• 20 years ago, Massmart set up a trust through which it channelled share transactions for the benefit of key managers.
  • It failed to convince Sars, and then a tax court, that it should be allowed to claim R954 million from that scheme as a loss, for the purposes of capital gains tax.
  • Now the Supreme Court of Appeal has rejected Massmart's latest efforts – saying Massmart's own evidence proved Sars' case.
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The JSE-listed Massmart will not be able to claim five years of losses in a long-running bonus scheme – worth R954 million – as a capital loss, after the Supreme Court of Appeal (SCA) ruled against its latest efforts.

And, in part, the owner of Game and Makro has its own evidence to blame, the judgment in the matter shows, proving elements of what the SA Revenue Service (Sars) had argued were accounting shams.

Massmart set up the Massmart Holdings Limited Employee Share Trust in mid-2000, about a year before the introduction of capital gains tax. Massmart said it suffered huge capital losses every year between 2007 and 2013 on shares bought and sold for the benefit of key management, but Sars and later a tax court did not buy that argument.

Having been rebuffed in the tax court, the company turned to the SCA for the right to its chosen account treatment – but found no sympathy; the company had known since legal advice obtained in 2003 that it could not claim capital losses from the share scheme trust for itself, the SCA said in dismissing its appeal with costs.

The share scheme itself was relatively simple. Managers were offered call options on Massmart shares that vested over the course of years. When the time came to settle accounts, the trust vehicle could buy shares, typically on the open market, and the participants would cash out their shares, with some 90% apparently choosing money over holding on to their cheaply-acquired equity.

But the implementation got complex. Massmart provided interest-free "loans" to the trust – which were never intended to be repaid, though they appeared as loans on the books of both Massmart and the trust.

In one of the more complicated versions of Massmart's argument, it acquired an asset when it acquired the right to have the trust (using money it loaned) to offer options and buy shares for its management, and so could claim losses against capital gains tax.

But those loans, though unpaid, were an asset on Massmart's books, the SCA said, and so [t]here could thus be no loss to speak of".

Massmart called three people intimately involved in the scheme as it argued otherwise.

"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," said the SCA.

(Compiled by Phillip de Wet)

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