Tax avoidance – when does it apply?

Tax avoidance – when does it apply?

• 27 May 2021
• Corporate Tax
• Peter Dachs

Tuesday, 02 October 2018

Important:

This article is based on tax law for the tax year ending 28 February 2019.

Author: Peter Dachs (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 Tax 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 Revenue 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 burden: it did so because it was in need of capital and this remained the main purpose of the transactions”.

This article first appeared on ensafrica.com.

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