A tax perspective on the valuation of shares

The recent case of CSARS v The Executors of Estate Late Sidney Ellerine (142/2017) [2018] ZASCA 39 (28 March 2018) dealt with the valuation of preference shares held by a person at the time of death. This article provides an overview of the case and a perspective on its broader tax relevance. 

Facts

At the time that he passed away, Sidney Ellerine held preference shares in a private company (Sidney Ellerine Trust (Pty) Ltd (‘SET’). The preference shares consisted of 112 000 7% redeemable non-cumulative preference shares. In addition to the preference shares, the deceased also held 50% of the ordinary shares of SET. The voting rights attached to the preference shares resulted in the deceased having an overwhelming majority of the voting rights of SET. 

Upon Sidney Ellerine’s death he was deemed to have disposed of his assets at market value for capital gains tax (CGT) purposes. The issue in dispute related to the valuation of the preference shares for purposes of determining the CGT arising on the deemed disposal.

More specifically, the question was whether the holder of the preference shares had the right to convert it into ordinary shares. In the absence of such a right, it would appear as if the value of the preference shares would be limited to their stated value of R1 each (approximately R112 000). However, if the holder was able to trigger this conversion, SARS determined the value of the preference shares to have been R563 million. 

Judgment

The dispute required the court to interpret two provisions of SET’s articles of association. Firstly, whether it allowed the preference shareholder to convert the preference shares into ordinary shares

 

 

without having to amend a provision that required written approval of 75% of the holder of each class of shares (where other persons held 50% of the ordinary shares). Secondly, whether conversion of the preference shares into ordinary shares would have varied the rights of existing ordinary shareholders in a manner that would have required their prior approval.

The court concluded in both instances that the deceased, as the holder of the preference shares, had the right to convert the preference shares into ordinary shares.

Broader relevance

The views of the court were based on an interpretation of the specific provisions of SET’s articles of association and are therefore in itself not necessarily of broader relevance in a tax context.

In all likelihood, the preference shares held by the deceased were intended to have a limited value for estate duty and CGT purposes, while providing some form of control over the assets held by the company. This case clearly illustrates the importance of rigorously and thoroughly considering all factors that may affect the rights attaching to the shares and consequently its value, which may in turn have tax implications.

The valuation of shares may be important for a number of reasons from a tax perspective, other than tax on death. Amongst others, the valuation of shares become relevant when exchanged or swapped in restructuring transactions that do not qualify for roll-over relief or when assessing whether a value mismatch (as contemplated in section 24BA) arises from a transaction. It is submitted that all such valuations must approached with the same attention to detail and rigour as illustrated in the above case in these circumstances.

 

 

 

 

Articles

Input tax: Holding companies

Input tax: Holding companies

Vendors may deduct input tax on  goods or  services acquired for purposes of making taxable supplies in the course of furtherance of their enterprise. This article considers a recent tax court judgment (case 1922) that dealt with input tax deducted by a...

Income tax verification: Assessed losses

Income tax verification: Assessed losses

SARS did away with the IT14 supplementary declaration for companies (IT14SD) in September 2022. It replaced that declaration with a letter that requests supporting documents based on the reason for the verification. This article considers a recurring request to...

Intra-group loans: Tax complexities

Intra-group loans: Tax complexities

Interpretation note on intra-group loans SARS recently published Interpretation Note 127 (‘IN127’). It mainly deals with applying the arm’s length principle to intra-group loans, as the transfer pricing rules require. This complex area requires consideration of,...

New tax rules for returns of capital

New tax rules for returns of capital

The National Treasury published the Taxation Laws Amendment Bill for 2022 on 26 October 2022. Amongst others, this bill includes an amendment that affects returns of capital. This is the outcome of a process that started in 2021. Principles of returns of capital When...

Need Advice?

We regularly advise and assist clients with South African tax matters. Do you need an opinion on the South African tax implications of a transaction or arrangement? Do you require assistance to resolve a tax dispute?

Contact Us

+27 (083) 417 5904

pieter@pvdz.co.za

pieter.van.der.zwan.sa