Back in 2017, self-storage group Stor-Age bought a smaller rival, Storage RSA, in a deal built to keep the tax bill down. The Cape Town tax court has now ruled that the structure was an impermissible way to avoid tax, siding with the South African Revenue Service.
The four-step deal
On paper, the transaction ran in careful steps. Storage RSA declared a large dividend of about R275m; Stor-Age bought new shares for R280m, taking almost the entire company; Storage RSA used that money to pay the dividend; and the original owners then sold their old shares for just R1,000. Because the cash reached shareholders as dividends rather than a sale, none of them declared a capital gain, treating the money as tax-exempt. The taxman did not buy it, ignoring the dividend and share steps and taxing the deal as if the shares had simply been sold at full value.
Why it matters beyond one deal
The court agreed the arrangement "cheated the fiscus", noting that a direct sale would have left the sellers in exactly the same position, minus the tax saving. The judge added that where the only difference between doing something directly and through a mechanism is the tax result, the mechanism carries no real weight beyond that saving. The ruling turned on South Africa's general anti-avoidance rules, and independent coverage noted it involved seven interconnected corporate taxpayers built around the sale of a successful self-storage business. There was a silver lining for the taxpayers, though: the court threw out the 75% penalty the revenue service had added on top. Tax specialist Richan Schwellnus said the case showed taxpayers can no longer assume carefully drafted legal documents alone will survive the revenue service's scrutiny. Bowmans warned that while a tax court ruling does not bind higher courts, it is a clear signal that this kind of "buy shares, then buy them back" structure could be challenged, with far-reaching implications for how mergers and acquisitions are taxed.
For now, it is a tax court decision, and an appeal could still change things. But if it holds, plenty of dealmakers will be rereading their old structures, and rethinking their next ones.
