JSE-listed Coronation Fund Managers’s shares plunged 11% on market displeasure as it faces a hefty tax comeuppance after the Supreme Court of Appeal (SCA) ruled against it in a battle with SA Revenue Service (Sars).
The group was subject of a review on a matter of principle relating to its international operations, and assessed for the 2012 to 2017 financial periods.
Coronation’s share closed at R31.80, 11.05% lower.
It warned yesterday in a JSE regulatory announcement that it would not be able to issue an interim dividend due to the ruling.
Coronation said it was quantifying the exact financial impact of the ruling and would update shareholders in due course.
“Given the material impact on earnings and cash flows, the company does not anticipate declaring an interim dividend,” it said.
However, the statement failed to disclose the actual amount Sars assessed.
The case focused on Income Tax Act 58 of 1962 – section 9D exemptions – whether a “controlled foreign company” was a “foreign business establishment” as defined – Tax Administration Act 28 of 2011 – understatement penalties.
In its 2022 annual report Coronation believed it would win the tax row and explained the dispute.
“In the prior financial year, this matter was heard in the Western Cape Tax Court and the court ruled in the group’s favour on September, 17, 2021. Sars subsequently appealed this judgment, and the matter was heard before the SCA on November, 17, 2022. The Group ...remain confident of (its) position. An outflow is not considered probable,” it said at the time.
The SCA handed down its judgment on February 7, 2023, which upheld Sars’ appeal.
Sars found fault with Coronation’s Ireland-based subsidiary, Coronation Investment Management SA (Cimsa), relating to its international operations and on the interpretation of whether it was considered a foreign business establishment (FBE).
The judgement by C Heaton Nicholls, the Judge of Appeal at the SCA, said, “I conclude that the primary operations of the business of Coronation Global Fund Managers (CGFM) (and, therefore, the business of the controlled foreign company as defined) is that of fund management, which includes investment management. These are not conducted in Ireland. Therefore, CGFM does not meet the requirements for an FBE exemption.”
The SCA dismissed Sars’ claim for penalties.
The SCA ordered Cimsa to pay the additional tax imposed by Sars additional assessment dated March 23, 2017, and the interest imposed.
Cimsa was also ordered to pay the respondent’s costs, including the costs of two counsel and Sars’s cost of appeal.
“Coronation said the company, together with its legal counsel, was considering an appeal against the judgment to the Constitutional Court. The company will provide a further update to shareholders in due course,” it said.
Investors were not impressed on social media.
Johann Biermann (@JohannBiermann1), an independent analyst, tweeted, “Coronation down 10% today. Cutting dividend on Sars litigation. Basically no real capital growth the last 10 years.“
Portfolio manager at Ashburton Investments, Wayne McCurrie, (@WayneMcCurrie) tweeted, “Coronation lost SCA tax appeal brought by SARS. Can’t quantify but material... Share down 10%. This is a buying opportunity I think.”
The Passive Income Guy (@hazelwood_dave) tweeted, “Coronation. Most surprising thing about the Sars tax ruling is that Coronation apparently made profits on their international funds. Last I checked, their flagship Global Equity Select Fund, for example, had lost money over the last 5 years.”
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