VAT incurred by holding companies: What does the latest Woolworths judgment tell us? 

By Duane Shipp

The recent judgment handed down by the Supreme Court of Appeal (SCA) in The Commissioner for SARS v Woolworths Holdings Limited [2025] ZASCA 99 has once again raised the issue of the deductibility of VAT incurred by a holding company on the acquisition of professional services as input tax. This judgement should be read in the context of two previous judgments by the SCA which dealt with a similar issue namely Commissioner for SARS v De Beers [2012] ZASCA 103 (“De Beers”) and Consol Glass (Pty) Ltd v The Commissioner for SARS [2020] ZASCA 175 (“Consol”). This article will compare these three judgements and discuss the implications of the Woolworths judgment for holding companies.

Legislative background

“Input tax” is defined in section 1(1) of the Value-Added Tax Act 89 of 1991 (VAT Act) as the tax charged on the supply of goods or services to a vendor or on the importation of goods by the vendor. To qualify as input tax the goods or services must be acquired by the vendor wholly or partly for the purpose of consumption, use or supply in the course of making taxable supplies. A taxable supply is a supply of goods or services by a vendor where tax is chargeable at the standard rate under section 7(1)(a) or the zero rate under section 11. Importantly for the purposes of the VAT Act, the supply of goods or services must be made by the vendor in the course or furtherance of the enterprise carried on by the vendor. VAT incurred by a vendor on the acquisition of goods or services which are not consumed for the purposes of making taxable supplies will not be allowed as input tax and may not be deducted by the vendor under section 16(3).

Holding companies often present a unique challenge when determining the deductibility of VAT incurred on the acquisition of good or services as input tax. Holding companies generally earn interest and receive dividends from their subsidiaries which under the VAT Act are regarded as consideration for the making of an exempt supply and a non-supply respectively and therefore do not form part of the holding company’s enterprise. VAT incurred on the acquisition of goods or services for the purposes of earning interest or receiving dividends may therefore not be deducted as input tax.

Furthermore, in De Beers and Consol, the SCA has also historically limited the deductibility of VAT incurred by holding companies on the acquisition of services for the purposes of mergers, acquisitions or the raising of capital by ruling that there was not a sufficient link between the acquisition of these services and the day-to-day enterprise of the holding company.

Commissioner for SARS v De Beers

A consortium approached De Beers Consolidated Mines Limited (De Beers) to propose a transaction in terms of which a newly established company would become the new holding company of De Beers. To assist in finalising the transaction, De Beers appointed non-resident and resident financial advisors and service providers. The Commissioner determined that the services provided by the non-resident service providers were imported services and assessed De Beers under section 7(1)(c). Furthermore, the Commissioner also determined that the VAT charged by the resident service providers could not be deducted by De Beers as input tax. De Beers objected and thereafter appealed against these assessments.

On appeal from the Tax Court, the SCA found in the case of a public company that there is a clear distinction between the enterprise of the company with the attendant overhead expenses and the special duties imposed on a public company in the interests of its shareholders. The court found that the special duties of a public company when it is the target of a takeover are too far removed from the VAT enterprise of the public company to justify characterising services acquired in the discharge of those duties to be acquired for the purposes of making taxable supplies. In other words, the court found that the services acquired from the non-resident and resident service providers were unrelated to the core enterprise activity of De Beers, being the mining and sale of diamonds.

Of importance for the Woolworths judgement, the court did however concede that if a vendor conducts business as an investment company, the investments which that vendor holds could conceivably be regarded on their own as constituting an enterprise within the meaning of that term in the VAT Act.

Consol Glass (Pty) Ltd v Commissioner for SARS

Consol Glass (Pty) Ltd (Consol) restructured its debt and like De Beers, Consol also acquired the services of non-resident and resident service providers. The Commissioner raised additional assessments for VAT on the imported services provided by the non-resident service providers and disallowed the deduction of the VAT incurred on the services provided by the resident service providers as input tax. Consol objected and subsequently appealed against these additional assessments.

The SCA, in considering the appeal, determined that the issues to be decided were, firstly, the vendor’s purpose in acquiring these services, and secondly, whether this purpose was for the making of taxable supplies in the course or furtherance of the vendor’s enterprise. The Commissioner contended that the services were acquired by Consol for the purpose of making exempt supplies in the form of a financial service being the issue of a debt security.

The court found that for the purposes of this enquiry it was essential to determine the enterprise that the vendor was conducting and found that the enterprise of Consol was the manufacture and sale of glass containers and not the carrying on of a financial services enterprise. When determining the closeness of the connection required between the services acquired and the making of taxable supplies the court found that a functional relationship was significant. In other words, for a given taxable supply, what goods or services were consumed, used or supplied for the purposes of that supply?

With regard to the company reorganisation which led to the original Eurobond debt and the subsequent restructuring of that debt, the court found that this activity did not bring a material change to Consol’s enterprise of making and selling glass containers. There was therefore no functional link between the restructuring of the debt and the making of taxable supplies by Consol. In the circumstances the services acquired from the non-resident and resident service providers were not consumed, used or supplied in the making of taxable supplies and Consol’s appeal was dismissed.

Commissioner for SARS v Woolworths Holdings Limited

Woolworths Holdings Limited (Woolworths) is a group holding company that provides management services to its subsidiaries including the provision of financial services and treasury functions. Woolworths charges its subsidiaries management fees for the provision of these services.

Woolworths acquired the shares in an Australian entity, David Jones Limited. The acquisition was funded through a rights offer made to both resident and non-resident shareholders. Various local service providers charged fees for services rendered as part of this rights offer and Woolworths sought to deduct the VAT incurred on a portion of these fees as input tax. Furthermore, Woolworths claimed that a portion of the services rendered by foreign service providers was used in the making of taxable supplies and was therefore not imported services under the VAT Act.

SARS disallowed the deduction of VAT on the acquisition of these local services and assessed the services provided by non-resident service providers as being imported services. This assessment was made on the basis that the rights offer was not undertaken in the course or furtherance of an enterprise conducted by Woolworths. In support of this disallowance, SARS argued that Woolworths was not engaged in the continuous or regular activity of issuing shares as part of its enterprise.

The SCA disagreed with SARS and found that Woolworths had the characteristics of an active investment company and that the management of these investments could be regarded as an enterprise as envisaged in the VAT Act. In particular, the court found that the determination of a vendor’s enterprise involved a comprehensive consideration of the vendor’s activities and that this inquiry should not be narrow or restricted. Accordingly, SARS had erred by isolating the rights offer to shareholders and thereby ignored the true extent and nature of Woolworth’s enterprise. In contrast to the judgment in De Beers where the services acquired were unrelated to the mining enterprise of De Beers, the court found a functional link between the services acquired by Woolworths and its enterprise of managing and expanding its investments.

Conclusion

The implications of the Woolworths judgment are significant for investment holding companies and serves to unlock input tax on goods or services acquired for the purposes of the vendor’s enterprise. In particular, the Woolworths judgment provides a fresh perspective on the De Beers and Consol judgments and the determination of an entity’s enterprise for the purposes of the VAT Act. When evaluating a vendor’s enterprise for the purposes of the deductibility of input tax, SARS is obliged to undertake a holistic and comprehensive examination of the vendor’s activities rather than focus on one particular aspect thereof.

Corporate vendors that are undergoing or planning acquisitions, mergers or capital raising would be well advised to consider the implication of the Woolworths judgment and the opportunities now available for the deduction of input tax.