Major South African retailer gets R8 million win against SARS

The Supreme Court of Appeal recently ruled in Woolworths’ favour in the retailer’s case against SARS.

The ruling affirmed that Woolworths has a right to claim over R8 million in input value-added tax (VAT), which has positive consequences for other South African taxpayers.

Tax Consulting South Africa’s Micaela Paschini recently outlined this case, calling it a “significant win for taxpayers”.

The dispute dates back to Woolworths’ 2014 acquisition of Australian retailer David Jones for R21.4 billion.

The acquisition formed part of Woolworths’ strategy to expand its operations beyond South Africa and increase its international footprint.

To fund the deal, Woolworths conducted a R10 billion Rights Offer, whereby it issued new shares to existing shareholders and incurred significant underwriting fees. 

Paschini explained that those underwriting fees attracted millions of rand in VAT, of which Woolworths claimed a portion, R8.47 billion, as input tax.

This was done on the basis that the share issue was part of its enterprise as an active investment holding company.

However, SARS disagreed with this position, arguing that the retailer was not regularly engaged in the business of issuing shares.

In effect, SARS viewed the Rights Offer as an isolated transaction outside the scope of Woolworths’ ongoing enterprise. 

The taxman also disallowed reductions to Woolworths’ output VAT liability for “imported services” and imposed a 10% understatement penalty to the tune of R2.1 million against Woolworths.

However, in its judgement handed down on 4 July 2025, the Supreme Court of Appeal rejected SARS’ narrow approach to the considerations of a vendor’s activities.

The court confirmed that Woolworths operates as an active investment holding company, not a passive investor, and raising capital is integral to such an enterprise.

The court noted that the VAT Act explicitly includes activities done in “connection with the commencement of an enterprise”. 

Therefore, a once-off capital-raising transaction does not disqualify it from forming part of the enterprise, especially for an investment holding company whose purpose is acquiring and managing subsidiaries.

In addition, the court ruled that services Woolworths procured from certain foreign underwriters were not “imported services” subject to additional VAT because they were used to further the retailer’s enterprise.

The court further set aside the 10% understatement penalty SARS imposed on Woolworths. 

SARS alleged that Woolworths relied on a tax opinion from its advisers only after the relevant VAT return had been filed, implying negligence or lack of disclosure. 

However, the SCA found no factual basis for SARS’ accusation, noting the opinion was obtained, disclosed in a timely manner, and was ultimately correct in law.

While SARS secured condonation for filing its appeal late, it was ultimately ordered to pay Woolworths’ legal costs, including the costs of two counsels.

What this means for taxpayers

Paschini said this finding spares Woolworths further VAT liabilities and signals important relief for businesses engaging offshore advisers in corporate transactions.

She said the judgment comes as many taxpayers face SARS audits and revised assessments seeking to claw back VAT refunds, sometimes because no genuine enterprise exists.

“The Woolworths case signals that SARS cannot cherry-pick transactions in isolation,” she explained. 

“Courts will look holistically at a taxpayer’s business and purpose, particularly for holding companies whose activities are inherently broad and strategic.”

The judgment was explicit that a comprehensive consideration of the vendor’s activities is required, rather than isolating a single or a segregated set of transactions. 

“The inquiry is not narrow or restricted. In this case, instead of examining the enterprise holistically, SARS impermissibly isolated the share offer,” it said.

This judgment also lands amid an era of heightened SARS vigilance. In recent years, SARS has shown an increasing appetite for litigation and disallowing input tax deductions.

Paschini said the taxman often scrutinises whether transactions form part of a taxpayer’s “enterprise”. 

This increased scrutiny has seen businesses experience revised assessments, reversed VAT refunds, and aggressive challenges, sometimes based on arguments that no genuine enterprise exists.

“For corporates, especially those planning mergers, acquisitions, or capital-raising, the case is a reassuring precedent,” she said. 

“It clarifies that capital-raising costs can indeed qualify for VAT deductions where linked to the vendor’s enterprise, even if the transaction is a once-off.”

“The ruling sends a clear message that SARS’ litigation zeal cannot override the fundamentals of the VAT system, which, as the court reminded, is meant to tax final consumption, not legitimate business operations conducted in the ordinary course.”