The Ladysmith case - lessons in tax avoidance

• Jurisdiction: South Africa
• Author: Chris Schembri,Lindsay Mitchell
• DOI: 10.10520/EJC173377
• Published date: 01 December 2014
• Date: 01 December 2014
• Pages: 1-24
• Published By: Siber Ink

1

© SIBER INK

The Ladysmith Case

LESSONS IN TAX AVOIDANCE

LINDSAY MITCHELL1 • CHRIS SCHEMBRI2 • CARMEN WESTERMEYER3

ABSTRACT

Taxpayers are constantly devising tax avoidance arrangements in attempts to

reduce their liability for tax. The legislature has responded by including various

anti-avoidance provisions in the Income Tax Act. The Commissioner has also

made use of the common law doctrine of substance over form to deal with

tax avoidance arrangements. The well-known Ladysmith case is an example

of a tax avoidance arrangement designed to secure a capital allowance on a

property development. Despite the availability, and possible applicability of

the then general anti-avoidance provision, s103(1), the Commissioner chose

to rely on the doctrine of substance over form to defeat this particular tax

avoidance arrangement. The Appellate Division of the Supreme Court (now

the Supreme Court of Appeal) agreed with the Commissioner’s application

of this doctrine to the arrangement in question, and found it unnecessary to

examine s103(1).

The legislature has since replaced s103(1) with a new general anti-avoid-

ance provision, namely, s80A read with ss 80B-80L.

The Ladysmith case provides an opportunity to test this new anti-avoidance

provision against a known tax avoidance arrangement, to determine whether

the current general anti-avoidance provision will be effective. The conclusion

drawn is that the provision is indeed effective, and has a broader reach than

its predecessor. Taking into account the possibility of an attack based on the

common law, this means that a tax-avoiding taxpayer will have a virtually

impossible task when defending his tax-saving arrangement in future.

A secondary but significant issue in the Ladysmith case arose in the court

a quo. The taxpayer raised as a point in limine the issue of the composition of

the tax court that was presiding over the matter, querying the appointment

of the two ‘assessors’. The court’s response to this provides an unusual insight

into the mechanics of the tax court.

‘Courts of law will not be deceived by the form of a transaction: it will rend

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

and substance,’4

or

‘… if it walks like a duck, swims like a duck and quacks like a duck, [it is] a

duck.’ 5

1

Professor in the School of Accounting, Economics and Finance at the University of

KwaZulu-Natal.

2

Senior Lecturer, School of Law, University of KwaZulu-Natal.

3

Freelance Lecturer, writer and consultant.

4

Wessels ACJ in Kilburn v Estate Kilburn 1931 AD 501 at 507.

5

Heim, Michael (2007) Exploring America’s Highways at 68. ISBN 978-0-9744358-3-1.

2VOLUME 5 • ISSUE 4 • DECEMBER 2014

Business Tax & Company Law Quarterly

© SIBER INK

INTRODUCTION

In the early and mid-eighties, in South Africa and elsewhere, tax avoid-

ance arrangements were rife. Accounting firms, particularly the large ones,

were the perpetrators of them. A firm ‘sold’ its particular tax-avoidance

arrangement to its own clients, and to the clients of others. A number of

tax-avoidance arrangements were marketed, including

• livestock schemes,

• brood-mare schemes,

• film schemes,

• aircraft schemes,

• container schemes,

• plantation schemes,

• bare-dominium schemes,

• improvement to leasehold property schemes, and

• premium schemes, being the particular scheme that was scrutinised in

the Ladysmith case6 and in its court a quo cases.7

This article brings together a series of events that culminated in the then

Appellate Division of the Supreme Court (now the Supreme Court of

Appeal) confirming that the Commissioner has a remedy outside of the

Income Tax Act to prevent the success of a tax avoidance arrangement.

In reaching its judgment, the Appellate Division turned to the ‘disguised

transaction’ or ‘substance over form’ principle instead of the general anti-

avoidance provision (then section 103(1)) to remedy the mischief of this

taxpayer. The article looks not only at the particular tax avoidance arrange-

ment, but also at the perceived bias that the Commissioner has in struc-

turing the composition of a tax court.

Although the point in limine heard and reported as ITC 15678 is probably

the only case decided on the structure of the tax court, a reader of this

judgment is unlikely to be aware that its facts relate to the now infamous

Ladysmith case, and that it forms one of the two a quo court cases heard in

the tax court that resulted in the taxpayer taking this matter on appeal to

the Appellate Division.

This article therefore confirms the link between ITC 1567 and the

Ladysmith case.

The nature of tax avoidance arrangements has changed over the years.

Due to the protected and private nature of most current tax avoidance

6

Erf 3183/1 Ladysmith (Pty) Ltd & another v CIR 1996 (3) SA 942 (A), 58 SATC 229.

The reference throughout this story to Ladysmith is in fact to two taxpayers, both

property-owning companies, namely, Erf 3183/1 Ladysmith (Pty) Ltd and another

‘unnamed’ company. For ease of reference they are simply referred to as ‘Ladysmith’.

7

ITC 1567 (1993) 56 SATC 72 and the unreported judgment referred to in ITC 1606

(1995) 58 SATC 328 where Zulman J’s judgment is quoted at 337.

8

(1993) 56 SATC 72.