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)

JurisdictionSouth Africa
Published date25 May 2019
Pages112-131
Citation(2016) 28 SA Merc JL 112
Date25 May 2019
AuthorThabo 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
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
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(2016) 28 SA Merc LJ 112
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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
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