Page 789 - SAIT Compendium 2016 Volume1

CASE DIGEST 2014-2015
Outcome
The merits of this matter have not been decided but merely referred back to the Tax Court. A hearing is scheduled for November 2015 in the Tax Court to decide the question whether the additional assessments were correctly made.
Core reasoning
Judge Mothle held that the question whether the reasonableness of the delay may be dealt with separately from the provisions of section 79. Further, the judge held that, in adjudicating the question as to reasonableness of the delay in terms of issuing the additional assessments, the Tax Court has jurisdiction and is suitably placed to deal with the complex facts and assess those facts in terms of the provisions of section 79. No reason exists for the North Gauteng Division to review the matter in the rst instance. After all, this issue is in the prime ambit of the Tax Court’s authority. As a result, there are no reasonable prospects of success that another court on appeal might decide that the dispute regarding the delay in issuing the additional assessments may be dealt with exclusively in terms of section 237 the Constitution.
6. Commissioner for SARS v Stepney Investments [2015] ZASCA 138; SCA Case No: 20192/2014 (30 September 2015) (SARS Website)
Issue
Business income tax – Paragraphs 26 and 29(1) of the 8th Schedule to the Income Tax Act: At issue is whether the 2001 valuation date value of shares acquired before 2001 is appropriate for purposes of determining starting base cost when calculating the capital gain tax.
Posture of case
This case is before the Supreme Court of Appeal with SARS appealing the decision of the Tax Court.
Facts
The taxpayer owned certain shares in a company, which were acquired prior to the 2001 enactment of capital gains tax. The company was mainly involved in the casino, hotel and leisure sector. Prior to 2001, the company was awarded a casino licence for a period of 15 years. Unfortunately, the company became involved in a legal dispute with a third party, causing a delay in the establishment of the casino. The dispute even meant that the company had to apply for a temporary licence to establish a casino at an alternative site.
The taxpayer disposed of the company shares during the 2002 and 2003 years of assessment. For purposes of calculating its base cost, the taxpayer sought to rely on the market value of the shares on the valuation date (1 October 2001) in accordance with paragraph 26 and paragraph 29 of the Eighth Schedule. Based on the taxpayer’s valuation, the taxpayer declared a capital loss.
SARS argued that the forecast amounts from 2001 were used, and not management accounts from 2004, which were available at the time of the valuation. A valuation of the assets was undertaken by the taxpayer on 25 August 2004 for capital gains tax purposes. The available gures showed that the forecast amounts from 2001 deviated by a substantial number. The taxpayer argued that SARS was effectively seeking to use hindsight based on post-2001 events.
Outcome
The Supreme Court of Appeal rejected the taxpayer’s market valuation for calculating the 2001 capital gain base cost in the shares.
Core reasoning
Judge Majiedt (with all sitting judges concurring) held that the actual gures indicated that the forecasts were unreasonably optimistic. The forecasts could not simply be accepted by a valuer. The forecasts had to be tested for reasonableness and for this purpose later information could be taken into account. More speci cally, the court found that: • there were problems in the projected tax calculations in that the incorrect statutory rates were used and that the
calculations differed from what was previously submitted to the Gambling Board;
• the capital expenditure forecasts were inaccurate because the forecasts did not take into account any construction to
be undertaken at the temporary site and this impacted materially on the valuation;
• the valuation was based on the assumption that the licence would be renewed after the 15-year period without taking
into account the risk that the licence would not be extended;
• the valuation disregarded the risk that the licence could not put to economic use given the unresolved litigation; and
• in applying the discounted cash ow method, a discount factor was applied across the board for all companies in the
group of the company, and this ‘one size ts all’ approach was inappropriate in the circumstances.
However, SARS conceded, and the court con rmed, that the value of the shares at the valuation date could not have been zero. The 15-year licence was a valuable asset.
SAIT CompendIum oF TAx LegISLATIon VoLume 1 781
CASE DIGEST 2014-2015