Latest / Tax Break: South African tax for professionals / Recent trends: be careful of the GAAR

Transcript

Recent trends: be careful of the GAAR · Tax Break: South African tax for professionals

• 0:11
  As the exhibitionist, we often get asked the question whether
• 0:14
  it's possible to make a transaction more tax efficient.
• 0:18
  Now I think in simple language we all know that that means can
• 0:22
  is there a way to pay less tax? Now there is case law to the
• 0:26
  effect where we look at the Duke of Westminster case where the
• 0:30
  the judge specifically said that taxpayers may arrange their
• 0:34
  affairs to pay as little tax as possible.
• 0:36
  And that case has been quoted in various South African cases.
• 0:42
  I think what taxpayers who want to do tax structuring just often
• 0:46
  for gate when they look at that case is what the judge said is
• 0:50
  that you may structure in the range your face in a way that
• 0:53
  you pay as little tax as possible, but it must all happen
• 0:56
  within the boundaries of the law.
• 0:59
  So our question for today that we are going to be looking at in
• 1:03
  tax break, your podcast for South African tax professionals
• 1:07
  and practitioners is what are some of these boundaries that
• 1:11
  you need to consider when you are structuring and planning
• 1:15
  transactions? Before we go to that, I would
• 1:19
  like to remind you to to write the podcast on your favorite
• 1:23
  platform. If you like the podcast to
• 1:26
  please subscribe for it. Then you can get notified of the
• 1:29
  new episodes every week. And if there are some of your
• 1:33
  colleagues who you think would also enjoy the podcast, please
• 1:36
  share the link to the podcast with them as well.
• 1:39
  Now there's a few are regular listeners would know that I
• 1:43
  always ask to send me an e-mail if you've got an idea for an
• 1:47
  episode. So I've got exciting news on
• 1:51
  that front. I've developed a podcast
• 1:53
  companion app where on the app you can send me your IDs
• 1:58
  privately or you can post them publicly.
• 2:00
  Your name wouldn't appear, but the idea would be there.
• 2:03
  And if it's posted publicly, then everyone else also goes to
• 2:07
  the app can give it the thumbs up to say, but I like this idea.
• 2:10
  I would also like to listen to an episode on it and that would
• 2:14
  then give me an idea as to are we should the next?
• 2:18
  What should the next few episodes be?
• 2:21
  So go and have a look at it. The app is at the link text dot
• 2:25
  pvz dot Co dot ZI slash app So app.
• 2:31
  You are of course still welcome to send me an e-mail as well.
• 2:33
  My e-mail address is in the show notes.
• 2:35
  If you've got any questions or you need tax advice, then just
• 2:39
  pop me an e-mail, right. So back to our question, what
• 2:44
  are the some of the boundaries that you need to consider when
• 2:46
  it comes to tax planning? So I guess if we look at the the
• 2:51
  whole spectrum of of boundaries or anti avoidance type of
• 2:57
  provisions on the one extreme these a principle of substance
• 3:02
  over form or simulation. It's not limited to tax.
• 3:06
  It actually applies in other areas of law as well.
• 3:09
  That basically says that if you if you trace up a transaction to
• 3:14
  look like it is something, but your true intention is something
• 3:19
  else, then the courts will give effect to your true intentions.
• 3:22
  So there's an element of dishonesty which makes it quite
• 3:28
  serious transpiration. If you, if you're looking at
• 3:33
  something where you are purporting the transaction to be
• 3:36
  one thing, but you actually intend for it to be something
• 3:40
  else, you disguise it as something else.
• 3:42
  So that's on the one extreme, the substance over form where
• 3:45
  it's, as I say, there's an element of dishonesty involved.
• 3:49
  On the other side of the anti avoidance spectrum, you've got
• 3:53
  specific anti avoidance rules, like for example, the difference
• 3:56
  stripping rules, where it's the rule in the legislation that's
• 4:01
  targeting specific type of avoidance arrangements that you
• 4:05
  need to consider. Now somewhere in the middle if
• 4:09
  you are looking at the transaction that's not good by a
• 4:11
  specific anti avoidance rule where you haven't disguised it
• 4:16
  as something else, you've we find the guard, the general anti
• 4:20
  avoidance rules. So those are rules that we find
• 4:23
  in sections 80 capital A to 80 capital out of the Income Tax
• 4:28
  Act. And this is one of the key
• 4:31
  boundaries or the key provisions that would set boundaries on
• 4:34
  what you can or can't do from a tax efficiency structuring
• 4:38
  perspective. Now, why are we talking about
• 4:42
  the God now? It's not a new provision.
• 4:45
  It's been around for for many years.
• 4:48
  But I think there is a recent trend if we look at the cases
• 4:52
  coming before the courts that show us that such is applying
• 4:56
  the guard now there's four cases.
• 5:00
  I'm quickly going to run through them, but not through the
• 5:02
  detail. I think again, if we want to go
• 5:05
  through the detail, each case would probably need an episode
• 5:08
  or more on their own. So there was an apps that case
• 5:11
  that went to the Supreme Court of Appeal.
• 5:14
  It dealt with quite a complex structure that had cross-border
• 5:19
  preferences in it, loans coming back into South Africa.
• 5:23
  And the the the focus on of that, that that case was really
• 5:29
  it was on a from a procedural perspective dealing with the
• 5:32
  notices and what should they shouldn't be in the notice.
• 5:37
  Then there was a busy J case. It was a Tax Court case that
• 5:42
  where the judgment was published in May last year that dealt with
• 5:47
  the sale of shares and the resulting capital gain.
• 5:50
  Um, that if we look at the overall structure, it seems as
• 5:55
  if the capital gain wasted in a, in another entity rather than
• 5:59
  the beneficiary of, of the trust, we, it would have been
• 6:05
  subject to capital gains tax. It, it wasn't.
• 6:08
  And the focus of that case was really on the adequacy of
• 6:11
  Sasha's reasons for applying the guard.
• 6:15
  Then September last year, September 2025, there was
• 6:19
  another Tax Court case. So with these Tax Court cases
• 6:23
  being anonymised, the tax payer was called Tax Payer G.
• 6:27
  It involved the use of SDC credits and then also the
• 6:32
  possible recharacterization of what should have been fees or
• 6:36
  remuneration into tax exempt dividends.
• 6:40
  And I think what if you look at the the tax payer G case, what
• 6:45
  makes that quite an important one is that case actually
• 6:48
  focused on the substantive provisions of the GAR.
• 6:52
  So if you want to look at at case law that deals with those
• 6:57
  provisions, that is definitely a case to look at.
• 7:00
  And then more recently, the last one in the line of cases is the
• 7:04
  Erasmus case, Supreme Court of Appeal case that were where the
• 7:08
  judgment was published in March 2026.
• 7:12
  Again, it involved the use of STC credits and with with art.
• 7:18
  Then disallowed that and and assist forward issued the
• 7:23
  dividends tax assessment. The focus of that case was again
• 7:27
  where the SASH could post assessment go and change the
• 7:31
  reasoning that they relied on to apply the guard.
• 7:34
  So a lot of these cases are still quite focused on the
• 7:39
  procedural side of it. Now before we go into and
• 7:43
  discuss what the guard is all about, because that's really
• 7:46
  what I want to to get to in today's episode, is to talk a
• 7:50
  bit about what is the guard about?
• 7:54
  What are the requirements and what should you be looking out
• 7:56
  for if you are dealing with something that could potentially
• 8:00
  be subject to the guard. But before we do that, I think
• 8:04
  it is necessary to go into the history and the context of the
• 8:08
  provision a bit. So the goal was previously, it's
• 8:11
  been in the Income Tax Act for a long time and it was previously
• 8:15
  included in Section 103, subsection 1.
• 8:18
  And there's a whole body of case law on on that car.
• 8:23
  Now, there were some perceived weaknesses and shortcomings in
• 8:27
  that provision and it was replaced with the current
• 8:30
  version of the guitar in 2006. And I think the, the important
• 8:36
  part of these cases that we are now seeing is that until
• 8:39
  recently, there wasn't that much case law on the new guard.
• 8:43
  But I think there is now a clear trend emerging to say, but
• 8:47
  there's clearly from, from cases before the courts, we can see
• 8:50
  that Sasha is applying the the, the guard.
• 8:53
  As I said, not all these cases deal with the substantive
• 8:57
  elements of the guard. Some are procedural, but the
• 9:00
  fact is they show us that's artists applying the guard.
• 9:04
  And I think in that light it's important to understand, even if
• 9:09
  it's only at a very high level from a podcast like this, to
• 9:12
  understand. But when does the guitar come
• 9:14
  into play? Now the guard itself is actually
• 9:19
  a very complex provision. I the privilege of updating our
• 9:24
  chapter in the Silk textbook that I'm one of the authors on
• 9:28
  last year. And the more work and research
• 9:31
  are did on it, the more I realised.
• 9:33
  But there's a lot of nuances in, you know, you can interpret or
• 9:37
  apply that provision. So the idea for today is not to
• 9:42
  go into all of those nuances. And I think they are also, to be
• 9:47
  honest, fairly fact specific as to how you can or can't argue or
• 9:51
  interpret the guard in the case of a specific set of facts.
• 9:56
  So what I want to to limit the episode to is to really
• 10:00
  highlight a few elements of the gore to to sort of indicate what
• 10:05
  the triggers are. If you for you to be able to
• 10:08
  know when do you need to go and look a bit deeper into the
• 10:11
  guard? Okay, so the guard has got 4
• 10:14
  elements at the very high level. The first one is that there must
• 10:18
  be an arrangement, that arrangement, there must be a tax
• 10:22
  benefit arising from that that arrangement.
• 10:26
  The solo main purpose of the arrangement must be to obtain
• 10:30
  the tax benefit. And lastly, they, they, they are
• 10:34
  certain tainted elements described in the legislation.
• 10:38
  So one of those tainted elements must be present.
• 10:41
  If all four of these things are ticked off, so you've got an
• 10:45
  arrangement, there is a tax benefit.
• 10:48
  The solo main purpose was to obtain the tax benefit and there
• 10:52
  is a tainted element present. Then Sash may apply the guard
• 10:58
  and we'll talk about what may apply that God would mean or not
• 11:03
  mean towards the end of the day beside.
• 11:06
  Okay, so just a few pointers on on each of these requirements.
• 11:10
  If we look at the term arrangement that's defined in
• 11:13
  Section 80, capital L and it's quite a wide definition.
• 11:17
  So it talks about any transaction operations, scheme,
• 11:21
  agreement or understanding. So it's not necessarily
• 11:24
  something that's documented and understanding could just be an
• 11:28
  understanding between parties as to what they will do or not do
• 11:32
  and important whether it's enforceable or not.
• 11:35
  So the term arrangement takes you very far and I think most
• 11:39
  transactions would be arrangements.
• 11:41
  So in many cases, that's not the distinguishing feature of an
• 11:47
  impermissible avoidance arrangement that's subject to
• 11:50
  the guard. Then if we look at the tax
• 11:53
  benefit, there's a definition to say that you, you must have
• 11:58
  through this arrangement, they must have been an avoidance,
• 12:01
  postponement or reduction of, of tax, which is a tax in terms of
• 12:07
  the Income Tax Act. Now, what it means to avoid,
• 12:11
  postpone or reduce attacks, Um, these, these case law under the
• 12:16
  old car on that. And essentially it means that
• 12:20
  you must be stepping out of the way of an anticipated tax
• 12:25
  liability. So doing the transaction or the,
• 12:29
  I think the tax event that you've got, if you would have
• 12:32
  anticipated the tax liability and now you are stepping out of
• 12:37
  the way of that, you are likely looking at something with the
• 12:40
  tax benefits. So an arrangement with a tax
• 12:42
  benefit would then be referred to as an avoidance arrangement
• 12:47
  in guard terms. The next taste is the the
• 12:51
  purpose taste, which basically says that the solo main purpose
• 12:55
  of your arrangement must then be to obtain the tax benefit.
• 12:59
  And whereas the previous car had a subjective test decide but
• 13:04
  look at the intention of the tax payer, the wording of the
• 13:08
  current car. I think there is some
• 13:11
  disagreement between commentators, but I think if we
• 13:14
  look at the tax payer G case, it's clear that way we probably
• 13:19
  are is that it's an objective test looking at the facts and
• 13:22
  circumstances to ask. But what would the, the, the
• 13:26
  solo main purpose of the transaction be with possibly
• 13:31
  still considering the subjective intention, a subjective taste of
• 13:35
  what the intention of the tax payer was.
• 13:38
  So it's, it's a combination of those two things to look at all
• 13:42
  the surrounding facts and circumstances and ask, but what
• 13:45
  would the solo main purpose be? There's also a presumption as to
• 13:49
  what the purpose would be in Section 80, capital G, that
• 13:53
  basically says that if there's a tax benefit, then it's presumed
• 13:57
  that the solo main purpose was to obtain that tax benefit, and
• 14:01
  the onus is on the tax payer to prove otherwise, which makes it
• 14:05
  very important to be able to prove.
• 14:08
  But why did you do this transaction in this way other
• 14:11
  than getting the tax benefit? And then there's the the tainted
• 14:17
  elements again. I think with those things, the,
• 14:21
  the more we go into them, the the more you realise.
• 14:24
  But there's a lot of nuance to this.
• 14:27
  Essentially what they are in a business context.
• 14:29
  If you've done the transaction that's not done in a manner
• 14:32
  normally employed for bona fide business purposes other than
• 14:36
  getting the tax benefit, or the transaction lacks commercial
• 14:40
  substance. Now there's a lot of detailed
• 14:42
  rules and provisions behind when a transaction lacks commercial
• 14:46
  substance, then that tainted element would be would be
• 14:51
  present. In a non business context.
• 14:53
  It is you've employed the transaction was carried out in a
• 14:57
  manner not normally employed for bona fide purposes other than
• 15:01
  getting the tax benefit. And in any context, if you've
• 15:05
  got the transaction that has created the rights and
• 15:08
  obligations that would normally not be created by this dealing
• 15:12
  under arm's length terms or you the transaction or arrangement
• 15:18
  misuses or abuses some provisions of the act, then a
• 15:23
  tainted element would be present.
• 15:25
  So I think as you can already see from just this quick
• 15:29
  overview, it's, it's highly fact specific whether the guard
• 15:33
  applies or not. And it it really depends on on
• 15:37
  the detail of your specific transaction.
• 15:40
  So if all four of these conditions are met, the guitar
• 15:43
  you've you've got an impermissible avoidance
• 15:46
  arrangement. And the effect of that we find
• 15:50
  in section 80, Capital B that says that the Commissioner may
• 15:55
  then do a whole list of things which includes disregarding
• 15:59
  steps in the arrangement, combining parties,
• 16:02
  recharacterizing some of the receipts, accruals or
• 16:05
  expenditure, or determine the tax broadly as if the
• 16:09
  arrangement was not entered into or as if the in a way that the
• 16:14
  Commissioner deems appropriate. Had it not been for this
• 16:17
  impermissible avoidance arrangement from a procedural
• 16:21
  perspective, how would you know if such is supplying the guard?
• 16:25
  Section 80 Capital J gives us the process and it basically
• 16:30
  tells you that if such intends supplying the guard, they need
• 16:34
  to issue a notice giving reasons and the tax payer must be able
• 16:38
  to respond to that. So this Section 80 J notices
• 16:42
  where a lot of the action in the case law is currently about and
• 16:48
  then from the other consequence, so should obviously go and
• 16:53
  determine your tax in under Section 80 B.
• 16:57
  But the other consequence that flows from Sasha applying the
• 17:00
  GAAR is that you are looking at an understatement penalty of 75%
• 17:05
  full impermissible tax avoidance arrangements.
• 17:10
  So I think if we can perhaps summarise what to to take out
• 17:16
  from today's episode is that the tax payer has the right to
• 17:21
  structure their affairs to pace little taxes possible.
• 17:24
  But there are some clear boundaries in the the law aimed
• 17:29
  at I, at these stops of transactions that include
• 17:34
  simulations, substance over form specific anti avoidance rules
• 17:39
  and in the guard. And I think if we can perhaps
• 17:44
  summarise, the guard is you need to, at least as a professional
• 17:47
  or tax practitioner, know these triggers well enough to identify
• 17:52
  them when you are possibly looking at something like this
• 17:55
  to know when to go and look a bit deeper.
• 17:58
  That's it for today's episode. And as always, I just want to
• 18:02
  remind you that nothing in this episode is intended to be tax
• 18:06
  advice. The podcast is for information
• 18:08
  purposes only. Until next time, goodbye.