There cannot be many people in South Africa who are not aware of Dave King’s extraordinary 13 year-long fight with the South African Revenue Services (Sars) over a tax assessment in excess of R3.2 billion.
Tax disputes do not normally make the front pages of Sunday newspapers, but when the numbers are so high and the fast-moving events so incredible that it could come straight out of the pages of a John Grisham or Dan Brown novel, it becomes a national talking point.
And even after this thirteen-year battle, costing hundreds of millions of rands in legal fees, the attempted confiscation of King’s assets and court dramas all around the globe, one is still left with a sense of dissatisfaction, a kind of anti-climax as to whether King was guilty or not. The legal issue of revenue versus capital will not be dissected and delivered on by the highest court in the land.
There was a lot of legal foreplay, an enormous amount of huffing and puffing on both sides but in the end the settlement reached between King and Sars in August this year – in terms of which King has paid Sars about R700m in outstanding taxes to settle all claims against him and his various family trusts – meant he could carry on with his life and his business career.
So who actually came out on top in this extraordinary battle?
Sars initially wanted R3.2 billion; it got R700 million. King remained steadfast that what he did was perfectly legal as the R1 billion or so profits he and his various family trusts made out of the sale of shares in Specialised Outsourcing during the 1997/98 stock market boom was well within his rights. He also maintains that the profits were not of a revenue nature but one of a capital nature.
Many others, including some of the finest tax brains in this country, agree with this.
If King was eventually found wanting by a court on this issue, it could possibly have been like a proverbial nuclear bomb for hundreds, if not thousands of wealthy estates who hold most if not all of their wealth in trusts, both locally and offshore.
All these tax shelters, meticulously crafted and protected over many years and generations could have been blown wide open to scrutiny by Sars. There must have been a collective sigh of relief amongst SA’s truly wealthy that the issue of revenue versus capital did not end up for deliberation in the highest court in the land.
So for the time being, the legal status quo remains.
Arriving in South Africa
I witnessed first-hand how Dave King, who arrived in SA with very little money from his native Scotland in 1976, first came up with the idea of starting Specialised Outsourcing (SO) in 1993/94.
This was during one of several rounds of golf we enjoyed together with his lovely wife Ladina on the lush fairways of the Dainfern Country Club where we both were members in those days. I don’t play golf much any more and Dave now does his golfing at esteemed courses such as River Club in Sandton and Augusta in the USA. See what a billion or two does to your social acceptability levels?
But I digress. Dave mentioned several times his idea and even at one stage invited me to join this new company of his. In a nutshell, SO was set up to handle the treasury functions on behalf of government and parastatals. These bodies, King always would say, were so bad at handling the billions that were sloshing around in their accounts, that he offered to manage these funds in exchange for a percentage of the profits. And it turned out to be a great success story and SO soon became the darling amongst mainly small-cap fund managers in the country.
So it was with a great deal of interest that I watched from afar how he went ahead, set up the company and eventually listed Specialised Outsourcing in 1995 at a price of, if my memory serves me, R1.20 a share. The share price of SO eventually peaked at R80 a share before it came crashing down in 1998/99 when the market got wind of the fact that King had sold most of his shares.
Irma Stern painting
King’s problems really started, I was told first hand, when he bought an Irma Stern painting at an auction for R1.7 million in 2000.
This was the first time that a Stern painting achieved a price of more than R1 million and this fact obviously caught the attention of the media, and ultimately also that of nuggety Mr Charles Chipps, a special investigator at Sars who, quite simply, read about the Stern-sale in a newspaper and decided to check up on the tax status of the buyer. To his astonishment he found that King declared a taxable income of a mere R60 000.
And thus was born what is today known as the King-versus-Sars battle which has raged for more than 13 years, on several continents costing, as I indicated earlier, hundreds of millions of rands in legal fees on both sides.
I understand that the legal fraternity in the Sandton area declared a national week of mourning when the final agreements were signed and accepted by the various parties to this extraordinary battle.
I say first hand, as I heard it from Charles Chipps himself who, at about the same time, was sniffing around my own tax affairs. Nought came of this investigation but it was done on the basis of rumours of untold wealth hidden away in some secret location.
This taught me two things about the tax man. Don’t flaunt your wealth in a conspicuous manner and second, don’t be surprised if your best pal/ex-wife/ex-girlfriend makes Sars their first port of call. “Jealous people,” Chipps told me, “are often the best source of information for the tax man”.
Chipps passed away a year or so ago and was therefore not around to collect his commission cheque from Sars for his hard work and diligence.
One of the reasons for settling with Sars and paying the R700 million fine was, as King said at the time, in order to move on with his life and to get stuck into more productive things, like building up the JSE-listed company MICROmega (MMG), of which he still is chairman and major shareholder.
So it is again with more than a passing interest that I have been following the performance of MICROmega on the JSE this year, especially since the settlement in August.
In July this year the share was still trading at R2 a share with very few trades. The news of the settlement set this share price free and since then it has rocketed by almost 500%, at one stage reaching almost R20 per share but trading at around R12.30 this week.
Profit of R860 million
Now here comes the most astonishing fact. King, via his family trusts owns about 83 million shares in MMG, which means King has made a gain of R830 million in three months, all due to the almost vertical increase in the share price of MMG.
On paper therefore King has made back all of the money he handed over to Sars earlier this year –and more.
“There is a difference between R700m in cash and a paper profit,” King noted wryly this week, “ but it does feel good,” he said when I made contact to check these facts – he at least still taking my calls. As I put the phone down to end the call, I realised there was still one question that remains unanswered.
Who today owns the Stern painting in question? Dave King or Sars?
Whoever owns it has the most expensive painting ever by a South African artist hanging somewhere on a wall.
*Magnus Heystek is investment director at Brenthurst Wealth. Contact him for ideas and suggestions at magnus @heystek.co.za