S.Africa: When does tax avoidance apply

By ENSAfrica

Groups of companies often wish to restructure or rationalise their operations. This generally involves a transfer of companies and/or assets between various entities. There are many commercial drivers for such transactions.

There are also a variety of ways in which the group can achieve its commercial goals. Depending on how the transactions are structured, the tax effects will be very different. There will be tax-efficient ways in which to achieve the group’s commercial goals and there will be tax-inefficient options which achieve the same commercial result.

Against this background, it is then necessary to apply South Africa’s anti-tax-avoidance provisions. In simple terms, there are two sets of rules which need to be considered. First, the statutory anti-tax-avoidance provisions contained in section 80Al of the Income TaxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... Act; and second, the common law provisions relating to simulated transactions.

In respect of the statutory rules, the principle that a taxpayer may arrange his or her affairs in a tax-efficient manner was confirmed in the case of Commissioner of Inland RevenueTax authorities are fundamental institutions within government frameworks, overseeing tax assessment, collection, and administration. Their operations ensure that tax laws are enforced and public funds are collected efficiently. This article delves into tax authorities' purpose, responsibilities, and structure, offering insights into their essential role in supporting government functions and economic stability. What is a Tax Authority? A tax authority is... v Conhage. (Pty) Ltd. In this case, the taxpayer required funding. It raised the funding through a sale and lease-back transaction with a bank.

The Supreme Court of Appeal found that “even if the particular type of transaction was chosen solely for the tax benefits, it would be wrong to ignore the fact that, had Tycon not needed capital, there would not have been any transaction at all. Tycon did not approach First Corp in order to alleviate its tax burdenTax liability represents the total amount of tax owed by an individual or business to a tax authority, whether local, national, or international. This obligation arises through various forms of income, profits, or transactions subject to taxation laws and regulations. Understanding tax liability is essential for compliance and efficient financial management for corporations and individuals. It influences how businesses structure...: it did so because it was in need of capital and this remained the main purpose of the transactions”.

This means that, in terms of South African tax lawTax laws form the backbone of any nation’s revenue system, setting the rules that govern how individuals and corporations contribute financially to support government functions. These laws define the types of taxes, the applicable rates, and the regulations regarding payment and compliance. They also outline the rights and obligations of taxpayers, ensuring a balanced and fair approach to funding public..., provided the purpose of the taxpayer in entering into the transaction was to achieve a commercial result (and not to obtain a tax benefit), the taxpayer is free to enter into a tax-efficient way in which to achieve such commercial goal.

Then one needs to consider the common law doctrine of simulated transactions. In this regard the tax waters were muddied by the decision in the case of SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... v NWK Limited. This case seemed to introduce a requirement that, in order for a transaction not to be simulated, it was necessary to examine the commercial sense of the transaction, to test its real substance and purpose.

If a transaction lacked a commercial purpose then, in terms of this judgment, it was arguable that it constituted a simulated transaction. However, in the cases of Roshcon (Pty) Ltd v Anchor Auto Body Builders and Commissioner for South African Revenue ServiceThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... v Mariana Bosch, it was held that simulation is a question of the genuineness of the transaction under consideration. If it is genuine then it is not simulated and if it is simulated then it is a dishonest transaction, whatever the motives of those who concluded the transaction. It is clear from these latter cases that the simulation doctrine requires an element of dishonesty, disguise or deception. In the absence thereof, this doctrine cannot apply.

In applying this principle to genuine transactions, it is therefore not necessary for a court to test whether such transactions have a commercial purpose as suggested by the NWK case.

If a particular transaction is attacked by SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... using the simulation doctrine then the prescription rules do not apply. This means that SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... can go back to transactions which took place more than three years prior to their investigation. This also means that the interest bill on any revised assessment issued by SARSThe South African Revenue Service (SARS) is the official tax authority responsible for the administration and enforcement of tax laws in South Africa. It plays a crucial role in managing the country’s fiscal policy by collecting revenue, administering customs, and ensuring compliance with tax legislation. Established under the South African Revenue Service Act, No. 34 of 1997, SARS functions independently... may be significant given the time between the transaction and such revised assessment. Penalties may be added to the revised assessment. However, the legal principles are clear. Provided the taxpayer entered into the transaction with the purpose of achieving a commercial objective and the transactions were not disguised or dishonest, then the anti-tax-avoidance provisions/simulation doctrine should not apply.