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1. I recently attended a Law Society Seminar on the changes proposed to Section 103(1) by SARS dealing with “impermissible” tax avoidance schemes. The view was that there was no such thing as “impermissible”. Tax avoidance is legal, evasion, illegal and the critical step is to be able to distinguish the one from the other. SARS believes its additions to the Section make the analysis easier by adding “red flag” definitions of what you will find whenever its evasion. It’s in a way asking someone to define pornography and getting the reply, “I can’t but I will tell you when I see it!”
2. At present a scheme could be hit by the Section only if it is carried out “solely” or “mainly” for the purposes of a tax benefit. Now it only has to be “one of the main purposes”. Presently, it’s the subjective view of the taxpayer as to whether one of the main purposes was in fact to avoid tax but an objective test is now suggested “by reference to the relevant facts and circumstances”. Presumably however this is exactly how a Court comes to a decision! SARS has introduced this requirement to deal with the observation (contained on page 44 of 76 tightly typed pages in SARS discussion paper) that:
“In essence . . . a taxpayer could with impunity enter into a transaction
with the (subjective) sole purpose of avoiding tax provided that there
was no (objective) abnormality in the means or manner or in the rights
and obligations which it created. Conversely, a taxpayer could with
impunity enter into a transaction which was objectively ‘abnormal’
provided that he did not, subjectively, have the sole or main purpose of
tax avoidance”.
3. The next step to determine whether it’s an “impermissible” scheme, is to see whether it was entered into on an arms length basis or for bona fide business purposes i.e. basically for a normal commercial reason. SARS poposes a host of new hallmarks or tests. These include “any circular flow of cash between parties” … “the participation of any tax indifferent party in that arrangement.” For the most part of these tests would apply as a matter of common sense. However the problem with these various tests is that a simple transaction might well constitute “impermissible” tax avoidance. Take a person who has invested his monies in an interest bearing account who decides that he has had enough of paying income tax on such interest, and withdraws the money, investing on the stock market and thereafter receives tax free dividends. Clearly here for better or worse the sole purpose (not just one of the main purposes) was to avoid tax. It is a transaction which has the effect of avoiding tax and it was done in a manner which would not normally be employed for bona fide business purposes. A number of red flags are also present The conclusion was that the investor cannot be taxed because he receives dividends which by definition are tax free and that is the end of the story.
4. A balanced analysis was given by a Hefer JA in 1999 when he noted,
“However, it is often said … that there is no equity in tax legislation … nor, I would add, complete rationality … The inequity of levying tax on income which will only be received in future is inherent in the system of receipts and accruals, which has been with us for many years. As long as the system prevails inequitable results cannot always be avoided. Of course, the Act must be interpreted and applied in the least onerous manner which its wording allows. But, if the wording is clear, it must be applied however harsh the result might be. The taxpayer’s remedy is to arrange his affairs, so far as he is able, so as not to attract these results”.
5. Who is SARS or I to quarrel with this view!
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