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[2021] ZASCA 27
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Massmart Holdings Limited v Commissioner for the South African Revenue Service (84/2020) [2021] ZASCA 27; 83 SATC 333 (26 March 2021)
THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Reportable
Case no: 84/2020
In
the matter between:
MASSMART
HOLDINGS LIMITED
APPELLANT
and
THE
COMMISSIONER FOR THE
SOUTH
AFRICAN REVENUE SERVICE
RESPONDENT
Neutral
citation:
Massmart
Holdings Limited v The Commissioner for the South African Revenue
Service
(Case
no 84/2020)
[2021] ZASCA 27
(26 March 2021)
Coram:
PONNAN,
MBHA and ZONDI JJA and MABINDLA-BOQWANA and POYO-DLWATI AJJA
Heard:
8
March 2021
Delivered:
This
judgment was handed down electronically by circulation to the
parties' representatives via email, publication on the Supreme
Court
of Appeal website and release to SAFLII. The date and time for
hand-down is deemed to be 10:00 am on 26 March 2021.
Summary:
Capital
Gains Tax (CGT) – taxpayer implementing a share incentive
scheme for its key management personnel - scheme conducted
through a
trust - whether taxpayer suffering capital losses for CGT purposes by
virtue of its dealings with, and in relation to,
the trust.
ORDER
On
appeal from
:
Tax Court of South Africa, Gauteng (Adams J, sitting as court of
first instance):
The
appeal is dismissed with costs, including those of two counsel.
JUDGMENT
Ponnan JA (Mbha
and Zondi JJA and Mabindla-Boqwana and Poyo-Dlwati AJJA concurring)
[1]
This is an appeal by
Massmart Holdings Limited (Massmart), the holding company of the
Massmart Group of Companies, against a judgment
of Adams J (sitting
with assessors) in the Tax Court of South Africa, Gauteng.
[2]
In 2000, Massmart resolved to adopt and implement a share incentive
scheme for its key management personnel.
The scheme was to be
conducted through the Massmart Holdings Limited Employee Share Trust
(the Trust). On 12 June 2000 the Trust
Deed for the Trust (the trust
deed) was adopted by Massmart. The first trustees of the Trust were
Mr Mark Franklin, an accountant,
and Mr Stephen Lewis, an attorney at
Edward Nathan and Friedland Inc.
[3]
On 23 January 2003, Mr Roger McKee, the then scheme administrator,
wrote to Mr Lewis:
‘
Members
of the accounting team . . . met today with Deloitte & Touche and
with Mark Franklin representing the trustees of the
trust . . .
The
following matters arose out of the meeting in respect of which we
need your legal advice:
1.
Clause 33 of the trust stipulates that “the trust shall not be
entitled
to make any profit on the resale of shares acquired by it .
. . the trust hereby ceding to the company . . . its right to any
profit”.
The questions arising out of this are:
.
. .
ii)
Does the cession embodied in 33 imply that no such profits (or
losses) ever
actually arise in the trust and therefore do not fall to
be dealt with in the trust’s financial statements, and that
instead
they arise, at the time of the transactions, in the relevant
group company?
iii)
In the case of a profit on such a resale of shares capital gains tax
will arise.
Can this be dealt with in the company which accounts for
the capital gain or must it be dealt with in the trust,
notwithstanding
the accounting treatment of the profit? . . .
iv)
In the case of a loss on a resale of shares, should such capital
loss, for tax purposes,
be carried forward in the trust or in the
relevant group company?’
[4]
The response from Mr Lewis on 5 February 2003 was:
‘
2.
Ad 1(ii) and (iii)
No,
for the reasons set out hereunder:
.
. .
2.4.
We are of the prima facie opinion that paragraph 33 does not
alleviate the Trust of such a CGT
obligation. The Trust is making the
gain or accruing the benefit and only then seeking to pass it on to
the holding company. In
other words, paragraph 33 does not
antecedently divest the Trust of the right to the gain or income. In
any event, paragraph [33]
may create problems under para 11(1)(a) of
the Eighth Schedule to the Income Tax, 1962 as the Trust may be seen
to be disposing
of an asset (i.e. its right to profits).
2.5.
In order for the Trust to avoid having to pay CGT on such a capital
gain, it would have to be
argued that [Massmart] is a beneficiary of
the Trust. [Massmart] (and not the Trust) would then be liable for
CGT on the capital
gain vested in it (paragraph 80 of the Eight
Schedule).
.
. .
3.
Ad (iv)
A
capital loss can only be set-off against a capital gain. Since the
capital gain arises in the Trust the loss must also remain
in the
Trust. Again, the situation in which the Trust makes a loss on a
resale of shares is not expressly dealt with in paragraph
33. Whether
paragraph 33 is interpreted to include, by necessary implication,
that a loss on a resale of shares accrues to [Massmart]
in the same
way that a profit is intended to, or whether paragraph 33 is to be
interpreted as not covering the situation of a loss
on a resale of
shares, does not make a difference. The loss on the resale of shares
will, in both instances, result in the capital
loss arising in the
Trust rather than [Massmart].’
[5]
On 1 October 2003 an addendum to the trust deed was adopted. The
addendum sought to inter alia delete
clause 33 and replace it with
the following:
‘
33.
RIGHT TO DIVIDENDS AND ACCRUAL OF NET PROFITS
33.1.
The trust shall not –
33.1.1.
earn any income as a result of dividends declared from time to time
by the company, the trust irrevocably having renounced
its rights
(insofar as it would otherwise have been entitled to receive
dividends in respect of shares registered in its name)
to receive any
such dividends; and
33.1.2.
earn any net profits (being the aggregate of profits less the
aggregate of losses) on the resale of shares acquired by it
from
beneficiaries or otherwise, the company being the vested beneficiary
in respect of such net profits.’
The
trust deed was restated and amended in November 2010. Clause 33 was
restated as clause 35.
[6]
The issue that accordingly arose for determination before the Tax
Court is whether, during its 2007
to 2013 years of assessment,
Massmart suffered capital losses for capital gains tax (CGT)
purposes, by virtue of its dealings with,
and in relation to, the
Trust. Massmart’s claimed capital losses for that period
amounted to some R954 million. The respondent,
the Commissioner for
the South African Revenue Service (SARS), disallowed the capital
losses claimed by Massmart. Massmart’s
appeal to the Tax Court
was dismissed and the assessments raised by SARS confirmed. The
further appeal is with the leave of that
court.
[7]
CGT was introduced in South Africa with effect from 1 October 2001.
As it was put in
Lion Match Company (Pty) Ltd v Commissioner for
the South African Revenue
Service:
‘
[CGT]
is loosely
defined as a tax payable on a capital gain and is triggered by the
disposal of an asset on or after that date. The CGT
provisions are
contained in the Eighth Schedule to the Income Tax Act 58 of 1962
(ITA). Section 26A of the ITA serves as a link
between the main body
of the Act and the Eighth Schedule. The Eighth Schedule determines
the taxable capital gain or assessed capital
loss and s 26A provides
that the taxable capital gain must be included in the taxable income
of a taxpayer for the year of assessment.
According
to para 3 of the Eight Schedule to the ITA,
a
taxpayer’s capital gain for a year of assessment in respect of
the disposal of an asset is equal to the amount by which
the proceeds
received or accrued in respect of that disposal exceeds the base cost
of the asset.’
[1]
[8]
Massmart initially claimed the loss as its capital loss, on the basis
that it was a vested beneficiary
of the Trust. In the objection to
the assessment raised by SARS, Massmart asserted:
‘
4.2
It should be appreciated that [Massmart] has been a vested
beneficiary of the trust from day one.
One should consider all of the
provisions of the trust deed to determine whether [Massmart] has been
a vested beneficiary or not.
By virtue of being a vested beneficiary
from day one, the relevant losses so sustained are claimable by
[Massmart] by virtue of
it being a vested beneficiary. In other
words, the ability to claim the relevant losses do not arise because
losses were sustained
in the trust, but the losses are claimable by
virtue of the fact that [Massmart] was a vested beneficiary from day
one and the
losses associated with those vested rights.’
[9]
However, by the time that Massmart had come to file its rule 32
statement with the Tax Court, it no
longer persisted in the
contention that it was a vested beneficiary of the Trust. It
explained ‘[t]his Rule 32 statement
contains new grounds of
appeal that embody an approach that differs from the approach
previously relied on by the appellant’.
It stated:
’
12.
During the years of assessment in question, the restated and amended
[trust deed] required the
Trust, on the instruction of [Massmart], to
grant call options [the options] to certain employees [the offerees]
to acquire shares
at the strike price
[2]
as at a later date.
13.
The [trust deed] required [Massmart] to bear the losses made by the
Trust, as a result of
the Trust granting the options, when such
options were eventually exercised by the offerees. The appellant did
de facto bear such
losses.
14.
When the offerees exercised the options, the Trust sold the shares to
the offerees at the
strike price.
15.
In order to be able to deliver the shares thus sold to the offerees,
the Trust generally
had to purchase shares in the market. The
acquisition and disposal of shares typically resulted in a loss for
the Trust, which
loss was borne by the appellant, both de facto, as
provided for in the Deed, and as detailed in notes to the annual
financial statements
of the Trust.
16.
As a result of the above, [Massmart] actually incurred expenditure
equal to the share sale
losses incurred by the Trust resulting from
[Massmart’s] instruction to the trust, in terms of the Deed,
inter alia to issue
the options to the offerees. This expenditure was
directly related to [Massmart’s] action in instructing the
Trust to grant
the options to the offerees and to satisfy those
options on the exercise thereof by the offerees.
17.
In this matter [Massmart] acquired a right against the Trust to
require the Trust to grant
the options to the offerees and, on the
exercise of such options, to acquire shares to the extent necessary,
at the expense of
[Massmart], and to deliver them to the offerees at
the strike price specified in the option contracts.
18.
The pattern of events set out above was carried out repeatedly during
[Massmart’s]
2007 to 2012 years of assessment, as a result of
which [Massmart] actually incurred de facto commercial losses as
follows, during
the years of assessment indicated below:
2007
-
R
234 161 613.00
2008
-
R
90 992 505.00
2009
-
R
84 602 796.00
2010
-
R
97 124 960.00
2011
-
R
146 983 736.00
2012
-
R
121 614 885.00.’
[10]
The new case sought to be advanced by Massmart in its rule 32
statement was:
‘
19.
For CGT purposes, whenever [Massmart] instructed the Trust to grant
the options and to deliver
shares to the offerees pursuant to the
exercise of such options by the offerees, [Massmart] acquired the
right (“the Right”)
to require the Trust to perform the
obligations arising from the instructions issued by [Massmart] and
accepted by the Trust.
20.
The Rights thus acquired by [Massmart] constituted an “asset”,
as defined in
paragraph 1, in the hands of [Massmart].
21.
The base cost of these Rights, namely rights to require the Trust
inter alia to acquire
and offer shares to the offerees, was the
expenditure actually incurred by [Massmart], as contemplated in
paragraph 20(1)(a), which
expenditure was equal to the losses made by
the Trust on the delivery of the relevant shares.
22.
When these assets were extinguished as a result of the performance of
its obligations by
the Trust, this resulted in a “disposal”
of the assets as contemplated in paragraph 11(1), which expressly
refers to
the “extinction of an asset”. [Massmart’s]
Rights against the Trust simply ceased to exist, and thus its assets
were extinguished, resulting in the “extinction of an asset”,
i.e. a “disposal” of the assets as contemplated
in
paragraph 11(1).
23.
There were no “proceeds”, as defined in paragraph 1, from
the disposal of these
assets as nothing was received by or accrued to
[Massmart] “in respect of that disposal”, as contemplated
in paragraph
35(1).
24.
As a result, for CGT purposes, [Massmart] suffered a “capital
loss”, being “the
amount by which the base cost of that
asset exceeds the proceeds received or accrued in respect of that
disposal”, as contemplated
in paragraph 4(a), each time such an
asset was extinguished during the years of assessment in question.
This is borne out by the
commercial reality that [Massmart] factually
incurred expenditure equal to the losses incurred by the Trust
without any proceeds
being received by or accruing to [Massmart] in
respect of the relevant “disposals”, as defined,
resulting in de facto
commercial losses to [Massmart].’
[11]
Massmart’s case came to be further refined on appeal. In heads
of argument filed with this court, it was
submitted by counsel for
Massmart:
‘
30.
In a nutshell, the appellant’s case is as follows:
30.1
When it issued instructions to the trustees of the
Trust to offer specific share options to specific employees
at
specified prices (“the strike prices”), the appellant
acquired a
jus in personam ad faciendum
, i.e. a right to claim
performance, against the trustees, requiring them to offer the share
options as aforesaid. The right was
an “asset” for CGT
purposes.
30.2
When this right was extinguished or discharged by performance by the
trustees, the extinction or discharge
thereof constituted a disposal
in terms of paragraph 11(1).’
[12]
In terms of paragraph 4 of the Eighth Schedule of the Act:
‘
A
person's capital loss for a year of assessment in respect of the
disposal of an asset-
(a)
during that year, is equal to the amount by which the base cost of
that asset exceeds the proceeds received or accrued in respect
of
that disposal . . .’
[13]
An 'asset', according to paragraph 1 of the Eighth Schedule,
includes:
‘
(a)
property of whatever nature, whether movable or immovable, corporeal
or incorporeal, excluding any currency, but including any
coin made
mainly from gold or platinum; and
(b)
a right or interest of whatever nature to or in such property.’
[14]
Massmart called three witnesses: Mr Hayward, its CEO and, at the
relevant time, its CFO; Mr Franklin, one of the
first trustees of the
Trust; and Ms Farquhar, the assistant to the share Trust
administrator. Far from supporting Massmart’s
case, the
evidence of the three witnesses rather appears to have bolstered
SARS’ contention that the notion that the so-called
right
constituted an asset, is illusory and an ex post facto reconstruction
to establish a basis by Massmart for a claim for capital
gains.
[15]
Ms Sena Farquhar was responsible for the administration of the Trust,
which included buying shares on behalf of
the Trust, preparing offers
for participants, assisting participants who exercised options
including selling shares on their behalf
and preparing the Trust’s
financial statements annually. She explained:
‘
.
. . The option was valid for ten years . . . it didn’t vest
until after two years, and it vested in quarters. So, at the
end of
five years, it was fully vested. The employee did not have to do
anything with it when it vested, but it was valid for ten
years. They
had to do something within the ten years. They had to trade it within
the ten years.
MR
EMSLIE: So, can I just confirm . . . they could only exercise a
quarter of the share options at the end of the first year, another
quarter at the end of the second year.
MS
FARQUHAR: Yes.
MR
EMSLIE: And so on?
MS
FARQUHAR: Yes.
MR
EMSLIE: Until year five, then it was fully vested, and then they
could exercise it whenever they liked. But did you and Mr Hawksley
advise employees when they could exercise their options?
MS
FARQUHAR: Yes, we did . . . We sent an
e-mail out to all the participants. How it worked is the
employees
were allowed to trade from the day after Massmart presented their
bi-annual results, and the period was open for trading
for three
months from that date, and it closed one month before the next . . .
reporting period. So, we advised them by e-mail
that we were open for
trading.
MR
EMSLIE: And, again, after the three months was up …
(intervention).
MS
FARQUHAR: We would then send them a
letter telling them that we going into a closed period . .
. and that
they were not allowed to trade until the results came out, which
would be two months after the close of that period.
So, we were …
(intervention).
MR
EMSLIE: And when there was … new open period, would you advise
them again?
MS
FARQUHAR: Yes, absolutely, [e]very time. Ja.
MR
EMSLIE: Now, can you tell the Court something about the exercise of
the options by the offerees.
MS
FARQUHAR: Okay. So, if a participant
wanted to exercise their options, they had to send me an instruction
to do so. It was by e-mail, there had to be something in writing.
They would tell me what the tranche number was, what the vesting
date
was, the quantity that they wanted to sell, and they would tell me
either I could sell at . . . the market price at the time
it went
into the market, or the broker could sell it, or they could set a
price, that they wanted to hold on to . . .
MR
EMSLIE: And did they also have an alternative to simply acquire the
shares and keep them?
MS
FARQUHAR: Yes, they did. That didn’t
happen very often. But, yes, basically you just sold
enough of the
shares in the market to cover their obligations. Which was the strike
price and the tax, and the remaining shares
that were left over . . .
would have been then transferred to their own share account.
MR
EMSLIE: Now, can you estimate roughly what percentage of participants
exercised the option to sell the shares, as opposed to
those who
didn’t?
MS
FARQUHAR: Oh, I would say about 90% of
the participants took the money. They didn’t keep
the shares.’
[16]
Mr Franklin confirmed that the Trust granted options to the employees
as part of their duties as trustees, on the
instruction of Massmart’s
directors. He was asked to identify the asset disposed of which gave
rise to the capital loss.
He could not. His evidence was to the
following effect:
‘
MR
FINE: What is the asset that it disposed of,
that Massmart, not the Trust, Massmart Holdings disposed
of.
MR
HAYWARD: M’Lord, if I may, this
situation is subtle. The asset and the resulting loss that
is
incurred on disposal of the asset, is incurred in the Trust. That
gives right to a nett loss, which the company, Massmart Holdings,
is
obligated to carry. And so it is the loss that is transferred and
disclosed in the books of the company.
MR
FINE: Mr Hayward, do you know
what an asset is?
MR
HAYWARD: It is – do I know what
the asset is, Sir?
MR
FINE: Do you know what an asset
is?
MR
HAYWARD: Yes, I do, M’Lord.
MR
FINE: What is the, I’m
talking about the loss, I know, and you know that I know what
a loss
is, I’m talking about what was the asset that was disposed of
by Massmart that gave rise to a capital loss.
MR
HAYWARD: M’Lord, sorry, I’m
not trying to be difficult, the asset disposed of was in
the books of
the Trust, which was the closing out of the transaction of the
beneficiary that gave rise to the loss.
MR
FINE: Let’s try and make it
simple. Or make it easier. Do you know that previously,
what was the
basis upon which capital losses were claimed previously by Massmart
before the appeal?
MR
HAYWARD: I have, M’Lord, I have
no recollection, I’m not clear on that.
MR
FINE: As the CEO, you don’t
know the basis upon which they claimed substantial amounts.
.
. .
MR
HAYWARD: I do not know that personally.
MR
FINE: So Massmart was claiming the
losses in the share trust as an assessed loss in Massmart.
You see
that?
.
. .
MR
FINE: So it was claiming the
capital losses in the trust as a vested beneficiary. You see
that?
MR
HAYWARD: I read that.
MR
HAYWARD: I do, M’Lord.
MR
FINE: Yes. And the basis for the claim
in this appeal is different, do you agree?
MR
FINE: . . . just on a
purely logical common sense basis that all that would happen
is the
directors would give an instruction to the trustees to grant options
and the trustees would carry out that instruction,
correct?
MR
HAYWARD: That is correct, M’Lord.
MR
FINE: Ja, there are no rights and
assets involved in that instruction, correct?
MR
HAYWARD: Not at that time but the
relationship is governed with rights and obligations through
the
trustees.
MR
FINE: Good. What asset is
involved there?
MR
HAYWARD: Nothing. No, at the time there
was no asset involved, that is correct.
MR
FINE: There’s an instruction and
if you go to page – if you go back to paragraph –
if you
go to page 25 of the original trust deed . . . you will see that the
duties of the trustees, the trustees in addition to
any other duty
imposed on this deed, whether express or implied, shall make offers
or grant options to offerees as directed in
terms of clause 13 but
always subject to the provisions of the Act. So that’s the
obligation, once they get an instruction
and authorisation, they
carry out the duty. That’s all it is, correct?
MR
HAYWARD: Yes, M’Lord.’
[17]
But, even were it to be accepted that the right contended for is an
asset as defined, there may well be a further
insuperable difficulty
in the way of Massmart. It is unclear when precisely, as contemplated
by paragraph 4 of the Eighth Schedule
of the Act, a ‘disposal’
of the asset occurred. At best for Massmart, it would seem that the
disposal would have occurred
when the trustees had agreed to grant
the options as instructed from time to time. But, as Ms Farquhar
testified, employees had
to first accept the grant of the option and
if accepted, exercise the option. Both Mr Franklin and Mr Hayward
confirmed that the
mere granting or acceptance of the option would
not result in any financial obligation for either the Trust or
Massmart. There
was therefore no unconditional obligation to pay, nor
had any expenditure actually been incurred at that point in time.
And, at
the time that the options were granted, it was uncertain if
any loss would indeed arise.
[18]
What is more, Mr Franklin accepted that the funds that Massmart had
advanced to the Trust were recorded as loans. He testified,
however,
that there was never any intention that the loans would be repaid.
But, he could not explain why the loans were recorded
as unpaid loans
in the financial statements of the Trust and the balances were
carried forward to each succeeding year. On that
score, his evidence
was:
‘
MR
FINE: Evidence will be led to show that
amounts advanced to the trust were recorded in what was for
accounting purposes styled as a loan account as between the trust and
the appellant in the books of the appellant.
Are
you able to comment on that?
MR
FRANKLIN: I agree with that.
MR
FINE: But what I’m
questioning you is, is there a difference between for accounting
purposes or was it in reality a loan as a matter of substance or is
it just for accounting purposes?
MR
FRANKLIN: It was for accounting
purposes because there was never any intention that it should
be
repaid. A loan normally is required to be repaid. So this was for
accounting purposes.
MR
FINE: So was the loan a sham? Was
it a simulation?
MR
FRANKLIN: It could have been
described reflecting on it as an advance for the purposes of
the
activities of the trust.
MR
FINE: But it is still a loan.
It’s a loan for the purchase of shares, correct?
MR
FRANKLIN: Well, the shares had
already been purchased by Massmart and it was a means of recording
that transaction in the books of the trust.
MR
FINE: Let’s just break it
up. An amount was paid by Massmart to the trust.
MR
FRANKLIN: No.
.
. .
MR
FRANKLIN: Well, it could have
been described otherwise, but it was not a loan in the sense
that a
loan means that the trust was required to repay it, because the trust
had no funds. So it would never have been able to
repay it. So in
that respect the term loan is probably misleading.
MR
FINE: So are the financial statements
of the trust misleading, Mr Franklin?
MR
FRANKLIN: I think all the parties
involved were quite comfortable with the description. It
could have
been that on reflection it could have been described separately, but
Massmart and the trustees were happy and the auditors
were happy and
it was described as a loan, but in fact it was an advance and there
is a technical potential difference between
a loan and an advance.
MR
FINE: Would you care to answer
the question, please? Are the financial statements of the
trust
misleading, yes or no?
MR
FRANKLIN: On reflection I think
they are misleading.
MR
FINE: Deliberately so?
MR
FRANKLIN: No, definitely not
deliberately so, because all the parties approved them.
MR
FINE: Yes but now to the uninitiated,
these financial statements would possibly be shown to SARS
for the
purposes of income tax purposes, income tax returns, correct?
MR
FINE: And we have under that in
clear and unequivocal terms loans from Massmart Holdings
Limited
Group and company. Do you see that?
MR
FRANKLIN: I do.
MR
FINE: And the assets and
liability position of the trust is determined with reference to
that
as a liability, correct?
MR
FRANKLIN: Correct.
MR
FINE: Yes. Then move to page 321
please and we see at page 321 under the heading note 6:
“
Loans
from Massmart Holding Limited Group companies.” Do you see
that?
MR
FRANKLIN: I do.
MR
FINE: Nothing about it not being a
loan, correct?
MR
FRANKLIN: Correct.
MR
FINE: And it talks about loans
payable. Do you see that?
MR
FRANKLIN: I do.
MR
FINE: Doesn’t say that it
was never the intention of the loans would not be repaid,
correct?
MR
FRANKLIN: Correct.
MR
FINE: In fact all it says: “These
loans are unsecured, interest free and have no repayment
date.”
Correct?
MR
FRANKLIN: Yes, the fact that it says
no fixed repayment dates suggests that…
MR
FINE: Yes?
MR
FRANKLIN: It may never be repaid.
MR
FINE: Or it is repayable on demand,
correct?
MR
FRANKLIN: Yes.
MR
FINE: Or repayable on demand.
MR
FRANKLIN: But all the parties
knew that that was impossible because there were no assets
of the
trust in order to be able to do that.
MR
FINE: And if the trust sold the
shares that it had? If the trust sold the shares that it
had? Could
pay or pay some, correct?’
[19]
Mr Franklin later added:
‘
MR
FINE: “No taxation has been provided as
no income accrues in terms of clause 33 of the trust deed.
To the
extent that capital gains arises in respect of profits on resale of
the shares, this liability is assumed by Massmart in
accordance with
clause 36 of the trust deed.” Do you see that?
Mr
Franklin: I do.
MR
FINE: So where there was capital gains
in the trust because of buying and selling of shares that
was a
liability that had been taken over by Massmart is that correct?
MR
FRANKLIN: That is the way it is
described.
MR
FINE: Yes.
MR
FRANKLIN: But the intention was
that it would always be borne by Massmart because the administration
of the trust was for the benefit of Massmart as it had to be done
through the trust because the Companies Act and the listing
requirements did not allow the loans to be made out of Massmart.
MR
FINE: Right. It is just …
(intervention)
MR
FRANKLIN: So it is merely an
administrative support arrangement.
MR
FINE: Yes, so the point is the
shares were bought by the arrangement.
MR
FINE: Yes, so the point is the
shares were bought by the trust, correct?
MR
FRANKLIN: They were bought in the
name of the trust but they were bought by Massmart in the
name of the
trust.
MR
FINE: Okay let’s go back to the
financial statements, Mister go back to 317 please, just
this one
example. An asset of the trust is shares in Massmart Holdings,
correct?
MR
FRANKLIN: Correct.
MR
FINE: Yes, Those shares were sold
by the trust to the employees on exercise of option, correct?
MR
FRANKLIN: Correct.
MR
FINE: In respect of those shares
there would either be a capital gain or a capital loss.
Correct?
MR
FRANKLIN: Correct.
MR
FINE: That liability would rest with
the trust, correct?
MR
FRANKLIN: No.
MR
FINE: Why not?
MR
FRANKLIN: Because the trust had
no resources to be able to fund that. They were doing this
as agents
for Massmart Holdings. The understanding throughout was that all of,
everything done in the trust was as a service, if
you will, an
administrative support service, to Massmart Holdings.
MR
FINE: The facility that they
didn’t have the funds to pay did not mean that they weren’t
liable to pay, is that correct? They had an arrangement with Massmart
Holdings that it would pay the capital gains because of the
arrangement in terms of the trust deed, is that correct?
MR
FRANKLIN: That is correct.’
[20]
The unpaid loans plainly constituted an asset in the hands of
Massmart. There could thus be no loss to speak of.
Instead,
what Massmart purported to do was to account for the Trust’s
losses in its books. This despite the fact that at
the outset they
had received legal advice from Mr Lewis that they could not, by
arrangement between them and the Trust, change
the incidence of
capital gains or losses.
[21]
It follows that the appeal must fail and it is accordingly dismissed
with costs, including those of two counsel.
V M Ponnan
Judge of Appeal
APPEARANCES
For
appellant:
TS Emslie SC
Instructed
by:
Webber
Wentzel, Sandton
Honey
Attorneys, Bloemfontein
For
respondent:
DM Fine SC (with him F Southwood
SC)
Instructed
by:
Mathopo Moshimane
Mulangaphuma
t/a DM5
Incorporated, Sandton
McIntyre
van der Post Attorneys, Bloemfontein
[1]
Lion Match
Company (Pty) Ltd v Commissioner for the South African Revenue
Service
[2018]
ZASCA 36
para
1.
[2]
The
strike price was the five day weighted average price of the Massmart
shares on the Johannesburg Stock Exchange to the day
preceding the
offer date.