The Valuation of Assets by Taxpayers – Lessons from Stepney Investments

capetownAuthor: Esther van Schalkwyk, Tax Consultant at BDO South Africa.

The Supreme Court of Appeal (SCA) recently handed down judgment in CSARS v Stepney Investments (Pty) Ltd in which it confirmed that valuations are not to be taken lightly by taxpayers.

Stepney disposed of a pre-valuation date asset of 4.37% of the shares it held in Emanzini Leisure Resorts (Pty) Ltd. Stepney elected to use the market value of the shares on the valuation date as the method of determining the value as at 1 October 2001.

The Commissioner initially rejected the discount cash flow methodology used by Stepney. Before the Tax Court, the Commissioner however abandoned its reliance on the net asset value methodology and conceded that the discount cash flow methodology was the appropriate methodology in the circumstances. The Tax Court decided in favour of Stepney that the additional assessments raised by the Commissioner should be set aside.

On appeal to the SCA, the Commissioner challenged the reasonableness of Stepney’s valuation, not based on the methodology used but rather on the underlying grounds of valuation.

The SCA reiterated a courts entitlement to reject a valuation if it is unsatisfied with the investigations underpinning it. The SCA proceeded to identify the fatal flaws in the valuation conducted by Stepney and held that Stepney did not discharge the onus of proving the market value (and therefore the aggregate base cost) of the shares. In upholding the appeal, the SCA referred the matter back to the Commissioner for further investigation and assessment.

Taxpayers can take a few important lessons from the Stepney case, namely:

  • In assessing a valuation, the courts will not simply accept a valuer’s opinion because he or she is an expert in the field. The onus is on the taxpayer to satisfy the court of the reasonableness of the assumptions underpinning the valuation.
  • A valuer should not accept figures at face value and has a duty to assess their reasonableness and correctness.
  • The taxpayer must demonstrate that all the relevant facts and risks were considered in arriving at the basis of the valuation.

Taxpayers should be able to justify valuations used. This applies to pre-valuation date assets but also where the market value of an asset is a relevant consideration for tax purposes.