By Jandre Robbertze
To what extent can you limit your tax liability by being creative with transactions and business structures, without running into trouble with the law?
In order to answer this question, one needs to consider the difference between permissible tax avoidance arrangements and impermissible tax avoidance arrangements as well as the difference between tax avoidance and tax evasion.
Section 80A of the Income Tax Act deals with the issue of tax avoidance as follows:
- Firstly, with regards to businesses: This section deems a particular arrangement as impermissible if it was entered into in a manner that would not normally be employed for bona fide business purposes OR if it lacks commercial substance, in whole or in part.
Section 80C refers to an arrangement that “lacks commercial substance” if it would result in a significant tax benefit for a party, but would not have a significant effect upon either the business risks or net cash flows of that party, apart from the tax benefit.
Secondly, in a context other than business: An arrangement is impermissible if it was entered into in a manner which would not normally be employed for a bona fide purpose, other than obtaining a tax benefit.
- In any context: An arrangement is impermissible if :
- it created rights and obligation that would not normally be created between persons dealing at arm’s length; OR
- it would result directly or indirectly in the misuse or abuse of the provisions of this Act.
Although it is still difficult to distinguish between permissible and impermissible tax avoidance arrangements, it would have been equally difficult to compile an exhaustive list of possible impermissible tax avoidance arrangements.
Classifying a transaction as an impermissible tax avoidance arrangement does not automatically equate to tax evasion.
For someone to be found guilty of tax evasion, there must have been an unlawful intention to wilfully deceive SARS (by means of fraud or deceit), either by misstating figures, or entering into simulated/ sham transactions.
Simulated/ sham transactions are so called because they are entered into in a manner calculated to mislead the tax authorities into and to conceal their true purpose or “true” transaction.
In the recent controversial judgment in SARS v NWK Ltd (2010), the Supreme Court of Appeal seemingly used the words evasion and avoidance interchangeably in trying to define the circumstances when transactions will be regarded as simulated.
The general consensus remains that the Income Tax Act is still the standard against which transactions should be measured.
Further points to note are as follows:
- under the common law, if two structures or transactions have the same economic result, a taxpayer is allowed to arrange his affairs or choose the structure or transactions that attracts the least amount of tax;
- if a transaction is classified as an impermissible tax arrangement, because it for instance lacks commercial substance, or was only entered into to gain a tax benefit, SARS can, for example, disregard a deduction that may have been given, and require that interest be paid on the amount of tax outstanding; and
- in instances of tax evasion, where taxpayers attempted to mislead SARS, the Commissioner is empowered to disregard the actual rights and obligations as created by a transaction and impose fines, imprisonment, or both. Furthermore, interest on the outstanding amount is payable, as well as an additional tax of up to 200% of the outstanding amount.