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The ABSA case: more on the GAAR · Tax Break: South African tax for professionals

0:11
A few episodes ago we spoke about the God, and now there's
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another case dealing with some of the substantive provisions of
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the guard. So that's what we'll be talking
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about today in this episode of Tax Break, your podcast for
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South African tax professionals and practitioners.
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2:25
So normally the podcast, I tried to make it not the technical,
2:30
not too long. But in for today's episode,
2:35
there's a, there's a case that's been in the news and that's made
2:38
some headlines. So I think it would be good to
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talk about the case a bit and share my views on what the
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possible broader impact could be.
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Unfortunately, I've I've just recorded the Afrikaans version
2:52
of the podcast too. So if you didn't know and you
2:56
want to listen to the Afrikaans version, there's a, there's an
2:59
Afrikaans one on Apple and Spotify too.
3:02
Tax break in Afrikaans and but that the, the episode is about
3:07
10 minutes longer than than the normal episodes.
3:11
But I do think that this case is quite complex and it hopefully
3:15
you find the, the, the long discussion helpful, right.
3:19
So let's get straight to it. The case is a guard case.
3:23
It's the Absa case. So it's one of the four cases
3:26
that I've mentioned in episode 73 as well that's now sort of
3:31
progressed to the another step in the in the process.
3:36
So I think it is important to understand the the the two
3:41
aspects that we are talking about understand what are this
3:46
case came about and what it is and isn't.
3:49
So what this guy's is, is initially when Sasha says or
3:55
when Sasha applied the guard to to APSA, part of the process of
4:00
applying the GAAR is that they must be a Section 80 J notice
4:03
that with that's issued and Absa was of the view that that
4:09
Section 80 J notice was legally flawed.
4:12
So apps are launched a review application to the High Court to
4:16
firstly set aside such as decision not to withdraw the
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flawed Section 80 J notice. And it seems like later on that
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application was amended to also then set aside the the
4:30
assessments that that float from this float Section 80 J notice
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the the High Court entertained the review and found that and
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and the ruled in Abscess favour. Sasha appealed to the Supreme
4:45
Court of Appeal, which ruled that the High Court shouldn't
4:48
have entertained the review and as part of five other tax cases
4:52
dealing with review applications to the High Court, Um, their
4:58
score there this case was and the review application was
5:01
considered by the Constitutional Court last year in in a batch of
5:08
cases specifically dealing with when the High Court with with
5:12
that heuristic action to review. If one looks at the provisions
5:16
of Section 105 of the Tax Administration Act, right.
5:20
So that review application was based on the fact that they were
5:24
that apps are argued that the that the Section 80 J notice was
5:30
legally flawed and there were two legal flaws or areas that
5:35
apps are alleged that Sash made. So because the Constitutional
5:41
Court found that the High Court had the jurisdiction to review
5:45
this the this specific judgment is now the Constitutional Court
5:49
dealing with these two legal questions.
5:52
So what's very important is it's not the normal process of
5:56
objection, appeal, going to the tax code and so forth.
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What it does seem to me to like, like it is the case if you look
6:06
at the at, at the judgment, there is mention of a Rule 31
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statement and of penalties being considered in in another
6:16
dispute. So it would seem to me as if
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there is a, a normal Chapter 9 dispute process that I'm not too
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sure if it's, if it's preceded or if it was perhaps, um, if
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it's about the pending, the outcome of what happens here, it
6:37
would go ahead or not. But it seems like there is a
6:41
another dispute process where possibly other aspects of of the
6:46
assessment and application of the goal could be considered
6:50
right. So I don't know, but it seems
6:53
like that's the case from from the judgment.
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Okay, so before we go into the the two legal errors that that
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the Constitutional Court had to then consider if we look at the
7:06
facts and what the transaction look like.
7:08
So apps are subscribed for preferences in an entity PSI PSI
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C3 a piece IC3 used that those funds to subscribe for
7:19
preference shares in peers. I C4 another South African
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entity piece. I see four it seems made a
7:27
capital contribution to an offshore trust, the D1 Trust and
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the D1 Trust then on length the money to Mrs. A which seems like
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it's the South African entity within the Macquarie Group and
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perhaps important here is it from from the from from the
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judgments in this court and the earlier courts.
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You get the impression that the the pressures that in which apps
7:57
are invested was a product that Macquarie introduced to Absar
8:02
right. So on that on lending there
8:05
would have been an interest payment by Macquarie to the
8:08
trust and from what I can see that interest payment the the
8:13
interest received by the trust was then exempt under section
8:17
101-H because the trust was a was a non resident.
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If that interest wasted in in back to to peace RC4, the which
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which is the PS was the capital the beneficiary or the the the
8:33
not that made the capital contribution.
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And that was the beneficiary of be of the D1 trust, which is and
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the resident that the the thin one H exemption would not have
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applied if one applied the conduit principle or Section
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25-B to A. So then within that trust, and
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it's not exactly clear how that was done there, the the, the
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interest from Mrs. A was swapped for interest in Brazilian
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government bonds, which then qualified for an exemption under
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the double tax agreement. Although it also seems again
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from the judgment as if whether it really qualified or not could
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be debatable now that interest from the Brazilian, Brazilian
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government bonds, if that wasted in a president, the exemption
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would still stand. So as a result of that swap, the
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interest that accrued to Peace RC4 now qualified for for
9:34
exemption in the hands of a resident.
9:38
And if one stands back a bit and you look at the overall effect
9:44
of this arrangement, sort of the the 2 ends of it, you've got the
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reduction from 4 South African entity that paid the interest
9:53
and that same money sort of flows on back to, to, to Epsom
9:59
in the form of exempt preferential dividend.
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So you've got the deduction while on the the the recipient
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side, eventually you've got exempt income.
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OK, So one can understand why Sasha was concerned about this.
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OK, what Sachin did, they applied the guard to Absa and
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remember EPSA was the subscriber for the preferences in issued by
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peers IC3 and the two legal questions that the
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Constitutional Court had to deal with.
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So and it was the the the judgment in principle was really
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limited to these two two legal questions because that that's
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this is the basis on which the review application was made to
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say. But the the a TJ notice was
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legally flawed is was absent even a party to this to this
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arrangement, this avoidance arrangement and did apps are
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gate the tax benefit and by implication good sash apply the
11:00
guard to ABSAR if it didn't get the tax benefit right.
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So it's an interesting judgment. The long one it goes.
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It exceeds I think 150 paragraphs and they said a
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majority judgment that was written by Judge Majeed and the
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minority judgment written by Judge Rogers.
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So the idea we are also already quite far in into the episode
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from a time perspective. So the idea is not to cover
11:30
everything that's in these 150 plus paragraphs of the judgment,
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but rather to highlight some of the aspects on that, that, that,
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that, that, that, that both of these judgments, how they dealt
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with the two questions that I think would is important to
11:50
understand the bigger picture. What I will do, I include it in
11:54
my, in my outline and the few notes that I've got some
11:59
paragraph numbers. So then you can, if you want to
12:03
go and read the, in my mind, the critical paragraphs, you can go
12:06
and look at them. So the first question was
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absolute, a party to the transaction or not.
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So EPSA allege that it subscribed for the preference
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shares with the understanding that this money would go to Ms.
12:21
A, but it wasn't aware of all the middle steps that happened
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in between the money going from Absar to MSA.
12:29
So Judge Majeed in paragraph 54 said that the term party must be
12:37
interpreted broadly. So it's objectively any person
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who forms part of the chain of transactions that constitute the
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arrangements, whether that party knew about all the steps or not.
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And then in paragraphs 56 and 60 the the code goes into why this
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is the correct interpretation. So what they say there is that
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if you don't interpret it this way, there is a risk that
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parties could willfully arrange to not know about the other
13:09
steps and in that way avoid the gore consequences that should
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follow. And if that happens, then the
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guard wouldn't achieve its purpose.
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So basically saying if an investment advisor offers you
13:26
good thing come with a product As for whatever reason to avoid
13:32
the tax the the guard not tell you what's happening inside the
13:35
box of this product and that would then that would then keep
13:40
you out of the way of the guard, although you would get the
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benefit. So that's really the court's
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reasoning there. What the the the majority
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judgment does say is in paragraph 58, whether you've had
13:53
knowledge of what happened there good possibly have an impact
13:58
elsewhere, for example, when you're looking at penalties.
14:02
And although I think again, if you look at how the penalty
14:05
table works, as soon as the the guitar has been applied, I
14:11
interpret that table to say, but then the penalties would follow.
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But I suspect that's possibly something that that if there's a
14:20
Chapter 9 dispute process going on, that might be addressed over
14:24
there. Right then their minority
14:27
judgment, so said Judge Majeed was of the view and the the
14:31
other 8 judges agreed that Absa was a party to the transaction
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because it formed part of the chain of transactions.
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It was supported to that chain. Judge Rogers on the other hand,
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paragraphs 119 and 132 said that the questions to to consider was
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firstly, what was the arrangement and secondly, why
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was it impermissible and in the context of what apps are did
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it's important to ask do what arrangement was absurd party.
15:03
So EPSA was a party to the first step, the last one where the the
15:07
dividence flowed back. But if they didn't know about
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the other steps, they couldn't have been a party to them.
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And if if one had to interpret it in any other way, so in other
15:20
words, the way that the majority judgment interpreted this, the
15:24
the outcome would be very unfair that results from that.
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Now, obviously I don't have the benefit of being part of the
15:33
whole build up to all of this knowing exactly what the the
15:38
arguments were that were advanced in the application and
15:42
in court. But I would have expected the
15:45
perhaps to be a bit more of a focus on which arrangements are
15:50
the avoidance arrangements. So in other words, the, the
15:55
concept arrangement is very broad.
15:57
So if I sell you goods, oi Ranger services, even something
16:00
as simple as that is an arrangement.
16:03
But an arrangement only comes within the, the, the realms of
16:06
the GAA if it is an avoidance arrangement.
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So they, I think they, they might have been something to
16:13
say. But although APSA was a party to
16:16
the arrangement, was it really a party to the avoidance
16:20
arrangement? So perhaps more of a focus on
16:23
the arrangement and then what the, the, the, whether whether
16:29
apps are supported or not. But it may be that that argument
16:35
was, was advanced or not. I I'm it's difficult standing on
16:40
the outside to say right. So that's the that's the party
16:46
question or the the to say, but was absurd party or not.
16:50
Then on the tax benefit question to cyber that apps are really
16:54
good the tax benefit. So what apps are argued is that
16:57
what it received was a preference dividend, which would
17:00
have been exempt in any event. And somewhere in this bigger
17:05
chain of transactions, somewhere someone else enjoyed the benefit
17:09
of having income being exempt that would not otherwise have
17:13
been exempt. So Sasha on the other end argued
17:18
that Episode was the eventual beneficiary of this benefit that
17:22
the Rose and therefore what Episode got was the tax benefit.
17:28
It's a very important statement, although I think the, the, IT,
17:35
it's, this appears a bit if if you look at the rest of the
17:38
judgment again, what Judge Manjeet said in paragraph 78
17:43
regarding the, the, the interpretation of Section 80
17:47
CAB, that provision empowers us to determine the tax
17:52
consequences for any party to an impermissible avoidance
17:56
arrangement. So in other words, if you are a
17:59
party to that impermissible avoidance arrangement, whether
18:02
you are the party that gets the that get the tax benefit or not,
18:06
such may determine the tax consequences for you.
18:10
So what they then also said is that this didn't really matter
18:16
because in the majority judgments view episode also got
18:20
the tax benefit. So the reasoning to as to why
18:25
apps are got the tax benefit that you will find in paragraph
18:28
79 to 96 of the majority judgment.
18:32
And what that that reasoning really says is that do determine
18:41
whether there's a tax benefit. The transaction must be stripped
18:44
off the avoidance features. So in previous case law under
18:49
the old car, the the the the taste for tax benefit is to say
18:55
with the F been tax but for this transaction.
18:59
So the courts in this instance, they interpreted this but for
19:04
taste. So what Judge Majeed said is
19:07
that the but for test is but for these avoidance arrangements or
19:13
these avoidance features, what would the outcome have been?
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And if you then strip the whole arrangement of the avoidance
19:20
features, they if if there is the benefit from a tax
19:26
perspective, then a tax benefit exists.
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So the court said that EPSA are the the the exempt preference
19:37
dividends were functionally or in substance equivalent to
19:41
earning taxable interest. And that's where apps are
19:45
derived the tax benefit either in the form of what they
19:49
received would have been taxable interest or it would have been a
19:53
lesser exempt dividend. So personally, and perhaps I'm
19:58
looking at the two technically, I'm struggling with that
20:01
argument a bit. Um, if you're saying what APSA
20:05
received on the preferential investment was functionally
20:09
taxable interest, in my mind that argument sort of goes into
20:14
the world of Section 8 E and 8 EA where you've got specific
20:20
anti avoidance rules that would target shapes with the
20:24
characteristics of date. So clearly these preferences
20:27
didn't fall into these rules and um, do to argue that what apps
20:35
are received in respect of the issues where, where was was
20:41
functionally really interest, I think in my mind sort of blurs
20:47
the line between the guitar and Section 8 E and a DA.
20:50
Or it could make the, it could make very interesting arguments
20:54
for preferences that do not fall into a DA to possibly still be a
20:59
bit of a problem. I don't know.
21:01
I don't think that was necessarily what was intended
21:04
here. The the one that I think in
21:08
following the overall logic and reasoning of the, the the
21:12
majority judgment would make more sense was to say, but at
21:17
PSI C4, the trust paid tax on on the amount that was now
21:22
converted to being exempt. They would have been lesser
21:25
dividends for Absa. So that's why Absa benefited
21:28
from all of this. And it seems that that's really
21:31
sort of the reasoning way we way the majority judgment go,
21:36
although there is this, I'm not sure if one can call it the age,
21:41
but sort of aging the argument by saying it's either the lesser
21:44
dividend or functionally really something that should have been
21:49
taxable interest if we look at the minority judgment.
21:53
So Judge Rogers, paragraphs 134 to 137 and it takes the position
22:00
that the the tax benefit is it's a defined term.
22:06
So it's it really refers to to to a liability for tax under the
22:14
act that was reduced and and the tax benefit to determine whether
22:19
these tax benefit the but for test is to say you need to
22:23
compare what actually happened to a plausible counter fact I'm
22:29
and then see what the tax difference would have been for
22:32
the parties involved. So the step that could plausibly
22:36
have been different is that the interest from the loan may not
22:40
have been converted into the Brazilian government bond
22:44
interest. And if you then apply this test
22:49
the the benefit. So in other words, the parties
22:52
whose tax liability would be less would have been either been
22:56
the D1 trust or Peace I C4 because they received interest
23:01
that was now exempt that would otherwise or but for this swap
23:06
between the the the interests and the Brazilian bond interest
23:10
would have been taxable. But on that definition, it's not
23:14
Absa. And linked to all of this, Judge
23:18
Rogers also states his view that the that is of the opinion that
23:24
only a party who obtained the tax benefit, only that part,
23:29
these tax position should be adjusted under Section 80
23:32
Capital B. So at an Absa level, it was
23:37
really just how much dividends that would absolve received.
23:40
But that's a, that's an economic benefit.
23:42
That's not a tax benefit. There's no, there was no
23:45
reduction in absolute tax liability because the dividends
23:48
that they received would have always been tax free, right?
23:52
So hopefully that gives you a bit of a perspective on the 2 on
23:57
the two legal questions or the legal flaws that the court
24:00
considered. What can we take home from this?
24:03
I think 4 points in my mind. Firstly, as the title of the
24:08
previous episode was be careful of the guard.
24:11
Be very, very careful of it, especially if you're looking at
24:13
something, any type of transaction arrangement that
24:17
looks a bit aggressive or that has got this flavour of a tax
24:21
arrangement, tax scheme to it. Be very careful of the car.
24:26
Secondly, who can be considered the party?
24:28
I think there's there's this judgment by the Constitutional
24:32
Court tells us that we need to interpret the IT.
24:35
It could be any person who's part of the chain of
24:38
transactions. And so you may be a party to a
24:43
transaction that although you, you don't think you're getting
24:48
the, the direct benefit, being a party to it would already
24:52
possibly put you at risk. Thirdly, I weigh the adjustment
24:56
can be made. So it's not necessarily the
24:59
party who gets the, the tax benefit.
25:02
I think there is some authority for that in in this judgment.
25:06
So if you are not, perhaps it's not your tax liability being
25:10
reduced, but you are get you're sharing in the economic benefits
25:16
somehow you may possibly be at risk of the guard being applied,
25:19
although you it's not your tax liability being reduced.
25:24
And then lastly, the concept of tax benefit may be wider than
25:30
you think. So even if you if you don't
25:33
think it's your tax liability being reduced, if you share in
25:37
the economic benefit of that, you may actually be deriving a
25:40
tax benefit or they they could be any interpretation based on
25:45
this judgment that you are that you are deriving some form of a
25:49
tax benefit. Right.
25:51
So that was a mouthful and long episode.
25:53
I hope that you found it useful. Just a quick reminder, it's
25:57
always nothing in this episode is intended to be tax advice or
26:02
a replacement for fact specific tax advice.
26:04
Until next time, goodbye.