South Africa's Tax Court upheld SARS assessments in cases IT 76725 and IT 76750–IT 76755 (7 July 2026), applying Part IIA of the Income Tax Act 58 of 1962 to disallow a dividend extraction scheme used to convert capital gains tax into exempt intercompany dividends in a share acquisition.
The South African Revenue Service (SARS) has published a South African Tax Court judgment upholding the application of the general anti-avoidance rule (GAAR) in a case involving shareholders of an investment company on 7 July 2026.
The South African Tax Court ruled that a share sale structured to avoid capital gains tax through dividend extraction breached the general anti-avoidance rule, backing the Revenue Service’s full position in case law that strengthens GAAR enforcement across acquisition structures.
The structure and SARS’s challenge
A group of shareholders attempted to sell their stake in RASS Investments (Pty) Ltd, which operated self-storage facilities, to ANCIENT Ltd in 2015. Rather than trigger capital gains tax on a direct sale, their tax advisers engineered a three-step mechanism: RASS declared a dividend payable only after a new subscriber injected funds, the subscriber purchased fresh shares for ZAR 280 325 530, proceeds funded the dividend distribution, and original shareholders then sold their holdings for ZAR 1 000.
The arrangement treated the dividend as exempt intercompany income and reported zero CGT.
SARS disregarded the dividend and subscription steps, reassessing the transaction as a share disposal subject to capital gains tax. The Tax Court (Cape Town) upheld the agency’s position in judgments handed down on 7 July across cases IT 76725 and IT 76750 to IT 76755.
Tax benefit and purpose tests under Absa
The Court applied the new tax benefit framework established in the Constitutional Court’s 2026 Absa judgment. The proper comparator, the Court held, is not “no transaction” but the arrangement as actually implemented after stripping tax-only features.
Since the shareholders’ commercial goal was to realise their investment value—something an outright sale would accomplish—the dividend-and-subscription chain “added nothing to the commercial result” beyond converting taxable sale proceeds into an exempt dividend.
On sole or main purpose, the Court found the structure’s only discernible function was the tax conversion. Critically, it held that Absa’s guidance on objective purpose assessment formed part of the Constitutional Court’s binding ratio, not mere obiter dictum, and therefore constrains lower courts.
Conhage principle confined
The judgment clarifies that the Conhage choice doctrine—permitting taxpayers to select different commercial routes to the same outcome—does not extend to steps added purely to alter tax characterisation.
The dividend-subscription mechanism was not an alternative means of sale; it produced identical commercial results while changing only the fiscal outcome. That distinction proved fatal to the taxpayers’ argument.
Penalties remitted despite GAAR loss
The Court discharged the understatement penalties, noting that the shareholders obtained professional written advice, disclosed the arrangement before the audit, and acted reasonably on an unsettled point of law. The disclosure itself suggested good faith intent rather than evasion.
