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SARS is fighting aGAAResively against “impermissible tax avoidance arrangements”: Considerations for taxpayers when entering into any form of transaction

Despite the crippling effects of the COVID-19 pandemic, the tide has turned and the South African Revenue Service (“SARS”) has collected ZAR1.884.9-billion in 2021/2022, 25.1% more than the previous year. Commissioner Kieswetter submitted that the revenue collection came through the issuing of assessments and tax disputes, and SARS’ recent successes in court are indications of their investigative prowess and them truly warming up to continuously deal with delinquencies.

What are the prospects of SARS attacking tax avoidance arrangements?

There is currently a dearth of reported cases on the General Anti-Avoidance Rules (current “GAAR”) reflected in sections 80A to 80J and 80L of the Income Tax Act, 1962 (as amended) (“ITA”), which applies to arrangements entered into on or after 2 November 2006.

In fact, the interpretation and application of the current GAAR is yet to be adjudicated by our courts. In our experience, these matters often do not see the light of day because of the enormous amounts involved (including penalties and interests) and because of Tax Court appeals being settled at the footsteps of the Tax Court.. However, given the recent pronouncements by Commissioner Kieswetter regarding tax collections, it would not come as a surprise that SARS may shut its doors for settlement and rather seek judicial clarification on the current GAAR, provided that the particular case is appropriate for that purpose.

Therefore, if parties enter into transactions where, in the view of SARS, there may be a tax avoidance motive, this will likely lead to SARS invoking its wide, but not unfettered, information gathering powers and may eventually result in adverse assessments and a tax dispute.

In order to limit SARS’ wiggle room in attacking arrangements taxpayers entering into arrangements should:

  • Seek professional legal and tax assistance to structure the transaction and prepare the underlying documentation
  • Ensure that the purpose of the various parties to the transaction is not to obtain the relevant benefit
  • Properly understand the contents of the agreements
  • Genuinely intend to enter into the arrangements supported by the agreements and related transaction documents
  • Ensure that the agreements and all correspondence between the parties and its founders, and the transaction and legal advisors support the parties’ intention or purpose for concluding the transactions

SARS will often assess and challenge a purported impermissible tax avoidance arrangement on two bases, namely the “substance over form” or “simulation” doctrine, and in the alternative, the current GAAR reflected in sections 80A to 80J and 80L of the ITA. A taxpayer in disputing SARS’ assessment should be mindful of the extent of the two aforesaid bases, but also understand the difference between them.

Simulation doctrine vs the current GAAR

The aim of the doctrine of simulation, being the general power of courts in all commercial contexts, is to ascertain what the true intention is to what the parties have agreed, and the court’s powers are limited thereto. The current GAAR, on the other hand, applies arguably to genuinely intended transactions which meet the various requirements of an “impermissible avoidance arrangement”, and SARS has far more incisive powers in this regard.

What is the current position with regard to simulation?

The judgment in Sasol Oil (Pty) Ltd v C:SARS [2019] 1 All SA 106 (SCA) is the latest in a line of authorities that has served to settle the controversy which ensued following the judgment in C:SARS v NWK Ltd 2011 (2) SA 67 (SCA). The position with regard to the simulation doctrine is now once again clear:

Firstly, the fact that a taxpayer has followed professional advice in minimising its potential exposure to a tax liability is not sinister. The courts will not interfere, provided that the transaction has a legitimate commercial purpose and that the minimising of the anticipated tax liability is not the raison d’être of the transaction concluded after receiving such advice.

Secondly, courts will interfere and categorise a transaction as a sham or simulation where the parties have dishonestly purported to perform in terms of the agreement between them, when in truth the only objective of such agreement was to disguise the true purpose, which could be the avoidance of a tax that would otherwise have been payable. In other words, the parties did not genuinely intend to bind themselves to the terms of the agreement.

The same cannot be said of the yet to be tested current GAAR

Since its amendment in 2006, no cases have been brought before the courts to judicially clarify and test the efficacy of the current GAAR. Section 80A of the ITA has four requirements for an arrangement to be characterised as an “impermissible tax avoidance arrangement”:

  • An “arrangement” is entered into or carried out
  • It results in a “tax benefit”
  • Any one of the “tainted elements” is present
  • Its sole or main purpose is to obtain a tax benefit

Essential to the current GAAR are the “tax benefit” and “purpose” requirements.

The “tax benefit” requirement

Trollip JA said in Hicklin v CIR 1980 (1) SA 481 (A) that “the ordinary meaning of avoiding liability for a tax ... is to get out of the way of, escape or prevent an anticipated liability” which “means a liability for a tax that the taxpayer anticipates will or may fall on him in the future”.

This was also described (in ITC 1625 59 SATC 383) as the so-called “but for” test which was recently confirmed by the High Court in Absa Bank Limited v C:SARS (21825/19) (11 March 2021). SARS has been granted leave to appeal the Absa case directly to the Supreme Court of Appeal and the appeal should be heard in the latter part of this year.

The “purpose” requirement

Once SARS has proved that the arrangement resulted in a tax benefit, the onus shifts to the taxpayer in that section 80G(1) of the ITA presumes that the arrangement was entered into or carried out for the sole or main purpose of obtaining a tax benefit, unless and until the taxpayer proves otherwise.

There is a well-established principle known as the “choice principle” which was introduced into South African law by CIR v Conhage 61 SATC 391 and was also referred to by the Supreme Court of Appeal in the Sasol Oil case. This principle is well-entrenched in South Africa’s constitutional democracy. The “choice principle” essentially provides that a taxpayer is entitled to structure a transaction in a manner which results in the least tax liability. If, for example, the same commercial result can be achieved in different ways, a taxpayer may enter into a transaction which does not attract tax or attracts the least amount of tax.

There is, however, a bone of contention between literati, taxpayers and SARS as to whether the purpose requirement warrants a subjective or objective inquiry. Some argue that the probabilities of the taxpayer’s ipse dixit should be tested against the facts and circumstances, as was the case with the now repealed section 103(1) of the ITA (in other words, the subjective inquiry). Others argue that the court should not focus on what the taxpayer says his, her or its intention was, but whether it could be said that, regard had to the relevant facts and circumstances, tax avoidance was the sole or main purpose of the arrangement (in other words, the objective inquiry).

In our experience, SARS favours the objective inquiry. This is so despite the fact that SARS conceded in a published document, entitled Tax Avoidance and Section 103 of the Tax Administration Act, 1962 (Act No. 58 of 1962) – Revised Proposals, that it was never the intention to prevent a taxpayer’s explanation of the reasons for an arrangement, but the intention was to ensure that the taxpayer’s statement of intent be rigorously tested against the facts and circumstances. In other words, according to the Revised Proposals, the threshold test under the purpose requirement remained unchanged and reinforced existing precedents.

Report or not to report?

A further consideration is whether the arrangement entered into (or elements thereof) by a taxpayer constitutes a so-called “reportable arrangement”, as set out in sections 34 to 39 of the Tax Administration Act, 28 of 2011 (as amended) (the TAA), which statutorily oblige a “participant” to an arrangement to report the details of the arrangement to SARS.

What constitutes a “reportable arrangement” is extremely wide and includes arrangements listed by the Commissioner in a public notice as reportable, as well as arrangements in terms of which a person derives a tax/financial benefit, or the arrangement has the characteristics (or substantially similar characteristics) as the “tainted elements” referred to in the current GAAR.

This too requires the careful consideration by taxpayers and the procurement of professional legal advice of experienced tax lawyers whether the arrangement is reportable or not, and if it is reportable, how one should report the arrangement. This is so especially in circumstances where “reportable arrangements” include characteristics of arrangements that may be subject to the current GAAR. The wording and contents of the reportable arrangement will undoubtedly come across of the desk of the SARS official assessing the relevant taxpayer.

Now that SARS is showing its teeth by eradicating transactions that lack commercial substance, do not attract tax, or attract the least amount of tax, taxpayers would be wise to consult with experienced tax lawyers before concluding or entering into any form of transaction. This will ensure that arrangements are structured in the most tax efficient manner and are given a stamp of approval so that the transactions have the best possible chance of surviving scrutiny by SARS.

As the saying goes, nothing is certain in this world except death and taxes. It should not, however, be death by taxes!

Andries Myburgh

Tax | Executive


Emilé Cronje

Tax | Associate