South Africa: Cape Town Tax Court judgment on ‘dividend-stripping’

Following the recent Constitutional Court judgment in the dispute between Absa Bank and the CSARS, the CSARS has scored another win, this time in the Cape Town Tax Court in a tax dispute regarding so-called ‘dividend-stripping’.

The judgment is particularly noteworthy as it is the first reported GAAR judgment in a dividend-stripping matter. It is also the first GAAR judgment post the Absa judgment, expressing a view as to “how much of that judgment binds this Court”, in particular in respect of whether the purpose enquiry is objective, and the test to be applied to determine if a tax benefit has been obtained.

The facts
On 3 July 2026, the Cape Town Tax Court (Francis J) handed down judgment in Company AF (Pty) Ltd and Others v Commissioner for the South African Revenue Service, dismissing seven appeals against additional capital gains tax (CGT) assessments raised under the general anti-avoidance rules (GAAR).

The appellants were corporate shareholders in RASS Investments (Pty) Ltd (RASS), a self-storage business. In February 2017, they sold their entire shareholding to a subsidiary of ANCIENT Ltd. Rather than a straightforward sale, shareholders who were individuals or trusts first transferred their RASS shares to investment companies on a roll-over basis under section 42 of the Income Tax Act (ITA), whereafter the disposal was structured as four inter-conditional steps:

i. RASS declared a pre-closing dividend of approximately ZAR 274.67 million.
ii. The acquirer subscribed for new RASS shares for approximately ZAR 280.33 million.
iii. The subscription proceeds funded the dividend.
iv. The appellants sold their original shares (now worth almost nothing) for ZAR 1 000.

The appellants treated the amounts received as exempt inter-company dividends and declared no capital gain. SARS disregarded the dividend and subscription steps, treated the full amount as sale proceeds, and assessed CGT.

The transaction was implemented before the revised provisions of paragraph 43A (regarding ‘dividend-stripping’) of the Eighth Schedule to the ITA came into effect on 19 July 2017.

Preliminary objection (SARS’s pleadings)
The Court upheld a preliminary objection by the taxpayer, applying the decision in CSARS v Erasmus [2026] 2 All SA 27 (SCA), that SARS could not plead an alternative ‘arrangement’ in its Rule 31 statement that differed from the composite transaction on which the assessment was raised.

Tax benefit (applying Absa Bank)
The Court applied the counterfactual established by the Constitutional Court in Absa Bank: compare the transaction as implemented against the same transaction stripped of its avoidance features, not against a “no transaction” scenario or an alternative deal the taxpayer might have preferred. In this case, stripped of the dividend and subscription, the transaction was in substance a sale of shares for full value, which would have attracted substantial CGT. The difference is the tax benefit.

Sole or main purpose
The purpose enquiry is objective (per Absa Bank). The commercial objective (a sale and change of control) could have been achieved by a straightforward sale. The Court held that the dividend-and-subscription mechanism added nothing to the commercial result. Its sole function was to convert taxable sale proceeds into an exempt dividend. The appellants’ subjective evidence did not displace that objective characterisation.

The Conhage principle
The appellants relied heavily on the Conhage principle (reaffirmed in Absa Bank) that a taxpayer may choose the most tax-efficient route to a commercial result: “If … the same commercial result can be achieved in different ways, he may enter into the type of transaction which does not attract tax or attracts less tax.”..

The Court accepted the principle but held that Conhage protects a choice between different means of achieving the same result. The Court held that in this instance, the dividend-and-subscription mechanism was not an alternative means of effecting a sale – it was a step grafted onto the sale whose only distinguishing function was to alter the tax outcome. This is a significant departure from the Conhage “choice” principle and is likely to cause substantial uncertainty regarding the ability of taxpayers to structure their affairs in a tax-efficient manner.

Tainted elements
With respect to the other GAAR elements, the Court held that multiple tainted elements were independently established:

• The mechanism was commercially abnormal: the closed circle of funds and nil net effect on RASS was not a manner normally employed for bona fide business purposes.
• Lack of commercial substance: the mechanism made no difference to business risk or cash flows.
• Non-arm’s-length terms: the circuitous structure served no commercial need.

Misuse of the dividend exemption: s 10(1)(k)(i) was deployed to convert sale proceeds into exempt dividends, defeating its anti-cascade purpose of profits moving between resident companies. Penalties and interest

• Understatement penalties (75%): The appellants relied in good faith on a specific professional opinion in a genuinely unsettled area and voluntarily disclosed the arrangement as reportable. The objective GAAR findings do not collapse the conduct-based penalty enquiry.
• Provisional tax penalties: Set aside and remitted for reconsideration.
• Interest: Confirmed (section 80K precludes remission where the GAAR is invoked).

Key takeaways

• Some aspects of this judgment, including its interpretation of the “choice” principle and the “sole or main purpose” test as decided in the Absa judgment, are concerning and we expect the taxpayers to appeal against the judgment.
• In the meantime, while this is a Tax Court judgment and thus not legally binding on higher courts, it provides a clear indication that a subscription-and-buyback structure could (depending on the facts) be vulnerable to a GAAR attack. Taxpayers should review existing arrangements involving pre-sale dividends funded by acquirer subscriptions. Of course, for transactions implemented on or after 19 July 2017, the potential application of the specific anti-tax avoidance mechanism in paragraph 43A of the Eighth Schedule to the ITA should also be considered.
• Parties should obtain specialist tax advice when contemplating or participating in “dividend-stripping” matters. Also, very importantly, if reliance is placed on a commercial rationale as the sole or main purpose, this should be thoroughly analysed and properly documented to be available as evidence should SARS at a later stage decide to attack the transaction.
• While the Conhage “choice” principle was endorsed in the Absa judgment, the Court held that it offers no protection where a step is added solely to change the tax character of what is received, rather than being an alternative route to the commercial outcome.
• The Court’s reliance on Absa Bank demonstrates that the objective purpose test and the ‘strip the avoidance features’ counterfactual are now applied by lower courts.
• The penalty remission is significant: good-faith reliance on professional advice remains a defence to understatement penalties, even where the underlying structure is found to be impermissible. This underscores the importance of obtaining and retaining robust written tax opinions.