Will the real NWK please stand up!

• Jurisdiction: South Africa
• Author: Paul Daniels
• DOI: 10.10520/EJC174138
• Published date: 01 March 2013
• Date: 01 March 2013
• Pages: 14-25
• Published By: Siber Ink

14 © SIBER INK

Will the Real NWK Please

Stand Up!

PAUL DANIELS1

ABSTRACT

It is trite law that where parties enter into a contractual relationship that gives

rise to a particular legal result, our courts will give effect to that contrac-

tual relationship if they are satisfied that such relationship properly and truly

reflects the intention of the parties — notwithstanding that the legal result

may give rise to a tax benefit for the parties. Where, however, the court ascer-

tains that the true, real intention of the parties to a contractual arrangement is

something other than it purports to be, it will give effect to what the transac-

tion really is and ignore the simulation. The doctrine is known as ‘substance

over form’.

For many years this doctrine has been tempered by the caveat that the

courts will give effect to the tenor of a contractual arrangement even if

achieves a tax benefit, provided that the parties to the arrangement in fact

really mean that it will have effect according to its tenor. That is, a tax avoid-

ance purpose will not necessarily make a contractual arrangement something

other than what it purports to be if, in fact, the contractual arrangement

reflects the real intention of the parties.

In 2011 the Supreme Court of Appeal in a unanimous judgement in CSARS

v NWK Ltd appeared to reject the test to determine simulation as being the

determination of the true intention of the parties and giving effect to such

intention — even if it results in a tax benefit. The court seemed to modify the

doctrine by holding that if ‘the purpose of [a] transaction is only to achieve

an object that allows the evasion of tax, or peremptory law, then it will be

regarded as a simulated’.

Many commentators are critical of the judgment, arguing that in allowing

the tax purpose of a contractual arrangement to trump the true intention of

the parties, the court had gone well beyond the well established doctrine of

substance over form, and had in fact created new law.

In a recent decision of the Western Cape High Court, Mariana Bosch and Ian

McCelland v CSARS, two of the judges adopted very different views on the

impact of the decision in CSARS v NWK Ltd 2 (the NWK case) on the doctrine

of substance over form. DavisJ argued that the dicta in the NWK case had

done nothing other than confirm the doctrine, while WaglayJ concluded

that the court in the NWK case had in fact modified the doctrine.

This article considers the background to the doctrine of substance over

form as developed by our courts over many years, and considers whether in

fact the judgment in the NWK case in fact modifies the doctrine.

1

Manager, Business Tax Advisory, Ernst & Young.

2

2011 (2) SA 67 (SCA), 73 SATC 55.