Valuation of pre-valuation date shares – ABC (Proprietary) Limited v The Commissioner for the South African Revenue Service
ABC (Pty) Ltd (Appellant), a minority shareholder in D Entity, realised a capital gain when it disposed of small percentages of its shareholding in D Entity during the 2002 and 2003 years of assessments. D Entity held a casino licence, but was involved in litigation concerning the location of the casino and had consequently not commenced operation of the casino at the time of the disposal.
SARS raised an assessment disputing the valuation date value of the shares, arguing that the shares had no base cost as at the valuation date, because D Entity’s only asset at that date comprised a casino licence. SARS further contended that the discounted cash flow method used by the Appellant to value the D Entity shares was unreasonable and that the net-asset value method should have been used. According to SARS, the net-asset value yielded a base cost of zero.
The Appellant acquired the D Entity shares prior to the valuation date of 1 October 2001. In relation to pre-valuation date assets, the Eighth Schedule to the Act allows a taxpayer to elect one of three methods of valuation of an asset to determine the valuation date value. This value constitutes the base cost of the asset at valuation date. The valuation methods are time apportionment base cost; market value on valuation date; or 20% of proceeds.
The taxpayer carries the burden of proving the reliability of figures used to calculate its tax liability in terms of section 102(2) of the Tax Administration Act, 28 of 2011. The court found in favour of the Appellant, indicating that its valuation, using the discounted cash flow model, was reasonable and reliable on the basis that the Appellant could demonstrate the bases for the assumptions used in its model. Peculiar to these facts, the calculation had also been audited and scrutinised by a public body, the Gambling Board, and was therefore not created exclusively for tax purposes. This aided the objective and independent nature of the calculation.
This judgment dealt with the evidence of expert witnesses in determining the value at length and confirms that taxpayers must be able to substantiate positions taken when calculating tax liability.