Analyses: Tax avoidance: The new abnormality requirement in section 103(1) of the Income Tax Act

JurisdictionSouth Africa
Citation(1997) 9 SA Merc LJ 54
Published date25 May 2019
Date25 May 2019
AuthorKathleen van der Linde
Pages54-61
Analyses/Analises
Tax Avoidance: The New Abnormality
Requirement in Section 103(1) of the
Income Tax Act
KATHLEEN VAN DER LINDE
University of South Africa
The legal distinction between the avoidance and the evasion of tax is
trite. Tax avoidance involves using perfectly legal methods of arranging
one's affairs so as to pay less tax, whereas tax evasion involves
dishonesty, such as the falsification of accounts or returns (see David
Meyerowitz
Meyerowitz on Income Tax
(1995-1996) par 29.1; Alwyn de
Koker
Silke on South African Income Tax
(Memorial ed 1989) vol III
par 19.1).
This consensus on the legal nature of tax avoidance is contrasted by
diverging views on the morality of such avoidance. The moral
acceptability of tax avoidance is usually defended by comparing tax
avoidance with a respectable contest, stressing the adversary relationship
between a taxpayer, trying to protect his property, and the revenue
authorities, attempting to deplete the taxpayer's pocket by collecting as
much tax as possible (see
Ayrshire Pullman Motor Services & DM Ritchie
v IRC
[1929] 14 TC 754 at 763-4). In
The Commissioners of Inland
Revenue v His Grace the Duke of Westminster
([1936] AC 3), the House of
Lords held that a taxpayer was free, within the limits of the statute, to
arrange his affairs so as to attract less tax. At the other extreme, tax
avoidance is regarded as an evil because by escaping his fair share of the
tax burden, the taxpayer forces the State to recover the lost revenue by
increasing taxes on other taxpayers (see
Commissioner of Taxes v Ferera
1976 (2) SA 653 (RAD) at 656F and the English cases referred to at
656A—E).
A court's view of the acceptability of tax avoidance may well influence
its interpretation of anti-avoidance provisions in tax legislation. It may
even lead to judicial activism, as happened in the United Kingdom. The
United Kingdom has no statutory general anti-avoidance measure, but
the courts eventually intervened and developed a 'substance over form'
approach. This approach, formulated by the House of Lords in
WT
Ramsay v Inland Revenue Commissioners
([1982] AC 300), basically
involves disregarding sham transactions. In
Furniss (Inspector of Taxes)
v Dawson
([1984] 1 All ER 530) the principle was extended and the House
54
(1997) 9 SA Merc LJ 54
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