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Looking beyond the headline: The Absa GAAR judgment explained | Absa Bank Limited and Another v Commissioner for the South African Revenue Service
In a recent decision, the Constitutional Court delivered a judgment in Absa Bank Ltd and Another v C:SARS that has significant implications for the application of South Africa’s General Anti‑Avoidance Rules (“GAAR”). Our team has previously published an article which takes a look at the judgment and its broader significance.
This follow‑up article by breaks down the court’s reasoning and highlights the key principles and practical considerations arising from the decision.
Absa Bank Limited (“Absa”) (and its subsidiary United Towers) subscribed for preference shares in PSIC Finance 3 and received tax exempt dividends on these preference shares. PSIC 3 then subscribed for preference shares in PSIC 4. PSIC 4 then made a capital contribution to a foreign trust. The foreign trust lent the funds to MSSA, Macquarie's brokerage entity in South Africa.
The foreign trust also invested in Brazilian government bonds and vested and distributed the income arising from the Brazilian government bonds to PSIC 4. Such interest income was exempt from South African tax in terms of the double tax agreement between South Africa and Brazil.
PSIC 4 was therefore not taxed on such interest income. PSIC 4 used the income arising from the interest on the Brazilian government bonds to declare and pay dividends to PSIC 3, which, in turn, declared and paid dividends to Absa Bank. These dividends were exempt from tax.
Absa launched a review in the High Court together with a request for a direction under section 105 of the Tax Administration Act (“TAA”) arguing that assessments by the South African Revenue Service (“SARS”) under the general anti tax-avoidance provisions in the Income Tax Act, 58 of 1962 (“Act”) (“”) in terms of which it re-characterised the tax exempt dividend income received by Absa from PSIC 3 as taxable interest income were flawed due to two legal errors. Firstly, that Absa could not be said to have been a party to the arrangement as it was unaware of the full structure, particularly the parts generating the alleged tax benefit and secondly, that Absa did not obtain a "tax benefit" from the arrangement both of which are requirements for the GAAR.
The High Court found these to be issues of law in respect of which it had jurisdiction and set aside the assessments (Absa Bank Limited v Commissioner for the South African Revenue Service 2021). SARS then appealed to the Supreme Court of Appeal (“SCA”).
The SCA held that the effect, purpose and normality of a transaction are factual questions. The dispute therefore did not constitute the exceptional circumstances required in terms of section 105 of the TAA. The High Court should thus not have granted a direction under that section and should not have entertained the review and therefore set aside the High Court’s orders.
The Constitutional Court granted leave to appeal to Absa and confirmed the High Court's jurisdiction under section 105 of the TAA, finding that the SCA erred in characterising the issues as factual. The remaining issues for determination by the Constitutional Court were whether the assessment should be set aside on review as a result of the alleged legal errors.
