Tainted Elements or Nugatory Directive? The Role of the General Anti-Avoidance Provisions (“GAAR”) in Fiscal Interpretation

• Jurisdiction: South Africa
• Pages: 319-351
• Published date: 16 August 2019
• Date: 16 August 2019
• Author: Julie Cassidy
• Citation: (2012) 23 Stell LR 319

319

TAINTED ELEMENTS OR NUGATORY

DIRECTIVE? THE ROLE OF THE GENERAL

ANTI-AVOIDANCE PROVISIONS (“GAAR”) IN

FISCAL INTERPRETATION

Julie Cassidy

LLB (Hons) PhD

Professor of Law, School of Law, Auckland University of Technology; Fellow of the

Taxation Law and Policy Research Institute, Monash University

1 Introduction

A number of commentators in South Africa have bee n critical of a key

aspect of t he relatively new Gene ral Anti-Avoidance Rule (“GAA R”)1 (Par t

IIA of Chapte r III of the Income Tax Act 58 of 1962) suggesting t hat section

80A(c)(ii),2 in part icular, is not necessar y in light of existing common-law

approaches to statutory interpre tation. A s discu ssed below, while not the

subject of these cr itical commentaries, the role of section 80A(a)(ii)3 is

equally u ncertain in light of the se commentators’ arg uments. These critical

commentaries have identied three common-law principles that p otentially

render these provisions unnecess ary. First, the common-law principle that the

law has regard to t he substance, rat her than the form, of t hings4 (plus valet

quod agitu r quam quod simula te concipiture). This includes the principle in

fraudem legis5 and the sham doctrine.6 Second, the edict that legislation

1 Cilliers, for example, accept s that an appropriately worded GAAR is a desi rable or dep ending on on e’s

perspect ive, at least a n accept able featu re of a moder n tax regime: C Cillie rs “The Proposed Section

80A(c)(ii) of th e Income Tax Act: Should it be Enacted?” (2006) The Taxpayer 182 As the title of his

article ind icates, his cr iticism is in rega rd to the draft version of s 80A(c)(ii) of the Income Tax Act 58 of

1962 In subse quent publication s he criticis es the enact ed version of s 80A(c)(ii): C Cil liers “Thou Shalt

Not Peep at thy Nei ghbour’s Wife: Se ction 80A(c)(ii) of the Income Tax Act an d the Abu se of Right s”

(2008) The Taxpayer 85; C Cil liers “T hou Shalt Not Peep at thy Neighbour’s Wife: Section 80A(c)(ii)

of the Income Tax Act a nd the Abuse of Rights: Part Two” (2008) The Taxpayer 103 See als o L va n

Schalkw yk & B Geldenhuy s “Sectio n 80A(c)(ii) of the I ncome Tax Act and the I nterpretat ion of Tax

Statutes in Sout h Afric a” (2009) 17 Meditari Accountancy Research 167 While t he latter part of Van

Schalkw yk and G eldenhuys’ ar ticle focus es on t he contention that s 8 0A(c)(ii) is redu ndant in light of

the Con stitution of the Re public of S outh Afr ica, 1996 (“the Const itution”) (179-180), the first part of

the ar ticle suggest s that s 80A(c)(ii) m erely reinfor ces the mo dern appro ach to sta tutory i nterpretatio n

Implicit is such is the sug gestion tha t s 80A(c)(ii) has no role b eyond that of the ex isting co mmon-law

principles d iscussed below (171 and 179)

2 Subs 80A(c)(ii) of t he Inco me Tax Act identifies as a “t ainted element” an arrangement that results

directly or i ndirectly in the m isuse or abuse of the pr ovisions of the Act (includi ng the GAAR)

3 Subs 8 0A(a)(ii) ident ifies lack of commercial subs tance as a relevant “tainte d ele ment” potentially

triggeri ng the application of th e GAAR

4 Dadoo Ltd v Kruge rsdorp Mun icipal Cou ncil 1920 AD 530 547 See also CIR v Saner 1927 TPD 162

172

5 Dadoo Ltd v Krugersd orp Municipal Coun cil 1920 AD 530 547-548

6 Zandberg v Van Zyl 1910 AD 302

(2012) 23 Stell LR 319

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should be inter preted to give effect to parliamentary intention.7 Thi rd, the

doctrine of abuse of rights,8 which in itself may b e “related to the plus valet

and fraus legis doc trines”.9

Building on this criticism of section 80A(c)(ii), the broader question

examined in this article i s: What can t hese provisions achieve that is not

already adequately facilitated by the existing common law? A nswering this

question involves a consideration of two interrelated issues. First, are these

common-law principles suf cient to combat tax avoidance? Second, do these

provisions seek to achieve a goal that goes beyond t hat provided by these

common-law principles?

In answering the rst que stion t he article begins by considering each

of these common-law principles i n tur n. This ana lysis highlights the

comparatively limited scope of these common-law principles. Unlike the

statutory GAAR provisions considered in the latter half of the article, absent

certain prerequisites these common-law principles cannot be applied. This

observation is then reinforced in the sp ecic context of t he application of

these common-law principles in taxation law jurisprudence. It is concluded

that because of, inter alia, the limited scop e of these common-law principles

they are not sufcient to combat ta x avoidance.

Further, it will be seen that in the taxation context the role of these common-

law principles has been signicantly impacted upon by the Duke of Westminster

principle. This refers to the oft-cite d controversial statement of Lord Tomlin

in Inland Revenue Commis sioners v The Duke of Westminster:10

“Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts

is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then,

however unappreciative the Commissioner of Inland Revenue or his fellow taxpayers may be of his

ingenuity, he cannot be compelled to pay an increased tax.”

While this was an English decision, the Duke of Westminster principle

has been accepted as relevant South Afr ican law. In CIR v Estate Kohler11

Centlivres CJ expressly adopt ed the Duke of Westminster principle, asser ting

“it has long been a well-recognised principle of law that a person may so order

his affai rs as to escape taxation” (in this ca se death duties).12 While in ca ses

such as t his the Duke of Westminster principle is stated a s a separate, sta nd-

alone doct rine, arguably the better view is that it is exemplary of a broader

principle of statutory inter pretation. As noted in Erf 3183/1 Ladysmith (Pty)

7 Principal Immig ration Off icer v Haw abu 1936 AD 2 6 27; CIR v Ne mojim (Pty) L td 1983 45 SATC 241

267; 1983 4 SA 935 (A); Swanepoel v Johannesburg Ci ty Council, Pr esident Insura nce Co Ltd v Kr uger

1994 3 SA 789 (A) 790

8 L du Plessis “Statute Law and In terpretatio n” in WA Jouber t (ed) LAWSA 25(1) 2 ed (2007) para 8; J R

Midgley & JC v an der Walt “Delict ” in WA Joubert (ed) LAWSA 8 2 ed (2007) pa ra 84; H Edward s & N

Bosman Intro duction to South Af rican Law and Leg al Theory (1977) 473

9 Cilliers (2008) The Taxpay er 87

10 [1936] AC 1 19

11 1953 2 SA 584 (A) 591-592

12 591 See also SIR v Hartzenberg 1966 1 SA 405 (A) 408; Hickli n v Secretar y for Inland Re venue 1980 1

SA 481 (A) 494; Er f 3183/1 Ladysmith (Pt y) Ltd v Co mmissioner of Inland Reve nue 1996 3 SA 942 (A)

950-951; Relier (Pty) Ltd v CIR 1997 6 0 SATC 1 (SCA) 11

320 STELL LR 2012 2

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Ltd v Commissioner of Inland Revenue,13 this doctrine involves the application

of a broader principle that permits parties to ar range their affairs so as to

remain outside the provisions of a part icular statute. In turn, even when

the Duke of Westminster principle is not expre ssly adopted, it s underlying

sentiments are often e choed in South African jur isprudence. Thus in CIR v

George Forest Timber Company Limited14 Botha JA reiterate d “if the Crown,

seeking to recover t he tax, cannot bring the subject within the letter of the

law, the subject is free, however apparently withi n the l aw that case might

otherwise appear to be”. More recently Boruchowitz J asserted , a nd t he

Supreme Cou rt agreed on appeal,15 that taxpayers are “free to a rrange their

affairs so as to remai n outside the provisions of a particu lar statute, including

a taxing provision”.16 It will be seen that when applied in a taxation context the

above common-law approaches either echo the Duke of Westminster principle

or are sp ecically premised on its continuing role. The Du ke of Westminster

principle is unfort unately alive and well in South African com mon law. Thus

in an swer to the rst research question, as a consequence of the continuing

role of the Duke of Westminster principle, it is ulti mately concluded that

these common-law principles do not adeq uately address tax avoidance in this

jurisdiction.

As to the second research question, the latter half of the article considers the

specic context of Part IIA of the Income Tax Act. It provides a brief overview

of the elements of Part II A, before focusing on the two controversial “tai nted

elements” contained in section 80A(a)(ii) and (c)(ii). The article then considers

whether these provisions simply replicate the common-law principles analysed

in the rst part of the article. In r egard to t he second research question, fr om

this analysis it becomes clear that the statutory provisions have a wider

operation t han the common-law principles. Notably the statutory provisions

are not premised on the prerequisites that are required to enliven the application

of the subject common-law principles. As further discussed below, it is the

limited scope of these pri nciples that has prevented the common law from

successfully combating ta x avoidance scheme s in the past. Thus in answer

to the se cond research question, t he legislation is intended t o have a broader

scope tha n the common law. Specical ly, it is contended that the legislative

direction to h ave regard to t he existence or absence of commercial sub stance

(section 80A(a)(ii)) that includes a focus on individual steps that are part of a

broader a rrangement that lack commercial substance (section 80 C(2)(a) and

(b)(iii)) will make a positive contribution to combating tax avoidance in South

Africa .

Specically i n regard to section 80A(c)(ii), contr ary to t he suggestions of

the above commentator s, this provision “represents a major sh ift in our rules

of statutory inter pretation of the Act from a literal towards a purposive driven

13 1996 3 SA 9 42 (A) 951, citing Dadoo Ltd v Krugersdor p Munici pal Cou ncil 1920 AD 530 548; Van

Heerden v Pien aar 1987 1 SA 96 (A) 107 See also CI R v Conhage (Pty) Ltd 1999 4 SA 1149 (SCA) 1155

14 1924 AD 516 531-532, quoted with support in Glen Anil Develo pment Corpora tion Ltd v SIR 1975 4 SA

715 (A); 37 SATC 319 334

15 Commission er, SARS v NWK 2011 2 SA 67 (SCA) para 42

16 Income Tax Case No 1833 2008 70 SATC 238 (G) para 28

THE ROLE OF GAAR IN FISCAL INTERPRETATION 321

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