Commissioner for the South African Revenue Service v KWJ Investments

KWJ Investments carried on a business involving redeemable preference shares and invested surplus funds with Investec Bank Ltd. The return on this investment took the form of an antecedent cession of rights to identified dividends that had been declared but not yet paid. Investec would initially acquire the dividend rights and later cede them to KWJ. In its tax return, KWJ included dividends that eventually accrued to it as cessionary in its gross income, but treated them as exempt from tax under the Income Tax Act 58 of 1962 as it stood prior to amendments effective from 25 October 2012. SARS issued additional assessments on the basis that KWJ acquired an unconditional entitlement to the dividend rights upon cession. KWJ challenged these assessments in the Tax Court, which found in its favour. SARS appealed to the Supreme Court of Appeal.

The appeal by SARS was dismissed with costs. The additional assessments issued to KWJ Investments were set aside. The order of the Tax Court was set aside and effectively replaced with an order setting aside the additional assessments on the basis of section 79(1) of the Income Tax Act.

The case clarifies the tax treatment of ceded dividend rights and affirms the importance of the 'generally prevailing practice' protection in section 79(1) of the Income Tax Act. It demonstrates that even where an amount may in principle fall within gross income, SARS may be precluded from issuing additional assessments if doing so would be inconsistent with its established practice.