Shepstone & Wylie Attorneys' Johan Kotze and Jenifer Woker successfully defended Digicall Solutions (Pty) Ltd in its recent dispute against SARS. This Western Cape High Court case dealt with trafficking in tax losses.

Section 103(2) of the Income Tax Act, 58 of 1962 is an anti-avoidance provision which allows the Commissioner for the South African Revenue Service to disallow setting off an assessed loss or balance of an assessed loss against the company's income if certain requirements are met. It exists to strip away any tax benefit derived from trafficking in tax-loss companies where the loss is used for tax avoidance purposes. An example of this would be where one purchases a controlling shareholding in the tax-loss company and then diverts income into the company, not incurring any income tax liability on the new income until the existing tax loss had been offset. Section 103(2) can, however, in certain circumstances, be lawfully circumvented through comprehensive tax planning.

In this case, SARS assessed Digicall by disallowing the utilization of tax losses in terms of section 103(2). Cloete J acknowledged what Willis J said in ITC 1847: “…taking advantage of an assessed loss is not an inherent wrong. On the contrary, the advantages presented by such losses can influence strategic decisions which can save companies and turn them around to the obvious benefit of employees and the Revenue Service, among others. Each case must be decided on its own merits”'

Cloete J accepted that the 'trafficking' contemplated in section 103(2) must be determined with reference to the sole or main purpose of the 'traffickee', rather than the 'trafficker'. She further accepted that Digicall was always beyond section 103(2) because no income was set-off by it against the assessed loss pursuant to the change in shareholding that SARS assessed. The change in shareholding was too remote from the accrual of income.