Woolworths Triumphs in Landmark VAT Case Against SARS

In a pivotal ruling handed down on 4 July 2025, the Supreme Court of Appeal (SCA) sided with Woolworths Holdings in its long-running dispute with the South African Revenue Service (SARS), affirming the retailer’s right to claim over R8 million in input VAT related to its 2014 acquisition of Australian department store David Jones.

The Dispute

To fund the R21.4 billion acquisition, Woolworths launched a R10 billion rights offer, incurring substantial underwriting fees. SARS challenged the VAT claim on these fees, arguing that the capital-raising transaction was a once-off event and not part of Woolworths’ ongoing enterprise.

The Court’s Findings

The SCA rejected SARS’ narrow interpretation, ruling that:

• Woolworths operates as an active investment holding company, not a passive investor.

• Capital-raising activities – even if infrequent are integral to its enterprise.

• SARS impermissibly isolated the rights offer instead of assessing the business holistically.

• The underwriting services were used by Woolworths, for the purpose of enhancing the value of its investments. Consequently, they were used for consumption, use or supply in the course or furthering of its enterprise. A functional link between the rights offer (together with the underwriting services) and the enterprise conducted by Woolworths was established. The services were therefore consumed by Woolworths in the course of making taxable supplies and Woolworths was entitled to an input tax deduction in respect of the costs incurred.

Additional Wins for Woolworths

• No VAT liability was incurred on the value of the services supplied by foreign underwriters under the imported services provisions as argued by SARS, as the services were used for the purposes of making taxable supplies in furtherance of the enterprise.

• The 10% understatement penalty of R2.1 million was struck down, with the court finding no basis for the levying of understatement penalties.

• SARS was ordered to cover Woolworths’ legal costs, including those of two counsels.

Implications for Taxpayers

This ruling sets a powerful precedent for businesses facing VAT audits. It reinforces that SARS must evaluate enterprise activities comprehensively, not cherry-pick isolated transactions. For corporates planning mergers, acquisitions, or capital-raising, the judgment offers clarity and reassurance on VAT deductibility.

Income Tax Implications Unpacked

While the focus is on Woolworths Holdings’ landmark win against SARS over input VAT deductions, the income tax consequences of the transaction also deserve attention, especially for investment holding companies and corporates engaging in capital-raising.

Income Tax Treatment of Underwriting Fees

• Capital vs Revenue Nature: Underwriting fees incurred during the rights offer are generally considered capital in nature, as they relate to the acquisition of a long-term investment. This means they may not be deductible under section 11(a) of the Income Tax Act.

• Interest deductibility: If any portion of the fees relates to interest-bearing instruments or financing arrangements, section 24J (governing interest and finance charges) may apply, allowing for limited deductions depending on the structure.

• Share Issue Costs: Costs incurred to issue shares (e.g. underwriting, legal, advisory) are typically not deductible for income tax purposes, as they are incurred to produce exempt income (i.e. proceeds from share issuance).

Impact on Taxable Income

• The raising of capital through a rights offer is not taxable – share proceeds are capital receipts.

• However, SARS could scrutinise whether associated expenses are treated correctly, especially if they relate to exempt income.

Strategic Takeaways

• VAT and income tax laws diverge in how they treat capital-raising costs.

• Businesses should segregate VAT claims from income tax deductions and ensure proper classification of expenses.

• SARS may still challenge income tax positions even if VAT claims are upheld – so documentation and tax opinions remain critical.

If you’d like to discuss any of this in more detail, or get advice on your situation, please contact us.