Pep­kor boss Pieter Erasmus has emerged vic­tori­ous in his R320m tax battle with the SARS, reports Business Day. The out­come of the case will send the tax agency back to the draw­ing board in how it deals with high net worth cli­ents who have com­plex tax affairs.

Erasmus, who recently sold more than R500m of the group’s shares, has been in SARS’ crosshairs for three years, but claimed he did not owe the fiscus money with regard to trans­ac­tions related to the pur­chase of Pep­kor shares. 

Busi­ness Day first repor­ted on the dis­pute when the agency pur­sued Erasmus for being party to what it said was an ‘imper­miss­ible tax avoid­ance arrange­ment’ in terms of the Income Tax Act.

In about 2015 Erasmus and Treemo con­cluded a sale and sub­scrip­tion agree­ment in terms of which Erasmus sold shares held by him in Pep­kor to Treemo for R510m in exchange for the issue to him of class B shares in Treemo. 

The agree­ment also provided for the sale by Erasmus of the class C shares he held in an entity called News­helf 1093.

The total value of the shares came to R750m, and this was settled by the issu­ance to him of class B shares in Treemo.

The Erasmus fam­ily declared dividends in Pieter Erasmus’ 2016 year of assess­ment but had claimed that any tax that may have been pay­able was off­set by a sig­ni­fic­ant bal­ance of sec­ond­ary tax on com­pany credit that had been acquired by Treemo.

Erasmus thus declared that no tax was due by him regard­ing the dividend pay­ments he received.

However, SARS argued that the cash dis­tri­bu­tions from Treemo con­sti­tuted dividend pay­ments to Erasmus and his fam­ily trust, and that these were there­fore sub­ject to dividend tax.

SARS fur­nished him with an assess­ment of R183.5m in dividend tax, an under­state­ment pen­alty of R137.6m and interest.

According to Business Day, SARS’ pos­i­tion was that News­helf 1093 had repur­chased its own shares from Treemo and that the sub­stan­tial pro­ceeds from this share repur­chase were then paid to Erasmus as dividends, thus shield­ing him from tax by cred­its that Treemo had acquired in an earlier “dividend strip” trans­ac­tion.

Erasmus, lodged an appeal with SARS, which was declined, for­cing him to seek legal recourse. 

SARS changed tack and aban­doned its reli­ance on the News­helf 1093 share repur­chase and instead con­ten­ded the avoid­ance arrange­ment was a cir­cu­lar flow of funds involving the trust’s sub­scrip­tion for shares in Treemo and a related call option agree­ment.

SARS was of the view that it was within its province to make these changes in its assess­ment. These were based on a bank state­ment that was annexed to Erasmus’ reply­ing affi­davit in the review pro­ceed­ings he had launched to chal­lenge the ini­tial assess­ment.

The SCA last week sided with the High Court, find­ing SARS lacks such powers.

Full Business Day report

Judgment