About historical base costs

This important case will be helpful for any practitioner dealing in tax disputes with SARS.

About historical base costs
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An exceptionally well-reasoned judgement was delivered in the Cape Town Tax Court in March. The case was ABC (Pty) Ltd v the Commissioner of the SA Revenue Services (case number: 12466). Minority shares were sold in a casino operation in the 2002/2003 tax year. A capital loss was recorded as the historical base cost of the asset at the date of commencement of the capital gains tax regime.

READ:Saving your assessed losses

In other words, the base cost of the shares exceeded the purchase consideration paid for the shares. In 2007, SARS reassessed the taxpayer in respect of the sale, contending that the base cost value was in fact zero. This resulted in a large taxable capital gain in the hands of the taxpayer.

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The casino company had been valued for capital gains tax purposes by a professional firm. Schedule 8, Paragraph 26 of the capital gains statute of the SA Income Tax Act provides for three methods of valuating a pre-valuation date asset, namely:

  • Using the market value at the valuation date;
  • Taking 20% of the proceeds as the base cost after deduction of the expenditure permitted under Paragraph 20;
  • The time-apportioned base cost method as provided under Paragraph 30 of Schedule 8.
  • The first method was chosen by the firm and a robust value allocated to the casino company.

Valued for different purposes
The figures allocated had in fact been calculated for a different purpose only a few weeks prior to the valuation.
The company had needed a temporary casino licence to operate at a site away from the originally proposed site. In obtaining a valuation for the purpose of the temporary licence, the firm of valuators had done a highly professional job, and it must be remembered that this value was not made for capital gains tax purposes.

SARS disputed the value on a number of grounds, including the fact that the discounted cash flow methodology adopted by the casino operator could not be made use of, or relied upon, because at the time of the valuation the casino had not yet begun operations.

The judge weighed the evidence and found that the valuation had been based on reasonable projections, the valuators belonged to an independent company and the calculations had been scientifically and professionally done. On the other hand, the SARS expert witness had relied upon materials hard to justify and not really reasonable.

The witness also had not come to a conclusion himself, but had been furnished with a set of projections that had been made for him. The judge then went a little further and set out the law with regard to the weight to be given in respect of expert evidence.

This case is a must-read for any tax practitioner dealing in tax disputes, as the niceties of the presentation of evidence in tax disputes is aptly demonstrated therein. The taxpayer was successful in the matter and the SARS reassessment, wherein capital gains tax was levied, was set aside.

Peter O’Halloran is an advocate in private practice. Phone him on 00267 390 2779