What has the practice been?
Prior to some recent court cases, it was accepted that SARS would allow transactions involving tax avoidance if the transactions remained true to the agreement or contract that created them. In addition:
…then if both of these criteria applied, SARS could attack the transaction. These criteria were instituted by the 2006 amendments to the Income Tax Act.
Thus, I may enter into a transaction which gives me a tax break. If the transaction is in line with my intention, then this is acceptable to SARS, provided my main motive is not the avoidance of tax and, as per requirement 2 above, there is nothing abnormal about it.
SARS has wide powers to attack transactions it deems are not meeting these criteria, such as setting aside the transaction, denying deductions to the parties to the transaction etc.
What are the Courts saying?
Recent judgments have called this interpretation into question. One judge held that if the purpose of a transaction was to avoid tax, then the transaction is “simulated” (i.e. artificial), and the transaction moves from the realm of avoidance to evasion. It is thus liable to be attacked by SARS. If this judgment changes the rules by removing or diluting the requirement for “abnormality” in the transaction, it will considerably strengthen SARS’ position. Tax specialists have debated whether this judgement changes what the practice has been. More definitive case law is required which specifically addresses the 2006 amendments.
It is important to be extremely cautious if you are about to embark on a transaction which involves tax savings. Until the issue is resolved as to which interpretation applies, uncertainty will prevail. SARS are already using these judgments to attack transactions.
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