract until those dates. The argument therefore
required that the proposed suspensive condition be inferred by way of a
tacit term of the scheme. The test for that is well established. It was
expressed by Nienaber JA in Wilkins NO v Vogel17 in the following terms
„A tacit term, one so self-evident as to go without saying, can be actual or imputed. It
is actual if both parties thought about a matter which is pertinent but did not bother to
declare their assent. It is imputed if they would have assented about such a matter if
only they had thought about it - which they did not do because they overlooked a
present fact or failed to anticipate a future one. Being unspoken, a tacit term is
invariably a matter of inference. It is an inference as to what both parties must or
would have had in mind. The inference must be a necessary one: after all, if several
conceivable terms are all equally plausible, none of them can be said to be axiomatic.
The inference can be drawn from the express terms and from admissible evidence of
surrounding circumstances. The onus to prove the material from which the inference
is to be drawn rests on the party seeking to rely on the tacit term. The practical test for
determining what the parties would necessarily have agreed on the issue in dispute is
the celebrated bystander test. Since one may assume that the parties to a commercial
contract are intent on concluding a contract which functions efficiently, a term will
readily be imported into a contract if it is necessary to ensure its business efficacy;
conversely, it is unlikely that the parties would have been unanimous on both the need
for and the content of a term, not expressed, when such a term is not necessary to
render the contract fully functional.‟

17 Wilkins NO v Voges 1994 (3) SA 130 (A) at 136H – 137D. See also 143D–I. Food and Allied
Workers Union v Ngcobo NO and Another 2014 (1) SA 32 (CC) para 37. Whether one can ever, by
way of a tacit term, render an unconditional contract subject to a suspensive condition, is an open
question. Rockbreakers & Parts (Pty) Ltd v Rolag Property Trading (Pty) Ltd 2010 (2) SA 400 (SCA)
para 24.

[26]  I would add only this to that exposition. If a party contends for a
tacit term it is incumbent on them to formulate that term so as to give
effect to what they say should be imputed to the contracting parties. The
term must be capable of „clear and exact‟ formulation.18 In doing so it
must be borne in mind that the more complicated the term the less likely
it is that both parties would have readily expressed assent to it on the
basis that „of course, that goes without saying‟.19

[27] Neither before the court below nor in this court was there any
attempt on behalf of the Commissioner to formulate the term that was
contended for. Eventually, after prompting from the bench, it was
suggested in this court that the words „provided such Participant is in the
employ of the company at the relevant time‟ should be inserted in the
preamble to clause 7.1, so that it would read as follows:
„On exercise of an Option in respect of any Shares, the Participant shall, provided
such Participant is in the employ of the company at the relevant time, become entitled
to delivery thereof against payment of the portion of the Consideration attributable
thereto, on the following dates …‟

[28] There are a number of difficulties with this formulation. First, it is
by no means clear that it imports conditionality into the contract. It is
after all couched not as a condition, but as a proviso. Second, it does not
cater for the fact that the shares were deliverable in three tranches at
different dates. The effect of the condition, if it be such, is to fragment a
single contract of purchase and sale into three separate contracts, each
subject to a different suspensive condition, that is, one for the sale of one
third of the shares subject to the participant remaining in the employ of
Foschini for two years and two others for the sale of similar quantities of

18 Rapp and Maister v Aronovsky 1943 WLD 68 at 75.
19 Desai and Others v Greyridge Investments (Pty) Ltd 1974 (1) SA 509 (A) at 522H – 523A.

shares, subject to the participant remaining in the employ of Foschini for
four and six years respectively. Third, the proposed condition does not
address the various situations in which delivery of the shares might occur
at other times, and in different quantities, by virtue of the provisions of
clause 7.1.4 of the scheme.

[29] Clause 7.1.4 appears after the clauses dealing with delivery
occurring in three tranches and reads as follows:
„provided that, in the case of a Participant whose service with the Company is
terminated for the reasons set out in 10.1 or if an Event occurs as provided for in 8.2
or if the Board at the Participant‟s request in its absolute discretion decides, the
Company shall be entitled to effect earlier delivery of the Sale Shares to the
Participant against payment of the Consideration by the Participant who shall be
obliged to effect payment therefor on a date or date earlier than the aforesaid
anniversaries of the Notice Date as may be determined by the Board.‟
Clause 10.1 provided for acceleration of the delivery dates on the
surrender of the participant‟s estate or their sequestration; or the
termination of their employment on death, or superannuation, or for
reasons of ill-health or any other reason approved by the Board; or
generally if the Board thought it advisable to do so. Clause 8.2 dealt with
a reorganisation of the group of companies in various ways.

[30] It is clear from clause 7.1.4 that continued employment until each
of the three anniversaries of the notice date was by no means a
requirement for receipt of the shares. A wide variety of circumstances
would entitle the participant to receive the shares notwithstanding the fact
that they did not remain in the employ of the company for the full period.
Thus a person who died, or was retrenched, or retired either in the
ordinary course or on grounds of ill-health, would still be entitled to
receive the shares. In addition the board had a wide discretion to permit

even someone who resigned or was dismissed to receive all or some of
the shares. All of these possibilities were inconsistent with the suggested
suspensive condition making entitlement to receipt of shares dependent
upon continued employment at the date of delivery.

[31] Apart from these difficulties the proposed clause would run counter
to other express provisions of the scheme. It would for example nullify
entirely the clause providing that on termination of employment by
dismissal or resignation the shares would be resold to Foschini (or the
Trust) at the price originally paid for them. That is dismissed by the
Commissioner, but it overlooks the fact that as an alternative to the resale
Foschini (or the Trust) was entitled, at its election, to cancel the sale and
an amount payable by the participant would then be determined. These
two provisions need to be seen alongside one another. If in the interim the
value of the shares had gone up the trust would no doubt be satisfied to
retain shares having a higher value than when it had sold them. However,
if the value of the shares had gone down in the interim, there might be
advantages to the trust in cancelling the contract and recovering the loss
in value from the former employee. That seems to be why it was given
the option of cancellation and recovering an amount calculated on a
different basis. Importing a suspensive condition would deprive it of that
right; because, the effect of non-fulfilment of a suspensive condition is
that the contract comes to an end automatically.20 That follows
necessarily from the fact that no action lies to compel the performance of
a suspensive condition.21 If there is no right to compel performance there
can be no question of a breach warranting cancellation of the contract.

20 Design and Planning Service v Kruger ante, fn 16.
21 Scott and Another v Poupard and Another 1971 (2) SA 373 (A) at 378H.

[32] Lastly, I can see no practical reason for importing the suggested
suspensive condition into the contract. It was perfectly workable without
that term and achieved precisely the aims of the parties. It recognised that
it would operate into the future over a period of years and that the
individual circumstances of the participants might alter during that time.
That was the reason for the discretion in clause 7.1.4 and the fact that
employees who were sequestrated, or were retrenched, or retired in the
ordinary course or who had good grounds for wising to resign, could
nonetheless take up the shares even though they would not remain in
employment up to the three critical dates. It also made allowance for
changes in the business circumstances of Lefic. For all those reasons I
can see no basis for importing the suggested suspensive condition into the
scheme.

Fiscal conditionality
[33] Accepting that the contracts in terms of which the taxpayers
purchased shares were not subject to a suspensive condition, it is difficult
to appreciate on what basis they can be treated as subject to such a
condition for fiscal purposes. In the heads of argument counsel explained
that the contention was that for the fiscal purpose of attracting a liability
for tax in terms of s 8A(1)(a) and in order to justify the tax consequences
of that section, there must be sufficient certainty at the time that the
liability to tax is imposed that the shares would be acquired in the future.

[34] This proposition lacked any foundation in the text of s 8A(1)(a) or
in any other provision of the Act. Once the section was held to apply by
virtue of the exercise of an option bringing into existence a contract of
purchase and sale, the tax consequences followed from the language of
the section itself. Any gain realised by the taxpayer in the year in which

the right was exercised was to be included in the taxpayer‟s income for
that year. Leaving aside situations where the amount of the gain could be
determined in consequence of the realisation of the shares simultaneously
with the exercise of the right, s 8A(2)(a) provides that a gain shall be
deemed to be made if the market value of the marketable security at the
time the right is exercised exceeds the consideration given therefor. The
effect of that deeming is to render the taxpayer liable to pay tax on an
amount so determined irrespective of whether, at the end of the day, after
delivery of the shares, the taxpayer enjoyed a de facto gain. If, at the time
the shares became deliverable in terms of this scheme, they were worth
less than the purchase consideration and the taxpayer invoked the stop
loss provision in the scheme that entitled them to compel Foschini (or the
Trust) to repurchase the shares at the price payable by the taxpayer, any
tax already paid would not be recoverable. Nor, if the taxpayer
nonetheless elected to pay for the shares and have them transferred into
their name, could they recover any tax already paid if their optimism that
the share price would recover proved unfounded.

[35] In advancing this contention counsel relied on the following
passage from the judgment of Nicholas AJA in this court in Golden
Dumps:22
„There is no difference in principle between a case where liability is contingent in the
legal sense and one where it is contingent in the popular sense. In the field of
accounting a contingency is understood as
“… a condition or situation, the ultimate outcome of which, gain or loss, will be
confirmed only on the occurrence, or non-occurrence, of one or more uncertain future
events”.
(See Faul et al Financial Accounting at 475.)

22 Commissioner for Inland Revenue v Golden Dumps (Pty) Ltd 1993 (4) SA 110 (A) at 118E-H.

A liability is contingent in that sense in a case where there is a claim which is
disputed, at any rate genuinely disputed and not vexatiously or frivolously for the
purposes of delay. In such a case the ultimate outcome of the situation will be
confirmed only if the claim is admitted or if it is finally upheld by the decision of a
court or arbitrator. Where, at the end of the tax year in which a deduction is claimed,
the outcome of the dispute is undetermined, it cannot be said that a liability has been
actually incurred. The taxpayer could not properly claim the deduction in that tax
year, and the receiver of revenue could not, in the light of the onus provision of s 82
of the Act, properly allow it.‟

[36] The context in which that statement was made demonstrates that it
has no application in the present situation and provides no warrant for a
principle that a contract not subject to a suspensive condition can for
fiscal purposes be treated as if it is so subject, in other words as an
entirely different contract. The case arose from a dispute between the
taxpayer (Golden Dumps) and a former employee, Mr Nash. Golden
Dumps and Mr Nash concluded a contract under which, on fulfilment of
certain conditions, Mr Nash would be entitled to purchase certain shares.
When he demanded delivery of the shares and tendered payment of the
price Golden Dumps disputed his entitlement to them. The dispute was
the subject of lengthy litigation23 where Mr Nash ultimately succeeded
with his claim. Golden Dumps then purchased the shares in the open
market in 1985 and received in return a considerably lesser sum by way
of the purchase price. It sought to set this off against income in its tax
return for the 1985 year, but the Commissioner disallowed the deduction
on the ground that the liability had arisen in 1981 and the judgment
merely confirmed the existence of that liability so that for the purposes of
s 11(a) of the Act it was not an expense „actually incurred‟ in the
production of income in the 1985 year. The passage from the judgment of

23 Nash v Golden Dumps (Pty) Ltd 1985 (3) SA 1 (A).

Nicholas AJA, on which the Commissioner relies in the present case,
merely explains why, in view of the liability‟s contingent nature until the
court determined the claim against Golden Dumps, no expense was
actually incurred. It has no bearing on the construction of either the
scheme or s 8A(1)(a) of the Act.

Reciprocity
[37]    The principle the Commissioner sought to invoke under this head
was one common to many contracts, where performance by the one party
is conditional upon reciprocal performance by the other. However, it can
have no application in determining when a liability to pay tax in terms of
s 8A(1)(a) arises. That is determined by the terms of the section and the
key event is the exercise of the right to acquire the marketable security,
not performance of the contract arising from the exercise of that right,
The rights obtained by the taxpayers by the exercise of the options was
unconditional. In order to enforce performance by delivery of the shares
the price needed to be paid, but even accepting that this involved
reciprocity, so that a refusal to pay the price would stultify any demand
for delivery of the shares, that would not render the rights acquired by the
taxpayers conditional. Cases that deal with different concepts under the
Act, such as when income accrues, so as to attract a liability for the
payment of tax, or an expense is incurred for the purpose of claiming a
deduction, are unhelpful in the context of a provisions such as s 8A(1)(a).
Accordingly all the Commissioner‟s arguments under the general head of
conditionality fall to be rejected.

Substance over form
[38] The argument under this head was based on the passage in NWK24
where Lewis JA said:
„If the purpose of the transaction is only to achieve an object that allows the evasion
of tax, or of a peremptory law, then it will be regarded as simulated. And the mere
fact that parties do perform in terms of the contract does not show that it is not
simulated: the charade of performance is generally meant to give credence to their
simulation.‟

[39] Using that as the foundation the Commissioner argued that
dishonesty is not a requirement for simulation and that, as the scheme had
clearly been formulated to enable the participants to avoid any significant
tax liability under s 8A(1)(a), it should be treated as giving rise to a
conditional entitlement to shares that would only trigger the application
of the section on payment for and delivery of the shares.

[40] That submission involved a misunderstanding of the judgment in
NWK as was pointed out in Roshcon.25 There I stressed that simulation is
a question of the genuineness of the transaction under consideration. If it
is genuine then it is not simulated, and if it is simulated then it is a
dishonest transaction, whatever the motives of those who concluded the
transaction. The true position is that „the court examines the transaction
as a whole, including all surrounding circumstances, any unusual features
of the transaction and the manner in which the parties intend to
implement it, before determining in any particular case whether a
transaction is simulated.‟26 Among those features will be the income tax
consequences of the transaction. Tax evasion is of course impermissible

24 NWK ante fn 3.
25 Roshcon (Pty) Ltd v Anchor Auto Body Builders CC and Others 2014 (4) SA 319 (SCA).
26 Roshcon para 37.

and therefore, if a transaction is simulated, it may amount to tax evasion.
But there is nothing impermissible about arranging one‟s affairs so as to
minimise one‟s tax liability, in other words, in tax avoidance. If the
revenue authorities regard any particular form of tax avoidance as
undesirable they are free to amend the Act, as occurs annually, to close
anything they regard as a loophole. That is what occurred when s 8C was
introduced.

[41] Once that is appreciated the argument based on simulation must
fail. For it to succeed, it required the participants in the scheme to have
intended, when exercising their options to enter into agreements of
purchase and sale of shares, to do so on terms other than those set out in
the scheme. That is manifestly implausible and was not suggested to
either Ms Bosch or Mr McClelland in evidence. Their approach was
simply that they were being offered an opportunity to acquire shares on
the terms of the scheme and they accepted those offers. As Watermeyer
JA said in Randles Brothers & Hudson27 in regard to a contention that
certain agreements of purchase and sale were not genuine „there was no
material advantage to be gained by pretending to enter into a contract of
sale which could not be gained by entering into a real contract of sale.‟
Similarly in this case there was no advantage to the parties in entering
into a conditional contract of purchase and sale when they were free to
enter into an unconditional contract and postpone performance of the
obligation to pay the purchase price and deliver the shares. The
Commissioner‟s contentions based on the notion of substance over form
must be rejected.

27 Commissioner of Customs and Excise v Randles Brothers & Hudson Ltd 1941 AD 369 at 402.

Conclusion
[42]  Leave to appeal is granted but the appeal is dismissed with costs,
such costs to include the costs of the application for leave to appeal in the
court below and this court and those consequent upon the employment of
two counsel.

M J D WALLIS
JUDGE OF APPEAL

Appearances

For appellant:
A R Sholto-Douglas SC (with him M W Janisch
and H Cassim)
Instructed by: State Attorney,
Cape Town and Bloemfontein

For respondent:
P B Hodes SC (with him P A Solomon SC and
AM Breitenbach SC) `
Instructed by:
Edward Nathan Sonnenbergs Inc, Cape Town
Webbers Attorneys, Bloemfontein.
Supreme Court of Appeal of South Africa

MEDIA SUMMARY– JUDGMENT DELIVERED IN THE SUPREME
COURT OF APPEAL
From:
The Registrar, Supreme Court of Appeal
Date:
19 November 2014
Status:
Immediate
Please note that the media summary is intended for the benefit of the
media and does not form part of the judgment of the Supreme Court of
Appeal.
Commissioner South African Revenue Service v Bosch and another

The SCA today dismissed an appeal by the Commissioner: SARS
against a judgment of the Western Cape High Court. The case raised the
income tax consequences of a share option scheme. The scheme had been
implemented by the Foschini group of companies and afforded certain
employees options to purchase shares in the group’s holding company,
which was listed on the JSE. The options were exercisable within twenty-
one days, but the shares would only have to be paid for and delivery
taken in tranches after two, four and six years respectively. The practice
of the revenue had been to accept that the employees acquired rights to
the shares on exercising the options and levied tax accordingly on any
difference between their value on that date and the price payable for the
shares.

In 2006 the Commissioner issued revised assessments to tax in
respect of 117 employees contending that tax was payable under
s 8A(1)(a) of the Income Tax Act on the difference between the price
payable for the shares on delivery and the value of the shares on the JSE
on that date. These assessments were challenged by the taxpayers and
these cases were dealt with as test cases in the Tax Court. The Western

Cape High Court held that the Commissioner’s original practice in taxing
the gains received from these share options was correct and accordingly
set aside the revised assessments. The SCA held this to be a correct
construction of the relevant provision of the Income Tax Act. It was
supported by the history of the legislation, the consistent approach of the
revenue authorities over a number of years and the fact that a new section
8C was introduced into the Act in order to deal with this type of situation.

The Commissioner’s alternative arguments that the contracts for
the acquisition of shares arising from the exercise of the options were
conditional were rejected as inconsistent with the terms of the scheme.
Similarly an argument that the scheme and the resulting contracts were
simulated transactions was not upheld. The court pointed out that it is
permissible for taxpayers to arrange their affairs in such a way as to
minimise their liability to pay tax and they are entitled to do so in
accordance with the Income Tax Act as it stands from time to time. If the
revenue authorities are not satisfied with the legal position in terms of the
Act they are free to amend it, in order to render the transactions in
question subject to tax.