Page 778 - SAIT Compendium 2016 Volume1

CASE DIGEST 2013–2014
Concurring judgment delivered by Wallis JA on the NWK case
In the NWK case, it was held at para 55 that if the commercial purpose of the transaction was to achieve ‘... an object that allows for the evasion of tax or of a peremptory law ...’, then the transaction would be regarded as simulated. This judgment was the cause of much scrutiny and uncertainty among academics who held that the case may be interpreted to exclude the ratio decidendi of the Dadoo case and that it substantially broadened the scope of what may be regarded as simulation (ie contracts facilitating tax avoidance).
It was, in the current case, pointed out by Wallis JA that the Zandberg case is still the foundation of law relating to simulated transactions in that ‘... the court must be satis ed that there is a real intention, de nitely ascertainable, which differs from the simulated intention...’ and that this inquiry is fact-speci c for which no general rule can be laid down. The courts will therefore investigate the intention of the parties to determine if an agreement is simulated. It was further pointed out, as was held in the Dadoo case, that parties may arrange their transactions in such a manner as to remain outside the provisions of a statute.
At para 27, Wallis points out that whether a transaction would be regarded as simulated, depends on its genuineness. This would, in turn, depend ‘... on a consideration of all the facts and circumstances surrounding the transaction’. At para 30, Wallis JA provides a quote of Watermeyer JA which consolidated both the principles of the Zandberg and Dadoo cases in an attempt to distinguish between simulated and genuine transactions. The relevant part reads as follow:
‘A transaction is not necessarily a disguised one because it is devised for the purpose of evading the prohibition in the Act or avoiding liability for the tax imposed by it. A transaction devised for that purpose, if the parties honestly intend it to have effect according to its tenor, is interpreted by the courts according to its tenor, and then the only question is whether, so interpreted, it falls within or without the prohibition or tax.
A disguised transaction in the sense in which the words are used above is something different. In essence it is a dishonest transaction: dishonest, in as much as the parties to it do not really intend it to have, inter partes, the legal effect which its terms convey to the outside world. The purpose of the disguise is to deceive by concealing what is the real agreement or transaction between the parties. The parties wish to hide the fact that their real agreement or transaction falls within the prohibition or is subject to the tax, and so they dress it up in a guise which conveys the impression that it is outside of the prohibition or not subject to the tax. Such a transaction is said to be in fraudem legis, and is interpreted by the courts in accordance with what is found to be the real agreement or transaction between the parties.’ (own emphasis).
The courts would therefore distinguish between an honest transaction which was entered or so worded to avoid the provisions of a statute (ie tax) versus a transaction falling in the taxing provisions of a statute but disguised to make it appear as if it does not. In referring to the NWK case, Wallis JA conceded that with tax, the courts are required to apply the above principles in a different context as parties would ‘build a transaction’ in order to make use of different loopholes in tax legislation. These additions to a straightforward commercial transaction would normally add no value to the underlying transaction which would cause the courts to strip away the unrealistic elements in order to disclose the true underlying transaction.
Wallis JA (presumable preferring to the NWK case) reiterated that ‘... nothing said subsequently in any of the judgments of this court dealing with simulated transactions alters those original principles in any way or purports to do so’ and that ‘the court examines the transaction as a whole, including all surrounding circumstances, any unusual features of the transaction and the manner in which the parties intend to implement it, before determining in any particular case whether a transaction is simulated’.
The commercial purpose of the transaction is therefore only one of the factors that would be considered and the common belief, based upon the NWK case, that transactions structured to avoid tax would be classi ed as simulated is incorrect – the court will still investigate all of the surrounding circumstances of the transaction to determine if simulation is present.
23. SARS v Pretoria East Motors (Pty) Ltd (291/12) [2014] ZASCA 91 (12 June 2014)
Introduction
The taxpayer conducted business as a car dealership in Pretoria selling new and used vehicles. The South African Revenue Service (SARS) conducted an audit on the taxpayer in respect of its 2000 to 2004 years of assessment. As a result, SARS raised various additional assessments in respect of income tax under the Income Tax Act 58 of 1962 (‘ITA’) and Value-Added Tax Act 89 of 1991 (‘VAT Act’). SARS furthermore imposed punitive additional tax of 200%.
Facts
Before the Supreme Court of Appeal (hereinafter referred to as the ‘SCA’) there were numerous substantive issues in dispute between the taxpayer and SARS on appeal from the Tax Court. It is, however, important to note that the signi cance of the judgment relates to the approach that SARS adopted in respect of the audit and in raising the assessment and the SCA’s criticism thereof.
SARS mainly relied on s 82 of the ITA and s 37 of the VAT Act (now s 102 of the Tax Administration Act 28 of 2011) in that, where disputes are concerned, the burden of proof lies with the taxpayer. The present appeal was therefore approached on the basis that the onus was on the taxpayer to show on a preponderance of probability that the decisions of SARS against which it appealed were wrong (CIR v SA Mutual Unit Trust Management Co Ltd 1990 (4) SA 529 (A) at 538D).
The approach adopted by SARS was to examine the accounts and where a discrepancy was found that was not understood and for which, according to the SARS of cial, no adequate explanation was furnished, an assessment for additional tax, either income tax or VAT or in some instances both was raised.
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