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

• Jurisdiction: South Africa
• Citation: (1997) 9 SA Merc LJ 54
• Published date: 25 May 2019
• Date: 25 May 2019
• Author: Kathleen van der Linde
• Pages: 54-61

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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