As it states in the wiki article, S/DIF can only do 2.0 LPCM channels. Surround LPCM can only be passed through transcoded to 5.1 Dolby Digital.
Besides LPCM 2.0 S/DIF can pass through Dolby Digital streams and DTS, but no HD-audio streams.
Your optical cable is capable of carrying either two channel PCM (uncompressed), Dolby Digital, or DTS. If you set your audio settings in Kodi to 2 channels and turn on passthrough for DD and DTS then your system will play surround sound for any source that is DD or DTS and stereo for any other type of audio source. If you also turn on transcoding then all non DD or DTS audio sources will be converted into DD and output to your receiver as 5.1 surround sound…ish. I believe the way this works is that all channels that are not in the source are muted. The result of this would be that on a two channel source your AVR sees a 5.1 signal but only output audio on the two channels. This may cause issues if you use Pro logic or other early surround formats for this type of material. You may want to play around a bit to find out if the transcode option is suitable for you.
Also are we talking about optical going from the vero to the AVR or the optical going from the projector to the AVR? Not all display devices allow DTS signals to pass through them.
Please do upload logs so we can see your audio settings. And please explain your setup in detail - is your Vero connected to the projector via HDMI and the AVR to the projector via S/PDIF or is your Vero connected directly to the AVR via S/DIF?
I stand corrected. I could have sworn I read that in the documentation somewhere but I must have been mistaken. I just tested it myself and with transcoding turned on all stereo source formats are output as 2.0 LPCM and non passthrough surround source material is transcoded to DD. This means that Pro Logic and equivalents work as they should, which is great.
I would disagree a bit about passthrough on a TV. Although for the OP’s situation a direct connection is the right choice, there are situations where it is the optimal choice (legacy AVR without enough appropriate inputs, Pi with non-HDMI soundbar, etc.) The reason I assume DD passthrough support is because ATSC required DD support and therefore it is common in the US for HDTV’s to allow passthrough of DD even though they will not normally pass DTS. Perhaps that is different outside of the US.