Stellenbosch Farmers’ Winery Limited v Commissioner for the South African Revenue Service; Commissioner for the South African Revenue Service v Stellenbosch Farmers’ Winery Limited

Stellenbosch Farmers’ Winery Ltd (the taxpayer) was the exclusive South African distributor of Bells whisky under a long-term distribution agreement. Following international restructuring within the Guinness/United Distillers group, the foreign supplier sought to terminate the agreement prematurely. A termination agreement was concluded in August 1998, under which a lump sum of R67 million was paid as compensation for the early termination of the exclusive distribution rights. SARS assessed the amount as revenue income subject to income tax, levied interest on alleged underpayment of provisional tax, and further assessed the receipt as subject to VAT at 14%. The taxpayer contended that the receipt was of a capital nature and not subject to income tax, that interest should not be levied, and that the receipt was either not subject to VAT or zero-rated.

In case no. 511/2011, the taxpayer’s appeal was upheld: the additional income tax assessment for the 1999 tax year was set aside and SARS’s cross-appeal on interest was dismissed. In case no. 504/2011, SARS’s VAT appeal was dismissed. Costs were awarded against SARS, including costs of two counsel.

The case is a leading authority on the distinction between capital and revenue receipts in South African tax law, particularly in the context of compensation for early termination of distribution or agency agreements. It affirms that compensation for the loss of a capital asset forming part of a taxpayer’s income-producing structure is capital in nature, even where valuation is based on projected profits.