Commissioner for the South African Revenue Service v Stepney Investments (Pty) Limited

Stepney Investments (Pty) Ltd disposed of 4.37% of its shares in Emanzini Leisure Resorts (Pty) Ltd during the 2002 and 2003 tax years. The shares were acquired before 1 October 2001 and thus constituted pre‑valuation date assets under the Eighth Schedule to the Income Tax Act 58 of 1962. Stepney elected to determine the base cost of the shares using their market value as at 1 October 2001. A valuation was prepared by Bridge Capital Services using the discounted cash flow (DCF) method, valuing the entire company at approximately R198 million, resulting in an aggregate base cost of about R8.7 million for Stepney’s shareholding. SARS rejected the valuation, adjusted the base cost to nil, and raised additional assessments reflecting capital gains for the 2002 and 2003 years. The Tax Court set aside the additional assessments, and SARS appealed to the Supreme Court of Appeal.

The appeal was upheld with costs. The Tax Court’s order was substituted. The additional assessments for the 2002 and 2003 tax years were set aside, and the matter was remitted to the Commissioner for further investigation and assessment. SARS was ordered to pay Stepney’s costs, including the costs of two counsel.

The case is significant for South African capital gains tax jurisprudence as it clarifies the evidentiary onus on taxpayers to substantiate market value when determining base cost of pre‑valuation date assets. It provides authoritative guidance on the proper use and scrutiny of discounted cash flow valuations and confirms that expert valuations must be based on reasonable, tested assumptions. The judgment also reaffirms that appeals from the Tax Court to the SCA are full appeals on fact and law.