Analyses: The Substance over Form Doctrine in Taxation: The Application of the Doctrine after the Judgment in Commissioner for the South African Revenue Service v NWK 2011 (2) SA 67 (SCA)

• Jurisdiction: South Africa
• Published date: 25 May 2019
• Pages: 112-131
• Date: 25 May 2019
• Author: Thabo Legwaila

Analyses

THE SUBSTANCE OVER FORM DOCTRINE

IN TAXATION: THE APPLICATION OF THE

DOCTRINE AFTER THE JUDGMENT IN

COMMISSIONER FOR THE SOUTH

AFRICAN REVENUE SERVICE v NWK LTD

2011 (2) SA 67 (SCA)

THABO LEGWAILA

Professor, Department of Mercantile Law, University of Johannesburg

I INTRODUCTION

‘Substance over form’ is a common law doctrine (‘the doctrine’) that

allows the courts to ignore the form of a disguised transaction to

examine the true nature of the transaction and attach adequate legal

implications to it (WT Ramsay Ltd v Inland Revenue Commissioners

[1982] AC 300; Dadoo Ltd & others v Krugersdorp Municipal Council

1920 AD 530 (‘Dadoo’)). The doctrine is based on a principle that Innes

CJ expressed in Dadoo (at 547) as a ‘branch of the fundamental doctrine

that the law regards the substance rather than the form of things — a

doctrine common, one would think, to every system of jurisprudence

and conveniently expressed in the maxim plus valet quod agitur quam

quod simulate concipitur’. This principle forms an important part of

South African law (see SA Pulp and Paper Industries Ltd v Commissioner

for Inland Revenue 1955 (1) SA 8 (T); Du Plessis v Joubert 1968 (1) SA 585

(A) (‘Du Plessis’); Bozzone & others v Secretary for Inland Revenue 1975

(4) SA 579 (A)).

While this doctrine has been widely applied in tax cases (see Commis-

sioner of Inland Revenue v Saner 1927 TPD 162; Commissioner of Customs

and Excise v Randles Brothers & Hudson Ltd 1941 AD 369 (‘Randles

Brothers’); Secretary for Inland Revenue v Hartzenberg 1966 (1) SA 405

(A)), its application is not limited to tax matters only. In fact, the

foundation of the South African law in regard to simulated transactions

is to be found in the judgment by Innes J in the case of Zandberg v Van

112

(2016) 28 SA Merc LJ 112

© Juta and Company (Pty) Ltd

Zyl 1910 AD 302 (at 309) (‘Zandberg’). In Zandberg, a pledge agreement

was disguised as an agreement of sale. This judgment illustrates that the

substance over form doctrine was not developed specif‌ically for tax cases

but for general application in determining the legal implications of

transactions and agreements.

The Supreme Court of Appeal decision in Commissioner for the South

African Revenue Service v NWK Ltd 2011 (2) SA 67 (SCA) (‘NWK’) is said

to have changed the application of the doctrine. This note analyses the

decision in NWK and the cases that were decided after NWK in the light

of the perceptions that NWK changed the application of the doctrine.

The purpose of this note is to determine whether NWK did in fact

change the law, and, if so, whether it sets a bad precedent or, at the very

least, a precedence at all.

II SUBSTANCE OVER FORM BEFORE NWK

It is trite that ‘[e]very man is entitled, if he can, to order his affairs so that

the tax attaching under the appropriate Acts is less than it would

otherwise be’ (Lord Tomlin in IRC v Duke of Westminster [1936] AC 1 at

19). Innes J in Zandberg noted (at 309):

‘Not frequently, however (either to secure some advantage which

otherwise the law would not give, or to escape some disability which

otherwise the law would impose), the parties to a transaction

endeavour to conceal its real character. They call it by a name, or

give it a shape, intended not to express but to disguise its true

nature. And when a Court is asked to decide any rights under such

an agreement, it can only do so by giving effect to what the

transaction really is; not what in form it purports to be.’

Since the judgment in Zandberg, South African courts developed the

doctrine over more than a century. In 1931, the Appellate Division in

Kilburn v Estate Kilburn 1931 AD 501 stated (at 507) that ‘[c]ourts of law

will not be deceived by the form of the transaction: it will rend aside the

veil in which the transaction is wrapped and examine its true nature and

substance’.

Just over 10 years after the Kilburn decision the same court elaborated

in Randles Brothers (at 395):

‘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

THE SUBSTANCE OVER FORM DOCTRINE IN TAXATION 113

© Juta and Company (Pty) Ltd