Purpose Requirement of the GAAR: Rethinking The ‘Subjective’ vs ‘Objective’ Debate

• Jurisdiction: South Africa
• DOI: 10.10520/ejc-btclq_v14_n3_a1
• Author: Ed Liptak
• Pages: 1-14
• Date: 01 September 2023
• Published date: 01 September 2023
• Published By: Siber Ink

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© Juta and Company (Pty) Ltd

Purpose Requirement of the GAAR:

RETHINKING THE ‘ SUBJECTIVE’ VS ‘OBJECTIVE’ DEBATE

ED LIPTAK*

ABSTRACT

The current general anti-avoidance rule (GAAR) was enacted in 2006. Its

overriding goal was to provide a more consistent and effective determent

to what the legislation termed ‘impermissible tax avoidance arrangements’.

As the SARS Discussion Paper on Tax Avoidance and Section 103 made clear, a

major problem facing the fi scus was the growth of a tax avoidance industry in

which extremely complex tax shelter products were designed and marketed

to taxpayers. This development refl ected a shift from prior practice in which

taxpayers approached advisors to obtain advice on specifi c problems to one

in which promoters marketed carefully prearranged products to clients.

These products were typically sold on a ‘black box’ basis, which hid the

specifi c inner workings of those tax shelter products. Amongst other things,

this approach enabled promoters the ability to protect their so-called intellec-

tual property, while giving clients the opportunity to use ignorance or ‘plau-

sible deniability’ as a defence against the GAAR.

To counter this problem and to resolve inconsistent applications of former

section 103, in which two taxpayers could enter into identical tax shelter

products but obtain different results depending upon their subjective state of

mind, Parliament introduced a hybrid test in which the subjective purpose of

a taxpayer must be tested against all of the relevant facts and circumstances of

the case, including the purpose of the avoidance arrangement in question. It

is a hybrid approach, in which the relative weight of the objective and subjec-

tive components will depend upon the circumstances of the case.

Tax shelter products are meticulously designed by their promoters for one

purpose — to generate a tax benefi t without having a signifi cant impact upon

a taxpayer’s business operations and to be as risk-free as humanly possible. It

is in these situations that the objective purpose of an avoidance arrangement

is of paramount importance, particularly where these tax shelter products

have been added to otherwise straightforward commercial transactions. As

a result, taxpayers should no longer be able to hide behind either their igno-

rance or the purpose of a larger arrangement into which a tax shelter product

has been inserted, to defeat the GAAR.

Introduction

In a famous and probably apocryphal story, a reporter asked a notorious

Depression-era gangster, Willie Sutton, why he robbed banks. His rather

bemused reply was ‘because that’s where the money is’.1

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*

Independent Tax Person Extraordinaire.

Robert Yoder ‘Someday They’ll Get Slick Willie Sutton’ Saturday Evening Post at 17

(20 January 1951).