Tax Court Applies The GAAR To Dividend Stripping: Companies AF (Pty) Ltd And Others v C:SARS

The Tax Court (Cape Town) has handed down judgment in Company AF (Pty) Ltd and Others v Commissioner for the South African Revenue Service (Case Nos. IT 76725 and IT 76750 to IT 76755), applying the general anti-avoidance rules (“GAAR”) in Part IIA of the Income Tax Act 58 of 1962 (“Act”) to a dividend stripping arrangement used in connection with the sale of shares in a self-storage business. The Court found in favour of the Commissioner for the South African Revenue Service (“SARS”). 

This judgment follows shortly after the Constitutional Court’s decision in Absa Bank Ltd and Another v Commissioner for the South African Revenue Service [2026] ZACC 15 (find our previous article here). 

Facts

RASS Investments (Pty) Ltd (“RASS”) was incorporated in 2003 and built and leased self-storage facilities through wholly owned subsidiaries. Capital was invested mainly through shareholder loans, with shares issued at nominal value, and RASS applied its profits to new developments, paying no dividends throughout its existence.

In early 2015, RASS began a restructuring (“Project Marbles”) aimed at introducing new investors and allowing partial disinvestment. Tax advisers recommended that individual and trust shareholders first transfer their shares to investment companies on a tax-free basis in terms of section 42 of the Act, so that value could later be distributed as exempt intercompany dividends. While Project Marbles was being implemented, ANCIENT Ltd (“ANCIENT”) approached RASS with an offer to acquire all of its shares.

RASS’ tax adviser confirmed that an outright sale of properties by RASS would attract capital gains tax (“CGT”) on the sale followed by dividend tax on the distribution of the proceeds by the investment companies. He advised, however, that there was another way to achieve the same commercial objective without attracting tax. In terms of this alternative structure, RASS would distribute its full value as a dividend, ANCIENT would subscribe for new shares at the underlying value, and the remnant shares would be sold at nominal value.

RASS’ managing director informed all shareholders that ANCIENT would be acquiring 100% of RASS and that only dividends tax, and no CGT, would be payable. RASS and ANCIENT signed a Memorandum of Understanding recording the proposed structure, and Project Marbles was terminated. The non-corporate shareholders thereafter transferred their RASS shares to investment companies.

The transaction was implemented in four steps:

• RASS declared a distribution of ZAR274 666 901, payable only after receipt of the subscription amount.
• SRIA (ANCIENT’s subsidiary) subscribed for new shares for ZAR280 325 530, giving it 99.99% of RASS.
• RASS used the subscription proceeds to pay the dividend.
• The exiting shareholders then sold their original shares for ZAR1 000.

Following an investigation, SARS issued additional assessments, disregarding the dividend and subscription steps and assessing CGT on a deemed disposal of shares for full value.

Tax benefit

Following Absa, the Court held that the comparator is not “no transaction” or a different transaction the taxpayer preferred, but the arrangement as implemented “shorn of the features whose only operation is fiscal.” The documents confirmed that the implemented transaction was economically a disposal. For example, the Main Agreement records that the shareholders wished to “extract ... the value created” and the subscriber wished to “acquire a 100% shareholding”. Further, the shareholder circular described ANCIENT as “buying the shares”.

Sole or main purpose

The Court held that the commercial objective (i.e. realising the value of the investment) could have been achieved by a straightforward sale. The pre-closing dividend funded by the purchaser’s subscription “added nothing to the commercial result. Its one discernible function … was to convert what would otherwise have been taxable proceeds of sale into an exempt inter-company dividend”. The shareholder circular further stated that “[n]o Capital Gains Tax will be payable” and the tax advisers’ opinions provided that only dividends tax would be payable when the investment companies ultimately distribute the proceeds to their individual or trust shareholders. Assessed objectively the Court held the arrangement’s main purpose was to obtain the tax benefit.

Importantly, the Court held that the statements made by the majority in Absa regarding the objective character of the purpose enquiry were not obiter dictum but formed part of the ratio decidendi and are therefore binding. The Court reasoned that the objective standard was “a step in the path to the disposition of both issues” before the Constitutional Court, and that a subordinate court is “not free to disaggregate an apex judgment into severable propositions and retain only the holdings it finds congenial”.

The Court also confirmed that while Absa reaffirmed the Conhage choice principle (by stating that “[t]he principle is part of our law and was not weakened by Absa”), it does not protect “a step grafted onto the chosen route whose only distinguishing operation is to alter the tax outcome”. Conhage therefore permits a choice between routes to one commercial outcome, but it does not shield an additional step whose only function is to change the tax characterisation of what the taxpayer receives. In this regard, the Court stated that “[w]hat Conhage protects is a choice between different means of achieving the same commercial result,” whereas the “dividend-and-subscription mechanism was not an alternative means of effecting a sale. It produced the same commercial result as a sale while changing only the fiscal character of what the sellers received”.

Tainted elements

The Court held that the arrangement met the abnormality requirements set out in section 80A of the Act.

Penalties

The appellants obtained specific professional advice (in the form of both a draft and a final written opinion from their tax advisers), disclosed the arrangement as reportable before any audit, and acted in good faith on a genuinely unsettled question of law. The Court observed that “a taxpayer bent on evading tax does not ordinarily volunteer the structure to the Commissioner”. The Court further held that the objective GAAR findings do not, without more, convert a reasonable error of legal judgment into culpable conduct, and the understatement penalties were accordingly remitted.

Conclusion

The Court applied the new test for a “tax benefit” as set out in Absa, holding that the proper comparator is the arrangement actually implemented, stripped of its avoidance features, and not an alternative transaction.

Importantly, the Court held that the statements made by the majority in Absa regarding the sole or main purpose test were not obiter dictum but formed part of the ratio decidendi and are therefore binding. The Court confirmed that the majority judgment in Absa reaffirmed the choice principle as set out in Conhage but held that the principle did not assist the taxpayers in the circumstances.

A key aspect of this case was the declaration of the pre-acquisition dividend, which constituted an additional step in relation to the proposed transactions. The facts may therefore potentially be distinguishable from a subscription and buy-back structure, where the purchaser subscribes for new shares in a company and the company uses the subscription proceeds simply to buy back shares from the existing shareholder, without a separate dividend declaration.