If you’ve ever wondered whether it is legal to arrange your affairs to pay less tax, the tax court has just given us new insight, and it’s more nuanced than a simple “yes” or “no”. Company AF (Pty) Ltd v the Commissioner of SARS (“the case”) has taken another look at our General Anti-Avoidance Rules in terms of the Income Tax Act, or “GAAR”.
GAAR is the law allowing SARS to look into transactions it believes were designed purely to avoid tax. The case involved a taxpayer who restructured a shareholding using a dividend, followed by a share subscription, instead of simply selling the shares outright, resulting in much less tax payable as a result. SARS argued that this was an artificial scheme to avoid tax and the taxpayer argued it was simply a smart way to do a genuine, commercial deal.
Who Won?
The court accepted SARS’s arguments on the main issue, but the taxpayer walked away with some wins too. The court agreed with SARS that the arrangement fell within the realm of the GAAR, but it also confirmed something important that taxpayers have relied on for years: the “choice principle” in terms of the Conhage-case. Conhage confirmed that if the law gives you two ways to reach the same result, you may pick the most efficient tax route. The tax court did not discard this principle, and confirmed that it is still valid.
But Here’s The Catch
The judgment draws a sharper line than before and in effect held that it is not enough that the end result of your restructuring makes commercial sense. Every individual step, especially any step that exists mainly to save tax, needs to be part of a genuine commercial journey and is not just interposed for its tax effect. In this case, the court found that while the eventual sale had a genuine, commercial purpose, the dividend-and-subscription mechanism used to get there, served no purpose other than to save tax. This distinction sank the taxpayer’s case.
For taxpayers, business owners, and anyone doing estate or investment planning, this is the headline lesson: tax efficiency is still allowed, but each step in a plan needs its own honest commercial justification.
A Silver Lining on Penalties
Losing the GAAR argument did not mean that the taxpayer lost everything. SARS had also initially imposed a hefty understatement penalty, arguing the arrangement was deliberately abusive. The court disagreed and remitted the penalty entirely. The reason was based on the correct application of understatement penalties in terms of our Tax Administration Act considering the taxpayer’s behaviour, and not the tax avoided. The court drew a clear distinction between getting the tax law wrong and the taxpayer’s behaviour.
In this instance, the taxpayers had:
- fully disclosed the transaction to SARS as a reportable arrangement;
- not misrepresented any facts; and
- relied on specific and professional advice given at a time when this area of law was genuinely unsettled.
The court’s reasoning is a useful reminder for everyone: being wrong about a legal question is different from being dishonest or careless. If you’ve taken proper advice, been transparent with SARS and the law later turns out not to be in your favour, that shouldn’t automatically cost you a penalty on top of the tax bill (i.e. additional assessment).
Why This Matters Beyond One Court Case
The judgment also grapples with the relationship between the GAAR and more specific “dividend-stripping” rules introduced in our tax law. The court found that even before those specific “dividend-stripping” rules existed, the GAAR was already wide enough to catch this type of arrangement (or transaction). This means that newer, stricter rules in the law did not create a brand-new risk, they simply reinforced protections that, in the court’s view, already existed.
The Takeaway For The Rest of Us
You are still allowed to structure your affairs sensibly to reduce tax, but this case is a reminder that SARS and the courts are looking more closely at why each step in a transaction exists, not just whether the overall outcome looks legitimate. If you’re planning a significant transaction, restructuring a business, or doing estate planning, it’s worth getting advice that can show the commercial rationale for every moving part, not just the arrangement or transaction as a whole. It is important to note that Tax Court judgments are not binding and do not create formal precedent, but that they do carry persuasive value and help set the tone for the broader tax landscape.
We will be watching closely to see whether this matter proceeds on appeal to the High Court, i.e. a court of record whose rulings are binding.
