DURBAN - MASSMART has suffered yet another blow after the Supreme Court of Appeal ruled that the retailer could not claim nearly R1 billion worth of losses from the taxman for a share incentive scheme implemented 20 years ago for senior managers.
The Supreme Court of Appeal dismissed Massmart’s appeal of a court decision that gave the SA Revenue Service (Sars) a right to disallow R945 million in capital losses claimed by the group.
In his judgment, the appeal Judge Visvanathan Ponnan, said that 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,” Judge Ponnan said. “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.”
The court action stems from the decision by Sars to block the capital losses claimed by Massmart after the company could not identify the asset disposed of which gave rise to the capital loss.
Massmart, the owners of Game, Makro and Builders Warehouse brands, approached the SCA after the Tax Court of South Africa dismissed the
company’s determination that it had suffered R954m capital losses during its 2007 to 2013 years of assessment by virtue of its dealings with the trust.
In 2000, Massmart resolved to adopt a share incentive scheme for its key management personnel, conducted through the Massmart Holdings Limited Employee Share Trust.
On June 12, 2000, the Trust Deed for the trust was adopted by Massmart, and the first trustees of the trust were an accountant, Mark Franklin, and Stephen Lewis, an attorney at Edward
Nathan and Friedland Incorporated.
Judge Ponnan said in his judgment that Massmart’s witnesses Franklin, former chief executive, Guy Hayward, the assistant to the share trust administrator, Sena Farquhar, had not helped the company’s case.
“Far from supporting Massmart’s case, the evidence of the three witnesses appears to have bolstered Sars’s 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 Judge Ponnan.
For instance, during his testimony, when asked what was the basis upon which capital losses were claimed previously by Massmart before the appeal, Hayward said: “I have, M’Lord, I have no recollection, I’m not clear on that … I do not know that personally.”
While 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.
He could also 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.
Franklin had said it was for accounting purposes that funds advanced to the trust were described as loans because there was never any intention that it should be repaid.
“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,” Franklin said. “So in that respect the term loan is probably misleading.”
BUSINESS REPORT