Update on previously disclosed legal matter with SARS

Spur Corporation Limited
(Incorporated in the Republic of South Africa)
(Registration number 1998/000828/06)
Share code: SUR
ISIN: ZAE 000022653
(“Spur Corporation” or “the group”)

UPDATE ON PREVIOUSLY DISCLOSED LEGAL MATTER WITH SARS

Introduction

As previously disclosed, Spur Group (Pty) Ltd (“Spur Group”), a wholly owned subsidiary of
the Spur Corporation, and the South African Revenue Service (“SARS”) have been involved
in a legal dispute since the group’s 2015 financial year regarding the tax deductibility of a R48
million payment related to the Spur Group Management Incentive Share Scheme 2004 (“the
Share Scheme”).

Shareholders were first advised of the matter in the consolidated financial statements of Spur
Corporation for the year ended 30 June 2015, following the conclusion of an income tax audit
of Spur Group by SARS on 9 December 2014. Shareholders have been updated regularly
over the years, with the most recent update provided in the contingent liability note 46.1 of the
consolidated financial statements of Spur Corporation for the year ended 30 June 2021, as
published on 23 September 2021.

Update

During 2018 the Income Tax Court (“ITC”) found in Spur Group’s favour in the original hearing
on this matter, and in 2019 the full bench of the Western Cape High Court (majority judgment)
found in Spur Group’s favour dismissing the subsequent appeal by SARS.

Following a further appeal by SARS, the matter was heard in the Supreme Court of Appeal of
South Africa (“SCA”) in August 2021, with judgment handed down on Friday afternoon, 15
October 2021. The SCA upheld SARS’ appeal, effectively ruling against Spur Group and
issued its judgment against Spur Group.

The group is considering its rights in consultation with legal counsel and will determine the
appropriate course of action, which it believes, at best, could only include making application
to challenge the SCA ruling at the Constitutional Court.

As a result of the SCA ruling, the R22.034 million tax receivable, recognised as an asset on
Spur Corporations consolidated statement of financial position as at 30 June 2021, will be
charged to profit or loss as an additional income tax and interest expense.

In terms of the judgment Spur Group will be required to settle SARS’ legal costs, which are
not yet determined. The disputed income tax assessments were settled in cash in earlier
financial years. The SCA judgment therefore has no cash flow impact on Spur Group, other
than SARS’ legal costs.

Detailed background to legal dispute

During the 2015 financial year, SARS issued additional income tax assessments to Spur
Group in respect of the 2005 to 2012 years of assessment totalling R22.034 million
(comprising R13.996 million in additional income tax and R8.038 million in interest). The
additional assessments were issued following the disallowance of a deduction claimed in
respect of the group’s Share Scheme. The additional income tax assessments were paid in
full during the 2015 and 2016 financial years.

Following failed dispute resolution proceedings, Spur Group appealed the additional
assessments, and the matter was first heard in the ITC in February 2018. The ITC found in
favour of Spur Group. SARS appealed the ruling. The appeal was heard by a full bench of the
Western Cape High Court on 29 July 2019 with the majority judgement issued on 26
November 2019 in favour of Spur Group, dismissing SARS’ appeal with costs awarded to Spur
Group.

SARS subsequently appealed the matter to the SCA, with the appeal heard on 17 August
2021.

Prior to the SCA judgment on 15 October 2021, based on the advice of counsel and Spur
Group’s tax advisers, as well as the findings of the earlier judgments, the board of directors of
Spur Corporation was confident that the prospects of SARS’ appeal being successful was low.
Consequently, the total payments made previously were reflected as an income tax receivable
asset (an overpayment of income tax) in Spur Corporation’s consolidated statement of
financial position.

The disputed matter

The disputed matter relates to a contribution of R48.472 million (“the Contribution”) made by
Spur Group to a share trust which facilitated the funding of another company, owned by
employees, to acquire shares in Spur Corporation as part of the Share Scheme. The Share
Scheme was approved by Spur Corporation shareholders at a general meeting of
shareholders on 15 December 2004.

The Contribution was claimed by Spur Group as a tax deduction in accordance with the
general deduction formula of the Income Tax Act 58 of 1962 (“ITA”). Expenditure is generally
deductible by a taxpayer where it is incurred in the production of the income of that taxpayer.
The cost of incentivising employees is generally considered to be a cost incurred in the
production of the employing company’s income, and this point is not in dispute. The
expenditure incurred by Spur Group in this case was paid to a trust. The trust utilised the
Contribution to provide the funding required to establish the Share Scheme which was
intended to benefit the employees of Spur Group. On this basis, it was submitted, by Spur
Group, that the Contribution was incurred in the production of Spur Group’s income and
therefore legitimately deductible. The Contribution was not paid, either directly or indirectly, to
Spur Group’s employees.

The legal question before the SCA was on whether there was a sufficiently close connection
between Spur Group’s expenditure of the Contribution to the trust (to implement the Share
Scheme) and Spur Group’s income-producing activities, for the expenditure to be claimed as
a deduction.

The SCA judgment found that the Contribution by Spur Group to the trust was used only to
finance the purchase of Spur Corporation’s shares in a separate company owned by
employees. The funding provided by the trust was repaid to the trust on conclusion of the
Share Scheme, with Spur Corporation being the only capital beneficiary of the trust. The SCA
therefore concluded that the Contribution itself did not benefit the employees, despite it being
used to facilitate the benefits that accrued to the participants of the Share Scheme. On this
basis, the SCA concluded that there was an insufficient link between the expenditure incurred
by Spur Group and the benefits arising from the incentivisation of Spur Group’s key staff.

The SCA also addressed the issue of prescription as, at the time of SARS issuing the
additional income tax assessments relating to this matter, the original income tax assessments
for the 2005 to 2009 years of assessment had prescribed. As a result of an inadvertent
administrative error made by the management of the group at the time, the SCA has ruled
that, in terms of the Tax Administration Act 28 of 2011, prescription does not apply, and the
assessments from 2005 to 2009 remain valid. The administrative errors did not impact the
merits of the group’s claim but rather whether the assessments were issued on prescribed
periods.

Cape Town

18 October 2021

Sponsor

Sasfin Capital

A member of the Sasfin Group

Date: 18-10-2021 07:30:00
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