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Sars "Sham" Doctrine Setback Over Share Scheme Challenge

South Africa

SARS have sought generally to rely on the sham doctrine to challenge tax avoidance, rather than the General Anti Avoidance Rule. In a recent case, an attempt by the Revenue to set aside a share scheme on this basis failed. Taxand South Africa discovers how the case unfolded.

Before 2004, share scheme gains were taxed in SA at the time of the 'exercise of a right of acquisition'. In the 1990s 'deferred delivery' schemes evolved which allowed the taxing of these transactions at the time of purchase (at which time the gains were usually very small) with no further tax payable on delivery. However in 2004 a tax law change effectively brought deferred delivery schemes to an end.

A full bench of the Cape High Court has now ruled on the tax treatment of the 'deferred delivery' share scheme. It unanimously decided 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 recent decision of the Supreme Court of Appeals on "substance over form" in the NWK matter had not changed the long standing South African law relating to "sham" transactions. The High Court found that, in relation to this deferred delivery share scheme, there was no sham, 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.

SARS have sought leave to appeal the judgment to the Supreme Court of Appeals.

Taxand's Take


Share schemes are widely used in South Africa, and as a result the tax treatment of such is of great significance to employers and employees alike. 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 rather than tax evasion.

Your Taxand contact for further queries is:
Robert Gad
T. +27 21 410 2500
E. rgad@ens.co.za

Taxand's Take Author