Page 758 - SAIT Compendium 2016 Volume1

CASE DIGEST 2013–2014
para 26 (1) of the Eighth Schedule gives the taxpayer an election to use any one of three valuation options. One option is market value as contemplated in para 29 of the Eighth Schedule, which ABC chose to use.
ABC had valued the entire D Entity company using the discount cash ow (DCF) method and then apportioned the company value to the percentage of its D Entity shares sold. This apportionment was for the purpose of determining the base cost of the shares for CGT purposes. The Commissioner for the South African Revenue Service (CSARS) rejected the DCF method in his additional assessments issued to ABC for the 2002 and 2003 years of assessments in which he reduced the base cost of the shares to nil.
On 5 July 2007, ABC objected to the additional assessments. The objection was based on the fact that the Commissioner’s rejection of the valuation of the D Entity shares as at 1 October 2001 was misguided and awed in material respects. Following the disallowance of the objection, an appeal was made by ABC to the Cape Town Tax Court.
Facts
During the 2002 and 2003 years of assessments, ABC (Pty) Ltd, an investment holding company, sold some of its shares in D Entity (Pty) Ltd, a casino and hotel company. 2.37% of the shares were sold during the 2002 year of assessment and another 2% were sold during the 2003 year of assessment. ABC recognised a capital loss in excess of R8 million for CGT purposes on the disposal of the shares. On 10 April 2007, the Commissioner for the South African Revenue Service (CSARS) issued additional assessments in respect of the years of assessments when the shares were sold.
In the additional assessments, raised in terms of para 29(7) of the Eighth Schedule, the Commissioner reduced the base cost of the ABC’s shares in D Entity from R8,6 million to R nil. The resulting effect for ABC was a capital gain of R2 million in its 2002 year of assessment and another capital gain of R2,2 million in its 2003 year of assessment.
On 5 July 2007, ABC objected to the additional assessments. ABC had valued the entire D Entity company using the discount cash ow (DCF) method; this method values the business of an entity on its future forecast free cash ows, discounted back to present value terms through the application of a discount factor which represents the required return sought by an investor. This discount factor is also re ective of the risk inherent in the business. The valuation was obtained from an independent rm of specialists. However, the Commissioner rejected the DCF method, viewing the ‘net asset value’ method as a more appropriate valuation method under the circumstances. In terms of the net asset value method, the Commissioner considered D Entity’s net asset value to be R nil on 1 October 2001. ABC’s shareholding in D Entity as at 1 October 2001 was therefore also R nil, thereby justifying the Commissioner’s reduction of the base cost of the shares to nil.
The speci c circumstances viewed by the CSARS as warranting the rejection of the discount cash ow method were the fact that as at 1 October 2001, although D Entity had been granted a casino licence, the pending litigation with the X Group regarding a dispute over the location from which the casino would operate made it dif cult to predict future cash ows. As a result of this dispute, D Entity applied for a temporary licence for the operation of a temporary casino at an alternative site, but this licence was only granted on 4 October 2001, after the ‘valuation date’ of 1 October 2001 for CGT purposes.
The court held that the litigation between the X Group and D Entity was not so signi cant as to make future cash ow predictions very dif cult for the purpose of using the DCF valuation method. Furthermore, upon testimony of witnesses, it was found that although the temporary licence was granted after 1 October 2001, by that date all indications from the Gambling Board were that D Entity would de nitely receive the licence. So much so that the company had already made certain capital expenditures regarding site preparation with the con dence that it would receive the licence.
Held
Both the future cash ows and the discount rate used in the DCF method were found to be reasonable; having been prepared independently by a highly professional rm for substantiating the temporary licence application. They were also audited by the Gambling Board considering the grant of the licence.
Yekiso, J further surmised the following at para 64:
‘In addition, the gures were not prepared for a capital gains valuation but rather in support of a temporary licence application. In my view, gures prepared by a third party and subjected to public scrutiny would be more reliable than if prepared by management solely for capital gains valuation purposes.’
The 2002 and 2003 additional assessments were consequently set aside, with the Commissioner being ordered to pay costs.
7. AD CC v CSARS DTC VAT 1069 (25 July 2014)
Introduction
This is an appeal to the Durban Income Tax Court against the imposition of 200% additional tax in terms of s 60 (1) (a) of the Value-Added Tax Act 89 of 1991 (‘VAT Act’).
Facts
The taxpayer is a close corporation operating as a retail business which has been owned and managed by Mr Y as from 2006. The retail business was started and managed by Mr Y’s father until he fell ill in 2005, whereupon Mr Y returned and took over. The taxpayer was registered for VAT from 1991 to 2000, whereupon SARS deregistered it for not meeting the threshold requirements. No VAT or income tax returns were submitted by the taxpayer between 2001 and 2010 and no accounting of cer was appointed for that period. However, Mr Y continued to charge VAT from 2006–2010. SARS conducted an audit at a client of the taxpayer and noted that it was issuing tax invoices and charging VAT on goods sold. It consequently conducted an audit on the taxpayer during 2010 for the 2007–2010 years and found that the taxpayer had received deposits of R5,2 million during that period and issued an assessment for R339 614. The taxpayer had co-
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