In the recent
Woolworths Supreme Court of Appeal judgement,[1] Woolworths Holdings Limited (Woolworths) had incurred significant VAT on professional fees for a rights offer to fund the acquisition of the Australian retail store business, David Jones. Woolworths claimed an input VAT deduction on the portion of fees incurred in relation to the rights offered by resident shareholders.
SARS disagreed, taking the view that the rights offer was an isolated activity. Woolworths did not issue shares in a continuous, unchanged or uninterrupted manner for the rights offer to qualify as an enterprise activity.
The SCA clarified that Woolworths was an investment holding company engaged in activities relating to capital raising to acquire investments. The financial management of those investments was integral to its enterprise, even for a once-off transaction at the start of the business enterprise. The SCA held that these activities formed part of Woolworths’ enterprise even if they were not conducted continuously or regularly. They were connected to the commencement or termination of the continuous activities of the enterprise.
The SCA emphasised that a comprehensive, holistic consideration of the vendor's activities and a broad interpretation of "any enterprise or activity" in the definition of "enterprise" was required:
"The evidence that Woolworths Holdings acquires, holds and manages its investments is beyond dispute. Similarly, the evidence pertaining to the raising of capital or debt for its subsidiaries and itself was supported by minutes and resolutions taken at its Board meetings. All these activities are part of the enterprise of Woolworths Holdings as a listed active investment holding company." (Our
emphasis.)
The SCA held that SARS had ignored the facts relating to Woolworths’ enterprise activities and provided no explanation as to why investment activities and related financial management should be excluded from the factual determination of its enterprise.
De Beers[2] distinguished
The SCA's analysis of existing South African and international case law has significantly enriched the jurisprudence on this issue.
SARS had heavily relied on the De Beers case, in which the SCA acknowledged that "investments held by an investment company can conceivably be regarded, on their own, as an enterprise as envisaged in the VAT Act." In
De Beers, however, the SCA held that the holding of shares and receipt of dividends did not form part of De Beers' main trading activities of mining and selling of diamonds from South Africa.
The SCA accepted that Woolworths conducted the enterprise of an active investment holding company, which involved acquiring and managing investments, including capital investments, and assisting in the management of those investments. The court found that SARS’s argument, that the holding of shares by Woolworths Holdings was not an enterprise, "can only be based on a misreading" of the De Beers judgement.
Tiger Oats[3] affirmed
The SCA drew parallels with its decision in the
Tiger Oats case, noting Woolworths’ many subsidiary investments in South Africa, Africa and Australia from which it earned dividends and interest from loans advanced. The Woolworths board determined capital management policy and made related decisions for itself and its subsidiaries.
The SCA accepted detailed witness testimony that Woolworths Holdings provided financial, treasury, management and internal audit services to its subsidiaries, including sourcing the most cost-effective forms of debt and capital. The evidence confirmed that Woolworths'
raison d'etre was the business of an investment holding company, as in
Tiger Oats. Active involvement of the holding company in its subsidiaries’ business was a key factor.
Consol Glass[4] distinguished
In Consol Glass, the SCA held that refinancing arrangements undertaken for the group's internal reorganisation did not have a "functional effect" on the core glass-manufacturing enterprise. By contrast, in
Woolworths, the capital raise affected the totality of Woolworths' operations, as the rights offer was undertaken to expand its business as an investment holding company through the acquisition of the Australian retail store business.
International precedent relied on
The SCA also referred to two European Court of Justice cases,
Cibo[5] and
Kretztechnik[6], as authority for its conclusions, holding that:
"The undue focus by SARS, in the case before us, on the specific mode of raising capital (the rights issue), and isolating that activity from the rest of Woolworths Holdings’ activities, makes little sense and would render this aspect of South African Tax Law incoherent both nationally and internationally."
Understatement penalties
The judgment also addressed the 10% understatement penalties imposed by SARS, which were remitted in full by both the Tax Court and on appeal to the SCA.
The understatement penalty (USP) table provides for a 10% USP in a standard case of "substantial understatement". Section 223(3)(b) of the Tax Administration Act requires SARS to remit the penalty if the taxpayer has obtained a tax opinion from an independent registered tax practitioner before the due date of the relevant return, provided that the opinion is based on full disclosure of the specific facts and confirms that the taxpayer's position is more likely than not to be upheld in court.
Woolworths had a section 223(3)(b) opinion, dated and submitted to SARS, before the due date of its VAT return.
SARS argued that the tax practitioner who issued the opinion was not independent, alleging that he “‘peddled a model to Woolworths to move it away from the applicable legal position’” and
had a direct and improper interest in the fee for the opinion.” This was a novel argument by SARS. Just as Woolworths profits from its activities as an active investment holding company, a tax practitioner's business involves giving tax advice for a fee, which itself generates taxable income for the
fiscus.
The SCA rejected SARS’s argument, noting that it had been raised for the first time in the heads of argument and was unsupported by evidence that the opinion was "self-serving, contrived and designed to improperly persuade Woolworths Holdings to claim input tax".
Condonation
Although SARS filed its notice of appeal four months late, the SCA condoned the delay. The court found that while the delay was significant, the matter was of great importance to both parties, and the issues warranted a decisive determination given the different factual context compared with
De Beers and
Consol Glass.
