THE SUPREME COURT OF APPEAL OF SOUTH AFRICA

JUDGMENT

Case No: 20192/14

In the matter between

Reportable

THE COMMISSIONER FOR THE
SOUTH AFRICAN REVENUE SERVICE

FIRST APPELLANT

and

STEPNEY INVESTMENTS (PTY) LIMITED

RESPONDENT

Neutral citation:  Commissioner for the South African Revenue Service v
Stepney Investments (20192/14) [2015] ZASCA 138 (30 September 2015)

Coram:
Navsa, Shongwe, Majiedt and Mbha JJA and Van der Merwe
AJA

Heard:
8 SEPTEMBER 2015

Delivered:
30 SEPTEMBER 2015

Summary:
Tax – determination of base cost of shares in terms of Eighth
Schedule to the Income Tax Act 58 of 1962 for capital gains tax purposes –
4.37% of shares in company disposed of – market value of shares on
valuation date to be determined – whether discount cash flow valuation
method appropriately applied by taxpayer.

______________________________________________________________

ORDER
______________________________________________________________

On appeal from: Tax Court of South Africa, Cape Town (Yekiso J sitting as
President of the Tax Court):

1. The appeal is upheld with costs, including those of two counsel.
2. The order of the Tax Court is substituted with the following:
‘(a) The appeal is upheld.
(b) The additional assessments in respect of the 2002 and 2003 tax
years of assessments are hereby set aside.
(c) The matter is remitted to the Commissioner for the South African
Revenue Service for further investigation and assessment.
(d) The Commissioner is ordered to pay the costs, including those of
two counsel where so employed’.

______________________________________________________________

JUDGMENT
______________________________________________________________

MAJIEDT JA (Navsa, Shongwe and Mbha JJA and Van der Merwe AJA
concurring):

[1] Capital gains tax was introduced on 1 October 2001 through the
insertion of s 26A and the addition of the Eighth Schedule (the Schedule) to
the Income Tax Act 58 of 1962 (the Act). Where a capital gain accrues on the
disposal of assets in the seller’s possession on, or acquired after, 1 October
2001, capital gains tax is payable. The tax payable is determined by a
calculation of the difference between the proceeds of the sale and the base
cost of the asset disposed of. At issue in this appeal is whether the Tax Court
of South Africa, Cape Town, (Yekiso J sitting as President of the Tax Court),

was correct in setting aside the additional assessments raised by the
appellant, the Commissioner for the South African Revenue Service (the
Commissioner) against the respondent, Stepney Investments (Pty) Ltd
(Stepney), in respect of the 2002 and 2003 years of assessment for capital
gains tax. This requires a determination whether Stepney had proved the
base cost of the asset disposed of during those years of assessment, namely
4.37% of the shares it had held in Emanzini Leisure Resorts (Pty) Ltd (ELR).
This appeal is with the leave of the Tax Court in terms of s 86A(2) of the Act.

The legislative context

[2] The shares disposed of were a pre-valuation date asset as defined in
paragraph 1 of the Schedule, ie an asset acquired prior to 1 October 2001
and not sold prior to that date. Paragraph 25 of the Schedule provides that
‘[t]he base cost of a pre-valuation date asset . . . is the sum of the valuation
date value of that asset, as determined in terms of paragraph 26, 27 or 28 and
[certain other expenditure]’ Stepney elected in terms of paragraph 26(1)(a) to
utilise ‘the market value of the asset on the valuation date, as contemplated in
paragraph 29, of the Schedule’ as the method of determining the value of the
shares as at 1 October 20011. Paragraph 29(1)(c) provides that the market
value on the valuation date of the shares would be ‘the market value
determined in terms of paragraph 31 on valuation date’ (the paragraph 29
market value). Such market value would, in terms of paragraph 31(1)(g), be
‘the price which could have been obtained upon a sale of the asset between a
willing buyer and a willing seller dealing at arm’s length in an open market’.

[3] The contention advanced by Stepney was that it had sustained a loss
in respect of the disposal of the shares because the aggregate base cost of
the shares had exceeded the amount of the disposal proceeds. It placed a
value of R8 686 162 on the aggregate base cost, calculated as 4.37% of the

1 Paragraph 26(1) of the Schedule provides that a taxpayer may elect one of three methods to
determine the valuation date value of the asset, the first of which is the market value (para
26(1)(a)).

paragraph 29 market value of the total ELR shares, namely R198 768 000.
This valuation of the total ELR shares emanated from a valuation conducted
by Bridge Capital Services (Pty) Ltd in respect of all the ELR shares (the
Bridge valuation), undertaken for all companies in the Tusk group (which
included ELR) in order to determine the base cost of the various assets of the
group as at 1 October 2001 for capital gains tax purposes. Purportedly acting
in terms of paragraph 29(7)(b) of the Schedule2,  the Commissioner adjusted
this valuation to nil. In additional assessments raised on 10 April 2007 as a
consequence of this adjustment, Stepney was assessed for a capital gain of
R2 million in its 2002 year of assessment and for a capital gain of R2.2 million
in its 2003 year of assessment in respect of its disposal of the shares during
those years. The Commissioner disallowed Stepney’s objection to these
additional assessments, but the Tax Court set aside this disallowance3.

The factual context

[4] Stepney originally held 23.73% of the shares in ELR. The latter was
mainly engaged in developing, owning and operating casinos, hotels and
related leisure activities. The Kwazulu Natal Gambling Board (the Gambling
Board) awarded a casino licence to ELR on 21 August 2000 for a period of 15
years in respect of a defined area, namely Richards Bay. Complications arose
subsequently when members of a religious grouping, known as the Richards
Bay Ministers’ Fraternal, litigated against ELR in respect of the site where the
casino was to be erected. The awarding of the casino licence itself was,
however, not in issue. The litigation, which ultimately reached this court and in
which the Richards Bay Ministers’ Fraternal was unsuccessful, caused
considerable delays in the establishment of the casino at Richards Bay.
Consequently, ELR acquired an alternative site at Empangeni under a
temporary licence issued by the Gambling Board on 4 October 2001. At the

2 Paragraph 29(7)(b) reads:
‘(7) The Commissioner may, notwithstanding any proof of valuation submitted by a person to
the Commissioner . . .
(a) . . .
(b) where the Commissioner is not satisfied with any value at which an asset has been
valued, the Commissioner may adjust the value accordingly’.
3 In terms of s 3(4)(g) of the Act.

time of the valuation for capital gains tax purposes, ELR was in possession of
a permanent casino licence which it was unable to utilise and was in the
process of acquiring a temporary licence.

[5] The Bridge valuation lies at the heart of the dispute whether the value
placed on ELR (and a fortiori the determination of the aggregate base cost of
the shares disposed of) was reasonable. In this regard Stepney bore the onus
of proving that its valuation of the shares disposed of is correct4. In the Tax
Court it called a number of witnesses to discharge this onus, the main one
being an expert, Mr Pieter Veldtman of Bridge Capital Services, a chartered
accountant and an accredited sponsor and designated advisor in respect of
JSE matters and listed companies. One of his specialities is the valuation of
unlisted shares. The Commissioner, in turn, adduced the evidence of several
witnesses to meet this case, the most important of whom were Professor
Harvey Wainer and Mr David Costa who, like Mr Veldtman, are chartered
accountants. Prof Wainer is also an expert valuer of companies and
businesses, having lectured on the subject for more than 20 years and having
done several hundred such valuations. Mr Costa is a SARS employee based
in Port Elizabeth, responsible for large and complex audits.

The evidence

[6] Before setting out the evidence adduced by the various witnesses, it is
necessary to mention certain significant features of the case as it unfolded in
the Tax Court. These were emphasized by Stepney’s counsel during
argument. Firstly, the Bridge valuation was done by utilising the discount cash
flow (DCF) valuation method. This was contended to be the most appropriate
method in respect of the valuation of an asset such as shares. It entails
valuing the business of an entity on its future forecast free cash flows,
discounted back to present value through the application of a discount factor.
The Commissioner, on the other hand, in adjusting the base cost valuation to
nil, utilised the net asset value (NAV) valuation method. It was implicitly

4 Section 102(1)(e) of the Tax Administration Act 28 of 2011.

conceded in the court below that this valuation method was inappropriate and
that the DCF method should have been used. The concession was properly
made. It has the consequence that Mr Costa’s evidence on behalf of the
Commissioner became largely irrelevant, as is the case with that of Mr
Christiaan Vorster for Stepney, which evidence was led solely for the purpose
of justifying the adoption of the DCF, as opposed to the NAV, methodology.
And it has a direct bearing on the second striking feature of the case, namely
the nature of the evidence of Prof Wainer.

[7] Not only did the Commissioner concede that the wrong methodology
was utilised by his official, Mr Costa, but Prof Wainer’s mandate was also
narrowly circumscribed, namely to analyse the Bridge valuation and to subject
it to criticism. No separate independent valuation was done by Prof Wainer or
anyone else on behalf of the Commissioner. Prof Wainer compiled his report
in 2013, some nine years after the Bridge valuation. He listed numerous
shortcomings in the Bridge valuation, an aspect to which I shall revert
presently. But ultimately the Tax Court had before it only the Bridge valuation,
which was subjected to extensive criticism by Prof Wainer.

[8] The evidence of the lay witnesses on behalf of Stepney was largely
common cause. The narrative advanced by Mr Thabo Mokoena, a former
executive director in the Tusk group of companies, Mr David Hirschowitz,
Stepney’s general manager and Mr Jeremy Franklin, the former chief
executive of the Tusk group, which was later taken over by Peermont Global,
can be summarized as follows. With the advent of democracy and following
the abolition of the former homelands, Sun International, a major international
leisure group, had to dispose of some of its casino businesses, in line with the
new casino licences regime. Mr Franklin and some of his fellow Sun
international employees at that time established the Tusk group to explore
new casino opportunities flowing from Sun International’s disposal of some of
its casinos. The Tusk group became one of the major shareholders in ELR,
together with Stepney and an empowerment consortium. One of the entities in
the Tusk group, Tusk Casino Hotel Management, was contracted by ELR to
manage the Richards Bay casino. As stated, ELR had acquired a casino

licence for Richards Bay for a period of 15 years, which it was unable to utilise
until the litigation with the Ministers’ Fraternal was concluded. In the interim it
acquired a temporary licence on 4 October 2001 and operated a temporary
casino at Empangeni. A valuation of the assets of all the corporate entities in
the Tusk group (including ELR) was undertaken by Bridge Capital on 25
August 2004 for capital gains tax purposes. This valuation was done utilising
the DCF method and having regard to financial projections prepared by
Deloitte Consulting Group (Deloittes) and information provided by Tusk
management for ELR’s submission to the Kwazulu Natal Gambling Board for
a temporary casino licence at Empangeni. That application was dated 10 July
2001. Ancillary information was given to Bridge Capital by Messrs Mokoena
and Franklin and the rest of the Tusk group’s management to compile the
valuation report.

The Bridge valuation

[9] Mr Veldtman, who was responsible for the Bridge valuation, testified
about it. He confirmed having used the DCF methodology and that he had
relied on information from Tusk management, including the financial
projections prepared by Deloittes. The market value of the assets of all the
entities in the Tusk group, including ELR, was determined in accordance with
the relevant provisions of the Schedule for capital gains tax purposes. These
assets were unlisted shares. He explained and motivated his determination of
the future forecast cash flows and the discount factor that he had applied. On
behalf of the Commissioner Mr Costa issued a letter of audit findings to
explain why the Bridge valuation was not accepted. He advanced two main
reasons for the rejection of the Bridge valuation and for the raising of
additional assessments. The first was that the DCF valuation method was
wrongly utilised for the determination of the market value of the shares and,
second, that the forecasts used by Mr Veldtman for purposes of the valuation
were not reliable. The Tax Court found that the Commissioner did not
advance the unreliability of the financial projections and assumptions made in
the Bridge valuation as one of the factors that had been taken into account in
raising the additional assessments. The Commissioner’s primary contention

before us was that Stepney had failed to discharge its onus to establish the
validity or reliability of the projected revenue utilised by Mr Veldtman in
compiling his valuation. Stepney also contended that the Commissioner
impermissibly sought to change the grounds of assessment which it sought to
have upheld in this court.

[10] Mr Costa’s criticism of the Bridge valuation was along the following
broad grounds:
(a) the financial projections were made in perpetuity, and not for the
limited 15 year period of the casino licence;
(b) the estimates were not based on a trading history as ELR was a
‘greenfields operation’ at the valuation date, 1 October 2001;
(c) the estimates utilised by Bridge Capital was made in 2000 before
the temporary casino was erected; and
(d) it failed to factor in the effects of the September 11 terrorist attacks
in the USA.

[11] Prof Wainer’s main criticisms of the Bridge valuation were as follows:
(a) in valuing the shares Mr Veldtman failed to apply a discount based
on the fact that they were ‘minority’ shares;
(b) the validity or reliability of the information collated in the valuation
spreadsheet containing the financial projections was fundamentally
flawed in several respects, namely the projected tax, projected
revenue, projected working capital and the terminal value; and
(c) an incorrect date was used.
Before I discuss these criticisms, a brief consideration of the applicable legal
principles is apposite. First, I consider two legal principles which Stepney
vigorously advanced as preliminary aspects and, second, consideration will
be given to the nature of expert evidence.

The law

[12] Stepney submitted that on appeal against a decision of the Tax Court
this court has limited, narrowly circumscribed powers. It placed reliance on the
following dictum in Commissioner of Inland Revenue v Da Costa 5:
‘[I]f a decision of a Special Court is based on the exercise of a discretion, this Court
will interfere only if the Special Court did not bring an unbiased judgment to bear on
the question, or did not act for substantial reasons, or exercised its discretion
capriciously or upon a wrong principle: Ex parte Neethling and others 1951 (4) SA
331 (A) at 335’.
The submission is misconceived and the passage from Da Costa is quoted
out of context.

[13] In Da Costa, Van Heerden JA in fact held that there is ‘a full right of
appeal against any decision of a Special Court on issues of fact or law’.6 In
this regard the learned Judge referred to s 86A of the Act, as inserted by Act
103 of 1976, where this full right of appeal had been enacted. Reference was
also made to Hicklin v Secretary for Inland Revenue7 where Trollip JA held
that under s 86A:
‘The appeal is . . . a re-hearing of the case in the ordinary, well-known way in which
this Court, while paying due regard to the findings of the Special Court on the facts
and credibility of witnesses, is not necessarily bound by them.’
The excerpt from Da Costa and the reference to Ex parte Neethling8 must be
understood in the proper factual context. Neethling concerned the sale of
immovable property which was subject to a fideicommissum in favour of
certain minor children. As upper guardian the Provincial Division was called
upon to consider, in the exercise of its discretion, whether the proposed deed
of sale was in the interests of the minor children. It is in this context that this
court considered whether the Provincial Division had exercised its discretion

5 Per Van Heerden JA in Commissioner of Inland Revenue v Da Costa 1985 (3) SA 768 (A) at
775 F-G; (14/1984) [1985] ZASCA 32; [1985] 2 All SA 335 (A).
6 At 775C.
7 Hicklin v Secretary for Inland Revenue 1980 (1) SA 481 (A) at 485F; [1980] 1 All SA 301 (A).
8 Ex parte Neethling & others  1951 (4) SA 331 (A); [1951] 4 All SA 231 (A).

capriciously or upon a wrong principle, or whether it has not brought its
unbiased judgment to bear on the question or had not acted for substantial
reasons. And it is in this context that the passage from Da Costa above, relied
upon by Stepney, must be understood. Stepney incorrectly categorized the
matter before us as a ‘review’. It is not, as outlined above it is a full appeal.

[14] The second preliminary aspect concerns Stepney’s contention that the
Commissioner impermissibly sought to change the grounds of assessment. In
this regard reliance was placed on Commissioner, South African Revenue
Service v Brummeria Renaissance (Pty) Ltd & others.9 Stepney’s argument
proceeded along these lines that the original grounds of assessment was
limited to those enumerated in SARS’ statement of the grounds of
assessment in terms of Tax Court Rule 10(3). SARS could not subsequently
alter those grounds by, for instance, conceding that the DCF method was the
correct valuation method and in then seeking to assail this method on various
grounds. The contention cannot be upheld. Rule 12 of the Tax Court Rules
provides that the issues before the Tax Court are those adumbrated in SARS’
statement of grounds of assessment under Rule 10, together with those
outlined in the taxpayer’s statement of grounds of appeal in terms of Rule 11.
In paragraphs 4, 9, 20 and 23, in particular, of the statement of grounds of
assessment SARS pertinently raised the issue that Stepney’s market value of
the relevant ELR shares had been ‘overstated/inflated’ for purposes of
determining the base cost of the shares. SARS set out a summary of the
reasons why it took this view. It had therefore not merely confined itself to the
methodology utilised, DCF versus NAV, but it had pertinently challenged the
premise underlying Stepney’s valuation in several respects. Brummeria is
entirely distinguishable on the facts. There the Commissioner had issued
original assessments in March 2000 and revised assessments in March 2002.
Consequent to an objection in April 2002 by the taxpayer (Brummeria) to the
revised assessments, the Commissioner issued further revised assessments
in July 2004. Like the first revised assessment, the further revised
assessment had an entirely different basis than the original assessment.

9 Commissioner, South African Revenue Service v Brummeria Renaissance (Pty) Ltd &
others 2007 (6) SA 601 (SCA); (391/06) [2007] ZASCA 99; [2007] 4All SA 1338 (SCA).

Brummeria’s contentions that the further revised assessments were out of
time (s 79(1)(c)(i) of the Income Tax Act 58 of 1962, as it read at that time,
precluded the Commissioner from raising a further assessment after the
expiration of three years from the date of the first assessment (unless he was
satisfied that there was fraud, misrepresentation or non-disclosure of material
facts) were upheld on appeal. Cloete JA said that:
‘. . . once the Commissioner changed the entire basis of the assessment in the
further revised assessments, he allowed Brummeria’s objection to the revised
assessments in full as contemplated in s 81(5) and, as no fraud, misrepresentation or
non-disclosure is relied upon, that is the end of the matter. I therefore consider that
the Commissioner was precluded by the provisions of s 79(1) read with s 81(5) of the
Act from raising the assessments against Brummeria . . . .’
The reliance on Brummeria is therefore misplaced.

[15] In April 2006 the Commissioner challenged the Bridge valuation. By
letter dated 5 July 2007 Stepney lodged detailed objections to the letter of
assessment of 10 April 2007. It pointedly addressed various aspects raised in
the letter of assessment, namely the unresolved litigation against the
Ministers’ Fraternal and the delay in trading operations as at 1 October 2001.
Stepney also motivated fully why the Bridge valuation is correct. The dispute
was thus clearly understood by all concerned to go beyond the mere valuation
methodology. And on 30 April 2013 the Commissioner amended the
statement of grounds of appeal as follows:
‘Even if the Net Asset Value method were to be considered less appropriate or not
appropriate at all, and the Discounted Cash Flow Model considered more
appropriate, the valuation of the shares remains overstated / inflated for the reasons
mentioned in paragraphs 20 and 23 [of the statement of grounds of assessment].’
All the issues were in any event fully ventilated in the Tax Court. There was
no objection from Stepney in the Tax Court that the Commissioner had
changed the grounds of assessment. Stepney cannot now, on appeal,
complain about the widening of the issues, assuming in its favour that there
had been any.10 In the premises Stepney’s contention that the Commissioner

10 Shill v Milner 1973 AD 101 at 105.

impermissibly sought to change the grounds of assessment cannot be
sustained. The next aspect for consideration is the nature of expert evidence.

[16] The nature of expert evidence and a court’s approach to it is well
established. In Coopers (SA) (Pty) Ltd v Deutsche Gesellschaft Für
Schädlingsbekämfung MBH11, Wessels JA described it thus:
‘As I see it, an expert’s opinion represents his reasoned conclusion based on certain
facts [or] on data, which are either common cause, or established by his own
evidence or that of some other competent witness. Except possibly where it is not
controverted, an expert’s bald statement of his opinion is not of any real assistance.
Proper evaluation of the opinion can only be undertaken if the process of reasoning
which led to the conclusion, including the premises from which the reasoning
proceeds, are disclosed by the expert’12.
More importantly, as Addleson J said in Menday v Protea Assurance Co Ltd:13
‘It is not the mere opinion of the witness which is decisive but his ability to satisfy the
Court that, because of his special skill, training or experience, the reasons for the
opinion which he expresses are acceptable . . . the Court, while exercising due
caution, must be guided by the views of an expert when it is satisfied of his
qualification to speak with authority and with the reasons given for his opinion’ (My
emphasis).
It was contended on behalf of the Commissioner that Mr Veldtman’s evidence
did not meet the criteria laid down in Coopers and in Menday. It was
submitted that he failed to give reasons for some of his conclusions and that
much of the data upon which he based his conclusions was shown to be
fatally flawed. Further that he gave a bald statement of his opinions without
providing the underlying reasoning. It was contended that the information on
which Mr Veldtman based the valuation was not sound. I discuss those
aspects next.

The future forecast free cash flows

11 Coopers (SA) (Pty) Ltd v Deutsche Gesellschaft Für Schädlingsbekämfung MBH 1976 (3)
SA 352 (A).
12 At 371 F-H.
13 Menday v Protea Assurance Co Ltd 1976 (1) SA 565 (E) at 569B-E; [1976] 1 All SA 535
(E).

[17] As stated, Mr Veldtman testified that he received information from Tusk
management, upon which he relied to compile his valuation report. But at the
time of the valuation there was other information available which would have
had a material effect on the figures. The DCF calculation in the Bridge
valuation was not based on the management accounts of 2004, but on the
forecast amounts calculated by Deloittes in 2001 as part of the figures
submitted to the Gambling Board in respect of the application for a temporary
licence. Stepney sought to justify the use of the 2001 Deloittes figures on the
basis of them being closer to the time of the valuation date, 1 October 2001.
But this approach is fatally flawed inasmuch as the actual figures which were
available in 2004 (when the Bridge valuation was done) showed that the
figures forecasted by Deloittes in 2001 were unreasonable. As Prof Wainer
illustrated in his expert report and in oral evidence, the forecast for 2003 was
R49 million, whereas the actual figure was a R61 million negative, ie a
variance of R110 million. The actual figures for 2004 constituted only 10% of
the 2005 projected figures and only 20% of the projections for 2006 and 2007.

[18] Mr Veldtman also consciously disregarded ELR’s letter to the Gambling
Board dated 20 March 2003. In the letter, signed by Mr Mokoena on behalf of
ELR, the challenges and travails facing the temporary casino at Empangeni
was tabulated. Revenue during the nine months of trade was a mere 43% to
46% of budget and this, together with the ongoing litigation by the Ministers’
Fraternal, was said to have ‘precipated a major crisis for Emanzini’ (ELR). As
a result ELR submitted a revised project proposal to the Gambling Board in
respect of the permanent casino at Richards Bay in order to ‘obviate
disastrous consequences’. The letter undoubtedly casts a long shadow over
ELR’s optimistic forecasts of 2001, and yet no regard was given to it.

[19] Counsel for Stepney argued strenuously that the factors outlined above
could not have been taken into account, since to do so would amount to
applying hindsight. Taking into account the actual figures which were
available in 2004 and having regard to the letter above, would have been
eminently reasonable in the circumstances. In doing so Mr Veldtman would
have tested the reasonableness and correctness of the projections provided

by management. A valuer cannot just blindly accept at face value figures
presented to him or her – there is a duty to assess their reasonableness and
correctness. The necessity of assessing the reasonableness of the forecasts
was acknowledged in the Bridge valuation. The information available at the
time of the Bridge valuation pointed clearly to a significant overstatement of
revenue projected in 2001. But, as stated, no regard was given to it. The
information was available at the time that the valuation was conducted and
the proper perspective is that the valuer was duty bound to have regard to it to
interrogate the soundness of management’s projections. It was wrong not to
take the later information into account. And it resulted in a gross
overstatement of the projected revenue forecast which in turn led to a material
inflation of value in the Bridge valuation.

[20] The next aspect to be considered is the fact that the wrong date was
utilised in the valuation. As this had become common cause in the Tax Court,
it can be disposed of briefly. Instead of utilising the valuation date set out in
the Schedule (1 October 2001), the relevant figures were calculated in the
Bridge valuation with reference to 31 March 2002. The experts (Mr Veldtman
and Prof Wainer) had agreed in their joint minute that this mistake had a 10%
adverse impact on the valuation, ie approximately R19.8 million on ELR’s total
valuation and about R860 000 on the valuation of the relevant ELR shares.
Whilst relatively small, the adverse impact on the aggregate base cost is self-
evident.

[21] In respect of the tax calculations, it is uncontroverted that an
understatement of the tax amount would have led to an overstatement of
value in the Bridge valuation. The tax calculations emanated from ELR
management and was, on his own version, not verified for reasonableness by
Mr Veldtman, because he ‘felt comfortable’ that a ‘detailed and rigorous
calculation’ had been done by management. There was no evidence of this,
save for vague assertions by Mr Mokoena that the calculation had been done
as ‘part of the budgetary process’ and ‘by applying the norms in terms of tax
factors’. The problem is that the tax calculation does not accord with an
application of the relevant statutory rates. The matter is exacerbated further

by the fact that the tax calculations in the Bridge valuation, which according to
Mr Franklin were made by Deloittes as part of the submission to the Gambling
Board, differ from the tax amounts submitted to the Gambling Board as a
schedule to ELR’s letter of 10 July 2001. Thus, while the Bridge valuation
utilised the revenue figures contained in this letter, it strangely and
inexplicably did not use the tax amounts it contained. The Bridge valuation
thus falls short in respect of the tax calculations as well insofar as there has
been an understatement of the tax.

[22] There are material shortcomings in the reliability of the projected
capital expenditure as well. The amounts of projected capital expenditure
underlying the Bridge valuation were strikingly low – R5 0000 for 2003 and
2006 and nil for 2002 and 2004. The only substantial amount is the
approximately R181 million forecast for 2005. This amount was, according to
Mr Veldtman, provided for in respect of the permanent casino. No additional
capital expenditure for the construction of the temporary casino was taken into
account in the Bridge valuation. That amount would have been R71 million
according to ELR’s letter of 10 July 2001 to the Gambling Board. Mr Veldtman
testified that the expectation was for little or no capital expenditure to have
been invested in the temporary site. Not only was this in direct conflict with the
aforementioned letter, but it was also out of kilter with the facts available at
the time of the Bridge valuation. The temporary casino was to be housed in a
building previously owned and operated by Clover Dairies as a distributing
warehouse. It is self-evident, and in any event plain from Mr Mokoena’s
testimony, that substantial construction had to be undertaken to convert this
site into a temporary casino which was planned to operate for a period of
three years. Apart from the failure to include the sum of R71 million for the
temporary casino in the capital expenditure forecasts, the Bridge valuation
also did not include any substantial amounts for ongoing capital expenditure
for the maintenance of buildings, furniture and fittings.

[23] Stepney’s counsel conceded during argument that there were flaws in
the capital expenditure forecasts in the Bridge valuation, but contended that
these aspects had not been put to Mr Veldtman during cross-examination.

This contention loses sight of the fact that the ELR letter of 10 July 2001 to
the Gambling Board and the accompanying schedules reflecting the figures
came to the fore only when Mr Franklin testified, ie after Mr Veldtman’s
testimony. It appeared from Mr Franklin’s evidence that he had found these
documents in a storeroom at his house long after discovery of documents had
been made by Stepney. The criticism is therefore unfounded. In conclusion on
this aspect, the understatement of the amounts for capital expenditure
impacted materially on the Bridge valuation.

[24] A further aspect for consideration in respect of the future forecast
free cash flows is the reliability of the terminal value of R527 218 000 which
was used in the Bridge valuation. That figure is based on revenue flows into
perpetuity. It fails to take cognisance of the term of the casino licence, 15
years. The terminal value was in effect calculated on the basis that there was
no risk of the licence not being renewed upon expiry of the 15 year period.
This calculation was sought to be justified by Messrs Mokoena and Franklin
on the basis that renewal of the licence after 15 years was a mere formality
and that only the exclusivity period would expire. The only circumstances
imaginable under which the licence would not be extended, Mr Franklin said,
would be non-compliance with the licence conditions. This approach is far-
fetched and out of touch with reality. There was undeniably some measure of
risk attached, for example, changes in attitudes to gambling and in policy and
legislation. Prof Wainer is correct, in my view, that allowance should have
been made for the risk of non-renewal or, at the very least, the costs
associated with a renewal application. In essence, the loss of exclusivity after
15 years should have been taken into account. This fact would of necessity
also have an impact on the Bridge valuation.

The discount factor

[25] As stated, an appropriate discount rate must be applied to the
projected cash flows for a proper application of the DCF method. The discount
factor represents the required return on investment but also the risk inherent
in the business. A discount rate of 20.86% had been applied in the Bridge

valuation. This discount factor, also known as the weighted average cost of
capital, comprises the cost of equity and the cost of debt. The cost of equity
made up 19.92% and the cost of debt 0.95% of the discount factor of 20.86%,
ie a cost of equity: cost of debt proportionality of 90:10. Mr Veldtman failed to
furnish adequate reasons for applying a risk premium of 15%; he merely gave
vague assertions in this regard.

[26] A serious shortcoming is the fact that the same discount rate was
applied to all the entities in the Tusk group. The group owned and operated
casinos in Mmabatho, Venda, Klerksdorp, Taung and the one in Richards
Bay/Empangeni. Self-evidently, the risks in respect of these entities must
vary, particularly having regard to the fact that the others were established
casinos, whereas the one in the present instance was a start-up or greenfields
operation. There were many uncertainties in respect of this new casino –
whether it would attract sufficient clientele, the actual cost, when it would start
trading and so forth. Mr Veldtman conceded the point that there were varying
risks for the various entities and sought justification in the ‘swings and
roundabouts’ principle. He however failed to demonstrate how this principle
operated in practice in respect of the different casinos. The ELR
correspondence addressed to the Gambling Board, referred to above, clearly
showed that the temporary casino at Empangeni faced significant challenges,
amongst others the low revenues and ongoing litigation. On behalf of Stepney
much was made of the fact that Richards Bay was at the time of the valuation
one of the fastest growing metropolitan areas in the country. That may be so,
but the fact remains that the casino had been established at Empangeni and,
in terms of the concentric model of calculating population density and
potential clientele, the location of the casino would in the present instance
have resulted in the dilution of this consideration. The ‘one size fits all’
approach of Mr Veldtman was clearly inappropriate. The failure to assess the
ELR casino separately and with due regard to its own particular risk factors
had an adverse impact on the discount factor that was applied.

[27] A further problem is that certain obvious risk factors had been
disregarded. These were the unresolved litigation (which by its very nature is

steeped in uncertainty) and the risk of increased construction costs to erect a
temporary casino. Whatever legal advice might have been received
concerning the strength of Stepney’s case in respect of the litigation, a
purchaser of the shares would have considered it as an additional risk factor
and a valuer would be required to take that into account in applying a discount
factor.

Conclusion

[28] It is clear that the Bridge valuation is fatally flawed in the various
respects outlined above. A court is entitled to reject a valuation if it is not
satisfied with the investigations underpinning it:
‘For instance, if the expert added up his figures wrongly, or took something into
account which he ought not to have taken into account, or conversely, or interpreted
the agreement wrongly, or proceeded on some erroneous principle – in all these
cases, the court will interfere’14.
The Tax Court was wrong in upholding that valuation. As a consequence,
Stepney has failed to discharge its onus of proving the paragraph 29 market
value and thus also the aggregate base costs of the relevant shares. But
counsel for the Commissioner very properly conceded that the value of the
shares cannot be nil. There was clearly considerable value attached to ELR’s
sole asset, the casino licence. It was not seriously disputed that a casino
licence which grants the holder exclusive rights in respect of the specified
area for a period of 15 years has considerable value and it is in the interests
of justice that a proper valuation be calculated. The Tax Court should have
remitted the matter to the Commissioner for further investigation and
assessment in terms of s 83(13)(a)(iii) of the Act. The grounds of assessment
were unreasonable in two respects, namely the incorrect utilisation of the Net
Asset Value (NAV) methodology and the Commissioner’s valuation of the
shares as nil. The former was implicitly conceded in the Tax Court and the
latter was conceded at the outset before us.

14 Per Denning LJ in Dean v Prince 1954 (1) All ER 749 at 758.

Stepney is therefore entitled to its costs in the Tax Court in terms of s
130(1)(a) of the Tax Administration Act 28 of 2011.15

[29] The following order is issued:

1. The appeal is upheld with costs, including those of two counsel.
2. The order of the Tax Court is substituted with the following:
‘(a) The appeal is upheld.
(b) The additional assessments in respect of the 2002 and 2003 tax
years of assessments are hereby set aside.
(c) The matter is remitted to the Commissioner for the South African
Revenue Service for further investigation and assessment.
(d) The Commissioner is ordered to pay the costs, including those of
two counsel where so employed’.

________________________

S A MAJIEDT

JUDGE OF APPEAL

15 Section 130(1)(a) reads as follows:
‘The tax court may, in dealing with an appeal under this Chapter and on application by an
aggrieved party, grant an order for costs in favour of the party, if –
(a) the SARS grounds of assessment or ‘decision’ are held to be unreasonable . . . ;’

APPEARANCES

For Appellant:        P A Solomon SC and J Boltar
Instructed by:        Klagsbruin Edelstein Bosman De Vries Inc, Pretoria

Symington De Kok Attorneys, Bloemfontein

For Respondent:    S F du Toit SC and D Watson
Instructed by:         Faber Goertz Ellis Austin Inc, Bryanston

McIntyre & Van Der Post Attorneys, Bloemfontein
THE SUPREME COURT OF APPEAL
OF SOUTH AFRICA

MEDIA SUMMARY – JUDGMENT DELIVERED IN THE
SUPREME COURT OF APPEAL
MEDIA SUMMARY – JUDGMENT DELIVERED IN COURT OF
APPEAL
30 September 2015

STATUS: Immediate

THE COMMISSIONER FOR THE SOUTH AFRICAN REVENUE SERVICE v
STEPNEY INVESTMENTS (PTY) LIMITED (20192/14)

Please note that the media summary is intended for the benefit of the media and
does not form part of the judgment of the Supreme Court of Appeal

The Supreme Court of Appeal (the SCA) today upheld an appeal against a decision
of the Tax Court in Cape Town which had set aside the assessments by the
Commissioner for the South African Revenue Service against Stepney Investments
(Pty) Ltd for the 2002 and 2003 years of assessment for capital gains tax. The
commissioner had valued Stepney’s 4.37% shares which it had held in Emanzini
Leisure Resorts (Pty) Ltd and which it had disposed of during the years of
assessment at nil. Emanzini Leisure Resorts had acquired a casino licence for the
Richards Bay area for a period of 15 years. The Commissioner consequently
assessed Stepney for a capital gain of R2 million in its 2002 year of assessment and
for a capital gain of R2.2 million in its 2003 year of assessment. Stepney relied on a
valuation done by Bridge Capital Services undertaken for all companies in the Tusk
group (which included Emanzini Leisure Resorts) in order to determine the base cost
of the group’s various assets as at 1 October 2001 for capital gains tax purposes.
The discount cash flow valuation method was used to conduct the valuation.
Stepney utilised the market value of the shares as at the valuation date (1 October
2001) as the method of determining the value of the shares on that date. Stepney
contended that, in terms of that valuation, it had sustained a loss in respect of the
disposal of the shares because the aggregate base cost of the shares had exceeded
the amount of the disposal proceeds. The Commissioner had disallowed Stepney’s
objection to the additional assessments, but on appeal to it the Tax Court set aside
the disallowance in terms of section 3(4)(g) of the Income Tax Act 58 of 1962. In
upholding the appeal the Tax Court accepted the Bridge Capital Services’ valuation.

The SCA held that the Tax Court had erred in doing so, finding that the valuation
was fatally flawed in the following material respects:
(a) The projected figures for the future free cash flows were unreasonable when
compared to the actual figures which were available in 2004 when the
valuation was conducted. The failure to have regard to the actual figures was
wrong;
(b) the wrong date was utilised in the valuation;
(c) the projected tax calculations did not accord with the statutory rates and was
understated;
(d) the projected capital expenditure was also unreliable and unrealistic since it
failed to take into account at all the costs of erecting a temporary casino while
the litigation in respect of the location of the premises of the permanent
casino was being finalised;
(e) the terminal value was wrongly calculated on the basis  that revenue would
have flowed into perpetuity, whereas the casino licence would have expired
after 15 years. The loss of exclusivity after 15 years was not taken into
account;
(f) lastly, the discount rate was not properly applied as the same rate was used
for all the entities in the Tusk group – the other entities were established
casinos, whereas the one in the present instance at Richards Bay was a
greenfields operation. Certain obvious risk factors such as the unresolved
litigation and the increased cost of construction of a temporary casino had
also been disregarded.

The SCA thus upheld the appeal with costs.  It substituted the Tax Court’s order
with one in terms whereof Stephney’s appeal was upheld and the matter remitted
to the Commissioner in terms of section 83(13)(a)(iii) of the Income Tax Act for
further investigation and assessment. The SCA held that Stepney was entitled to
its costs in the Tax Court in terms of section 130(1)(a) of the Tax Administration
Act 28 of 2011. It held that the grounds of assessment was unreasonable in two
respects, namely the Commissioner’s incorrect utilisation of the net asset value
method and the Commissioner’s valuation of the shares as nil.

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