Michelle Hawkins | Senior Tax Specialist, PKF Octagon

A significant win for taxpayers recently occurred, regarding the "narrow" approach to the ability to claim input Value-Added Tax (VAT), where the issue of a taxpayer's enterprise activities is under consideration. The Supreme Court of Appeal (SCA) handed down a judgement in the matter of The Commissioner for the South African Revenue Service v Woolworths Holdings Limited on 4 July 2025^[1].

Woolworths Holdings (Woolworths), the group holding company, was spared millions in VAT payments after it claimed over R8-million in input VAT.

The dispute centred around Woolworths' 2014 acquisition of the Australian department store David Jones. Woolworths conducted a R10-billion rights offer, essentially issuing new shares to existing shareholders, to fund the R21.4-billion deal, and incurred significant underwriting fees. Those fees attracted millions of Rands in VAT.

Woolworths claimed these fees as input tax, on the basis that the share issue was part of its enterprise as an active investment holding company. The argument put forward by SARS was that Woolworths was not regularly engaged in the business of issuing shares. The rights offer was viewed by SARS as an isolated transaction outside the scope of Woolworths' ongoing enterprise.

SARS disallowed the deduction of the VAT input of R8,478,752.06 and levied an additional amount of R28,373.90 to the VAT output tax of R15,489,266.12 which Woolworths' had already declared. In addition, SARS imposed a 10% understatement penalty to the tune of R2.1-million against Woolworths.

The SCA rejected the "narrow" approach to the consideration of a vendor's activities confirming that Woolworths operates as an active investment holding company, not merely a passive investor, and that raising capital is integral to such an enterprise.

As the judgment clearly states: "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."

From this judgment and previous case law it is clear that Courts will look holistically at a taxpayer's business and purpose, particularly for holding companies whose activities are inherently broad and strategic.

In the judgment, Dambuza J noted that the Value-Added Tax Act, No. 89 of 1991 explicitly includes activities done in connection with the commencement of an enterprise. 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. The Judge noted further that "An entity conducting an enterprise as an investment company is entitled to input tax deduction in respect of costs incurred in relation to a rights offer made to shareholders to raise capital for further investment which would increase the value of its investments."

The services that Woolworths procured from certain foreign underwriters were further found by the SCA not to be considered as "imported services" subject to additional VAT because they were used in the furtherance of its enterprise. This significant finding provides important relief for businesses engaging offshore advisers in corporate transactions.

Critically, the court distinguished this case from the earlier De Beers decision, where costs related to a corporate takeover were held not to form part of De Beers' mining enterprise. In contrast, the Woolworths rights offer was directly linked to its business of managing and expanding investments.

The 10% understatement penalty (USP) imposed by SARS on Woolworths, was also set aside, as Woolworths relied on a tax opinion from its advisers. Noting that Woolworths obtained the opinion, disclosed it timeously which was ultimately correct in law, could not form a factual basis for SARS to rely on in imposing the USP.

The take-away from this matter is simple, in that SARS need to take a comprehensive consideration of the vendor's activities, rather than isolating a single or a segregated set of transactions. When you are being audited for input VAT in similar scenario, make sure that you record the comprehensive transaction for SARS to understand the methodology behind the input tax claim.