Commissioner for the South African Revenue Service v The Executors of Estate Late Sidney Ellerine

The late Sidney Ellerine held all 112 000 issued 7% redeemable non‑cumulative preference shares in Sidney Ellerine Trust (Pty) Ltd, giving him 99.47% of the voting rights. On his death, paragraph 40 of the Eighth Schedule to the Income Tax Act deemed a disposal of these shares at market value. SARS assessed the market value on the basis that, due to his overwhelming voting power and Article 7.1.10 of the company’s Articles, the deceased could convert the preference shares into ordinary shares, resulting in a value of over R563 million. The executors contended that special condition 5.8 of the Memorandum and Articles 4.2 and 34 required 75% consent of each class of shareholders for any such conversion, so that the shares had to be valued at par (R1 each). The Tax Court accepted the executors’ interpretation, prompting SARS to appeal.

The appeal was upheld with costs. The Tax Court’s order was set aside and replaced with an order declaring that the deceased was entitled to convert the preference shares to ordinary shares at the date of his death and that the shares must be valued for capital gains tax purposes on that basis.

The case clarifies the distinction in South African company law between a variation of shareholders’ rights and a mere diminution in the commercial value of shares. It confirms that conversion rights and voting control must be taken into account when determining the market value of shares for capital gains tax purposes, and provides authoritative guidance on interpreting company articles in tax valuation disputes.