A full bench of the Cape High Court has ruled on the tax treatment of a "deferred delivery" share scheme. These share schemes were very widely used before 2004. The schemes involved the exercise of an option (or acceptance of an offer) years before the shares were actually delivered to and paid for by the participant.

In this important "test" case, three judges of the Cape High Court overturned a lower court decision, which had taxed the gains made when the shares were delivered to participants. Judge Davis delivered the unanimous finding of the Court that the gains should be taxed under section 8A of the Income Tax Act at the time of exercise of the options and not when the shares were ultimately delivered against payment.

Central to the ruling were two findings: firstly that the contracts were not conditional, merely because the shares might be resold to the company on termination of employment, or if the share price fell below the offer price; secondly, that the decision of the Supreme Court of Appeals in the NWK matter had not changed the law relating to "sham" transactions. The High Court said in effect that the transaction in NWK was clearly simulated and the SCA was doing no more than applying long standing precedent to those facts. However, in relation to this share scheme, there was no sham or pretence, because the parties had not simulated their transaction. It was honestly designed and intended to have a specific effect, according to the candid evidence of the witnesses for the taxpayer, and the clear wording of the agreement.

A separate concurring judgment was delivered which suggests that the NWK case should not be considered a binding precedent in relation to matters involving tax avoidance, as distinct from tax evasion.

It is not known whether SARS wish to appeal.

The taxpayers were represented by Advocates P Solomon SC and A Breitenbach SC, instructed by ENS.

By Robert Gad, Tax Department, Director, ENS (Edward Nathan Sonnenbergs)