Dividend Stripping and the GAAR

Seven investment companies held the shares in a successful self-storage group. A listed property acquirer wanted to buy the business outright, and the sellers wanted to realise their investment. Commercially, that is an ordinary sale of a company. The obstacle was tax: a straightforward sale of the shares for their full value would have triggered substantial capital gains tax (CGT) in the sellers’ hands.

On specialist advice, the deal was instead implemented in four interlocking steps between about 16 and 28 February 2017:

The economic outcome was identical to a sale: the sellers exited completely, control passed to the buyer, and the sellers walked away with the full cash value of their shareholding. The only thing the dividend-and-subscription mechanism changed was the fiscal character of what the sellers received — taxable sale proceeds became an exempt dividend. SARS assessed them to CGT anyway, adding a 75% understatement penalty, a provisional-tax penalty and interest.

The sellers leaned hard on a principle every deal lawyer knows: a taxpayer is entitled to arrange its affairs to pay less tax, and where the same commercial result can be achieved in different ways, it may choose the way that attracts less tax. That principle comes from Commissioner for Inland Revenue v Conhage and was expressly reaffirmed by the Constitutional Court in 2026. It is alive and well.

But the Court drew the line precisely, and this is the sentence to remember: Conhage protects a choice between different routes to one commercial destination. It does not protect a step grafted onto the chosen route whose only distinguishing operation is to alter the tax outcome.

In Conhage itself the taxpayer genuinely needed capital, and a sale-and-leaseback was one of several real ways to raise it — the tax saving was incidental to a real choice between routes. Here, the commercial result the sellers wanted — a sale and a change of control — was fully achieved by the sale itself. The dividend-and-subscription mechanism was not an alternative way of selling. It produced the same commercial result as a sale while changing only the fiscal character of what the sellers received. That is not a permissible choice of route; it is a fiscal step bolted onto a sale that needed nothing added.

The general anti-avoidance rules in sections 80A–80L of the Income Tax Act let SARS disregard, combine or re-characterise the steps of an impermissible avoidance arrangement. The enquiry is sequential and cumulative — SARS must clear four hurdles:

1. Is there an arrangement? Yes — the composite four-step transaction.
2. Does it produce a tax benefit? Yes — the CGT a sale would have borne, versus the near-nil result actually produced.
3. Was obtaining that benefit its sole or main purpose? Once the first two are shown, section 80G presumes it was, and the taxpayer must rebut the presumption. The sellers could not.
4. Does it display a tainted element? The Court found four (see below); only one is required.

The most important point of principle: since a 2026 Constitutional Court judgment, Absa Bank v Commissioner for SARS, the “sole or main purpose” test is objective. The question is the purpose the arrangement is reasonably to be regarded as having in light of all the facts — not merely the purpose the taxpayer says it held. Honest evidence of intention is admissible, but it does not control the result; it is weighed against the objective features of the transaction and the contemporaneous record. And the record here spoke with one voice: the sellers’ own circular told shareholders in terms that “no capital gains tax will be payable”.

The sellers’ best argument was that there was no tax benefit at all, because the true comparison was not with a taxable share sale but with an abandoned restructuring plan (introducing new investors while the founders stayed on) that would also have carried no CGT. In other words: “we never would have sold this way if it were taxed — so compare us to the plan we’d otherwise have followed”.

Absa Bank settled how to run that comparison. The counterfactual is not “no transaction”, and not some different transaction the taxpayer says it would have preferred. It is the arrangement that was actually implemented, stripped of the features whose only operation is fiscal. Strip out the pre-closing dividend and the subscription, and what remains is a disposal of the sellers’ entire economic interest for cash provided by the buyer — a sale of shares, which attracts CGT. The gap between that CGT and the near-nil result is the tax benefit.

The abandoned plan could not be the comparator because it led to a different commercial end: it would have left the founders invested and in control, whereas the buyer required a clean exit and full change of control. A taxpayer does not displace a tax benefit by pointing to an abandoned plan that would have produced a materially different commercial result — nor by insisting it would have walked away rather than pay the tax. On the objective enquiry, what matters is what the arrangement did, not what the taxpayer says it would otherwise have chosen.

The sellers lost the war — the assessment to CGT was confirmed — but they won an important battle. SARS had added a 75% understatement penalty under the Tax Administration Act 28 of 2011. The Court remitted it in full.

The reasoning matters for every advised taxpayer. A penalty is not payable where the understatement results from a bona fide inadvertent error (section 222(1)). SARS argued that a structure found to be abnormal, lacking substance and abusive cannot also be an innocent error — especially for sophisticated, advised taxpayers. The Court disagreed, and the distinction is the key takeaway: the GAAR findings are objective findings about what the arrangement is. The penalty test is conduct-based — it asks how the understatement in the return actually came about. A transaction can be objectively impermissible under the GAAR and yet have been entered into by a taxpayer who genuinely and reasonably believed, on professional advice, that it was lawful.

This tracks how the Constitutional Court and Supreme Court of Appeal have treated opinion-reliance in Thistle Trust and Coronation. The provisional-tax underestimation penalty was likewise set aside and sent back to SARS to reconsider.

Remission of the penalties is not a soft landing. Two hard consequences remained.

The interest stood. Interest on the underpaid tax under section 89quat was confirmed — and it cannot be remitted where the GAAR has been invoked (section 80K). On a seven-figure tax bill running from the 2017 year of assessment, that interest is itself a very large number. A clean penalty outcome does not make the structure cost-free.

The targeted rules have since closed in. The Court was careful not to rely on later law to condemn conduct that pre-dated it — but for deals done today, the position is starker. Parliament has since enacted targeted anti-dividend-stripping rules in section 22B and paragraph 43A of the Eighth Schedule. A structure of this kind now runs into specific charging provisions before the GAAR is even reached.