In July 2026, the Tax Court handed down judgment in Company AF (Pty) Ltd and Others v Commissioner for the South African Revenue Service [2026] ZATC. The judgment deals with the application of the general anti-avoidance rule (the GAAR) in sections 80A to 80L of the Income Tax Act 58 of 1962 (the ITA) to a dividend stripping arrangement. Shortly after the judgment was published, I received an email asking whether this means that these types of transactions can no longer be done. The question raises two broader points. The first is what tax law does and does not do. The second is that the law has changed materially since the transactions in the case took place. In this article I consider the judgment from that perspective rather than as a GAAR analysis.
Facts of the case
Seven shareholders, natural persons and trusts, held the shares in a property company referred to in the judgment as RASS. Shareholder loans rather than share capital funded the company. The shares therefore had very little base cost, and a sale would have produced a capital gain close to the full proceeds. Before the transaction, the shareholders placed their shares into holding companies using section 42 of the ITA.
On tax advice, the taxpayers structured the disposal transaction in three steps. RASS declared a dividend equal to the full value of its business to the seven holding companies. A new shareholder, referred to as Ancient, then subscribed for new shares at the full value of the business. The subscription diluted the existing shareholders to 0.1% and gave Ancient 99.9%. RASS used the subscription proceeds to settle the dividend liability, and the existing shareholders sold their remaining 0.1%. Proceeds that would have attracted capital gains tax became dividends that qualified for the dividends tax and normal tax exemptions. Tax would arise only when the holding companies distributed the value to their own shareholders.
SARS applied the GAAR, treated the dividends as proceeds from the sale of the shares, and assessed the shareholders for capital gains tax. The court ruled in SARS’s favour. The judgment contains useful analysis of the GAAR itself, for example on the meaning of abuse or misuse, and adds to the existing authority on the provision.
Question 1: Tax law determines consequences, not permission
Tax law does not tell a taxpayer what it may or may not do. It determines the tax consequences of what the taxpayer does. The GAAR, read with this judgment, therefore does not prohibit a dividend followed by a subscription. It sets the tax consequences that follow when a transaction meets the requirements of the GAAR. Taxpayers must consider these consequences when structuring a transaction. This is something different from whether the transaction is permitted.
Question 2: Specific dividend stripping rules postdate the transactions
The transactions were implemented in February 2017. At that time, the only specific requirement for a transaction of this nature was that it constituted a reportable arrangement, and the taxpayers reported it. Specific anti-avoidance rules for this type of dividend stripping were introduced afterwards in section 22B of the ITA and paragraph 43A of the Eighth Schedule, with effect from 19 July 2017. These rules deem a portion of the proceeds, to the extent of extraordinary dividends, to be proceeds for capital gains tax purposes or income for normal tax purposes. The legislature has since refined the rules, including the 2019 amendments that cater for dilutive structures of the kind used in this case. Specific rules have therefore governed these transactions for close to a decade.
One should therefore not read the judgment as saying that these transactions had no tax implications until now. It arguably shows a finer point. Some scenarios fall outside section 22B and paragraph 43A. Where a taxpayer deliberately structures into one of those scenarios to benefit from the dividend exemptions, the judgment may elevate the GAAR risk. One could argue that the legislation now sets the boundaries of what is acceptable, so that a transaction outside those boundaries should not attract capital gains tax. In my view, the question then becomes a GAAR question of why the taxpayer is doing what it is doing, and the GAAR analysis becomes more important.
Question 3: Understatement penalties under the old and the new regime
SARS argued that a sophisticated structure of this nature cannot result in a bona fide inadvertent error. The taxpayers argued the opposite. The Tax Administration Act 28 of 2011 (the TAA) as it stood at the time prevented SARS from imposing an understatement penalty (USP) if the understatement resulted from a bona fide inadvertent error. The court described the taxpayers’ error as an error of legal judgment, namely a position that was reasonable, ultimately wrong, but taken on competent advice. That is considerably broader than the narrow view SARS adopts in its penalties guide. Relying on earlier Thistle and Coronation judgments, the court held that no USP applied because the taxpayers acted on advice.
The penalty regime has since changed. The bona fide inadvertent error defence previously applied before one reached the penalty table. It now sits under the substantial understatement behaviour as a ground for remission. SARS must consider every behaviour in the table and impose the penalty at the highest applicable rate. The table runs from tax evasion to the absence of reasonable grounds and a lack of reasonable care, with substantial understatement as the final behaviour and a 10% penalty where the quantum alone justifies it. One behaviour is an impermissible avoidance arrangement, which carries a 75% penalty. If the GAAR applies as a matter of fact, that is the behaviour that applies. The taxpayer cannot then reach the substantial understatement category to rely on the bona fide inadvertent error defence. This behaviour was already in the TAA in 2016, but the authority that developed around the bona fide inadvertent error defence effectively neutralised it. The recent amendment addresses that. The judgment should therefore not be read as authority that taking tax advice removes USP exposure where the GAAR applies.
Take-home message
When reading a judgment like the Company AF case, the context then and now matters. Two things have changed since the transactions in the case were implemented. The specific dividend stripping rules in section 22B and paragraph 43A came into effect shortly afterwards, and the penalty regime has recently changed. The judgment is useful for its GAAR analysis. It is not authority that these transactions were free of tax consequences until now, or that acting on advice removes penalty exposure where the GAAR applies.
