Abstract

This article considers the role that a so-called General Anti-avoidance Rule (GAAR) can or should play in changing the odds in a continuous battle between taxpayers and SARS as regards the parameter of permissible tax avoidance. Put another way, the question posed by the article is whether, or to what extent, the principles underlying the economic tax base can help to inform the application of the GAAR so as to guarantee fairness.
It is argued that any answer to this question is subject to one fundamental caveat. It is widely recognised that adopting a pure academic tax base is simply unfeasible and that the task for policy makers, therefore, is to devise a ‘second best’ solution, one that tracks that tax base as closely as possible but can work in practice. Amongst other things, this requires that the law identifies the correct taxable person; that it provides clear rules when realised income or gains should be recognised for tax purposes; that items and transactions are treated consistently; and that any deviations from the economic tax base are supported by clear policy considerations. Unfortunately, the article suggests, all too often the Income Tax Act (Act) falls short in these areas.
The ‘business purpose tests’ as used in several countries to identify impermissible tax avoidance are discussed. It is noted that the tests may look solely to the subjective purpose of the taxpayer, as was the case under section 103 of the South African Act, the objective purpose of the arrangement at issue, as in the case of New Zealand, or a combination of the two, as is currently the case under the South African GAAR.
The article notes that the degree of ‘business purpose’ required also varies. It ranges from the relatively high threshold required under the South African GAAR to the stringent New Zealand GAAR, which applies if an arrangement directly or indirectly has tax avoidance as its purpose and effect, but only if that purpose or effect is ‘not merely incidental’ to ordinary business or family dealings.