Defy Limited v The Commissioner for the South African Revenue Service

Defy Limited, an investment holding company, disposed of its business pursuant to a group restructuring and liquidation. One of its subsidiaries, Defy Appliances (Pty) Ltd, sold its business as a going concern, distributed the proceeds to Defy in anticipation of its winding up, and was left as a shell. The distributions included loan repayments, share premium reductions, revenue profits, and capital profits. Defy then distributed R498 million to its own shareholders in anticipation of its winding up. SARS assessed Defy for secondary tax on companies (STC) on a portion of that dividend, contending that part of the distribution was taxable. Defy argued that amounts received from its subsidiary constituted capital profits it had earned, exempt from STC under s 64B(5)(c)(ii) of the Income Tax Act 58 of 1962, resulting in no STC liability.

The appeal was dismissed with costs, including the costs of two counsel. The STC assessment issued by SARS was upheld.

The case clarifies the meaning of 'profits of a capital nature' in the STC regime and confirms that such profits arise only from the disposal of capital assets by the taxpayer itself. It prevents the duplication of STC exemptions through group liquidation structures and affirms a substance-based interpretation of the STC provisions.