Liberty Investors Limited (in Members’ Voluntary Liquidation) v The Commissioner for the South African Revenue Service

Between March 1995 and August 1996, Liberty Investors Limited received dividends amounting to R156 831 000 from its wholly owned subsidiary, DGI Holdings (Pty) Ltd. These dividends were capitalised by transferring part to share capital and part to the share premium account, and capitalisation shares were issued to shareholders. On 5 July 1999 the company was placed in members’ voluntary liquidation and, during liquidation, declared a further dividend of approximately R5.565 million. SARS levied secondary tax on companies (STC) on the basis that the earlier R156 831 000 constituted profits of a revenue nature distributed on liquidation. Liberty Investors contended that the amount represented profits of a capital nature and was therefore exempt from STC under s 64B(5)(c) of the Income Tax Act 58 of 1962.

The appeal was dismissed with costs, including the costs of two counsel, and the assessment of secondary tax on companies by SARS was upheld.

The case clarifies the application of secondary tax on companies to capitalised dividends and confirms the overriding effect of statutory deeming provisions in tax law. It underscores that capitalisation of revenue profits does not necessarily convert them into capital profits for tax exemption purposes, particularly in the context of liquidation distributions.