The Tax Court delivered its judgment in the matter between A Ltd and CSARS on 16 November 2012.
A Ltd was listed on the JSE and implemented an employee share incentive scheme during 2000 in terms of which shares in A Ltd would have had to be delivered to employees in future. A wholly-owned subsidiary, ALS, was set up to hold shares in A Ltd purchased on the open market through an interest-free loan from another A Ltd subsidiary.
In terms of section 89 of the previous Companies Act (1973), ALS could not own more than 10% of the issued shares of A Ltd.
A Ltd performed a share buy-back from ALS in 2004 in order for ALS not to exceed the 10% limit imposed by section 89.
On 29 August 2008, SARS issued an assessment in which Secondary Tax on Companies ("STC”) of R213 911 343.91 was raised inconsequence of dividend declarations which took place on 18 June 2004, 22 June 2004, 24 June 2004 and 11 January 2006. SARS, in effect, disallowed the exemptions from STC claimed by A Ltd in terms of Section 64B(5(f)) of the Act in respect of the dividends declared as such on the basis that the exemptions were claimed pursuant to a transaction, operation or scheme as contemplated in Section 103(1) of the Act. A Ltd’s objection to the assessment was disallowed and this appeal followed.
At issue in this appeal is whether Section 103 of the Income Tax Act applies to the purchase by A Ltd of its own shares from its subsidiary ALS.
The court held that in order for section 103 to be applied, SARS had to establish the following:
1. that A Ltd engaged in atransaction, operation or scheme;
2. that the transaction had theeffectof avoiding or postponing liabilityfor tax;
3. that the transaction was entered into or carried out in a mannerwhich wouldnot normallybe employed forbona fidebusiness purposes other than obtaining a tax benefit; or created rights or obligations that would not normally be created between persons dealing at arm’s length under a transaction of the nature of the transaction in question; and
4. that the transaction was entered into or carried out solely or mainly for thepurposeof obtaining a tax benefit.
As SARS could not establish all of the above requirements, the appeal was upheld.