The Label Won’t Save You. The Substance Will.

5 May

Written By Heynes Kotze, Head of Legal, Chartered Institute for Business Accountants (CIBA)

Revenue is tight. A few clients have left. You’ve been reading about ways to structure your practice income differently. Someone in a WhatsApp group mentioned a clever arrangement. It sounds legitimate. It even looks legitimate on paper.

Sound familiar? The City of Cape Town thought the same thing. And on 30 April 2026, the Western Cape High Court stripped the label off and showed everyone exactly what was underneath.

A city under pressure gets creative

The City of Cape Town had a genuine problem. Back in 2018, its own Acting Executive Director of Finance wrote to COGTA explaining that, due to the drought and water restrictions, water consumption had fallen to almost half of what it was in 2015, as residents reduced usage and property owners invested in boreholes, water harvesting mechanisms and greywater systems. Because sewerage tariffs were based on a portion of water consumed, the City was providing infrastructure without collecting the revenue to fund it.

Its solution, introduced in the 2025/2026 budget and effective from 1 July 2025, was to impose three new fixed charges, not linked to consumption, on all residential ratepayers: a city-wide cleaning charge, a fixed water charge, and a fixed sewerage charge. The aforesaid charges were in addition to the applicable consumption based tariffs. Indeed, each of the proposed tariffs were calculated not by what the ratepayer actually used, but by the value band the ratepayer’s property fell into (which was established by the City). In addition to the applicable consumption-based tariff, these charges attracted 15% VAT.

The City called them tariffs. It put them in the budget. It collected the money. And then the South African Property Owners’ Association (SAPOA), representing more than 90% of South Africa’s commercial property industry took it to court.

In SAPOA v City of Cape Town (Case no. 103018/2025), a Full Bench of the Western Cape Division (Mabindla-Boqwana JP, Le Grange J and Savage J) delivered a judgment on 30 April 2026 that should be required reading for every accountant in practice. Not because of municipal tariff law. Because of what it says about the danger of calling something what it isn’t.

The court’s central finding: the label is irrelevant

The Court’s starting point was a principle it drew from an earlier decision: “The nature of the payment which has to be made is determined by its actual nature, not by the label which is put on it.”

The City’s charges failed that test on every front.

Could they be property rates? To constitute a proper rate, the amount levied must be calculated as a rand-in-the-rand figure based on individual property values. The City used property value bands instead, and in doing so, as the Court put it, “moved into the realm of property rates, yet adopted an approach which fell outside the method for determining such rates.” Beyond that, the charges were never processed through the community participation and by-law procedures that legislation requires for property rate increases. And critically, the charges attracted VAT, while the VAT Act expressly provides that only actual municipal rates are VAT-zero-rated. That VAT treatment itself confirmed the charges were not rates.

Could they be fees for services? The Local Government: Municipal Systems Act requires, in section 74(2), that a tariff policy must, inter alia, reflect at minimum the principle that amounts individual users pay should generally be in proportion to their use of the service. A fixed charge pegged to property value has no link whatsoever to consumption. As the Court found: the charges “are fixed amounts determined from a schedule of property value bands created by the City, in respect of which VAT is levied. Users of services are therefore not treated equitably in the application of the charges in that services are not generally paid [for] in proportion to their use of that service.”

The City argued that the word “generally” in section 74(2)(b) gave it discretion to depart from proportionality. The Court disagreed, confirming, following the SCA in Capricorn District Municipality and Another v South African National Civic Association (Capricorn) [2014] ZASCA 39; 2014 (4) SA 225 (SCA), that the principles in section 74(2) are mandatory minimum requirements. A tariff policy must reflect them. No discretion. No exceptions for political convenience.

The result: the charges were declared unlawful and invalid, set aside with effect from 30 June 2026. The City bore costs on scale C (including those of two counsel) across the application and its own failed counter-application.

Now think about your own practice

When revenue pressure mounts, the temptation to be clever is real. The City’s situation is not so different from a small practice under financial strain: obligations to meet, income falling short, and a creative solution that looks defensible on paper.

The arrangements look different in a practice context, but the underlying logic (and the risk) is identical. The Court applied the same analytical tool that SARS uses every day: look past the label. Examine the substance. Determine the actual legal character of the transaction. As confirmed in the Accounting Weekly guide to how SARS sees contractor and freelance relationships, SARS places significant weight on the substance of a relationship over its documented form.

Here are the patterns that carry the same risk the City just encountered:

“Management fees” with no underlying service. A company pays a related entity a monthly management fee. On paper: a legitimate, deductible business expense. In substance: a profit distribution, a disguised salary, or an income-shifting mechanism. If the fee lacks genuine commercial substance (no real service, no arm’s-length pricing, no evidence the work was done) the label dissolves under SARS scrutiny.
Independent contractors who are really employees. An employment relationship is ended and the same person is immediately re-engaged as a contractor, avoiding PAYE and UIF. The contract says “independent contractor.” The reality (same hours, same desk, same manager, no other clients) says employee. SARS has the tests, the appetite, and the authority to reclassify. The employer pays back-PAYE, interest, and penalties.
Loans that are really salaries or dividends. A company advances funds to a director or shareholder with no interest charged, or at rates below the official rate, and the repayment never materialises. SARS will look through the loan label and tax the arrangement according to what it actually is, a fringe benefit, a donation, or a deemed dividend.

In every case, the principle is what the Court articulated in Cape Town: “The nature of the payment... is determined by its actual nature, not by the label which is put on it.”

The professional dimension

The stakes go beyond a SARS audit and a revised assessment, though those alone can be severe.

If you advise a client to implement one of these structures and it unravels, you carry exposure too. CIBA’s Code of Professional Conduct requires members to act with integrity and not knowingly assist a client in arrangements designed to misrepresent their true nature. “The client asked me to” is not a defence. “Everyone does it” is not a defence. And as Cape Town discovered, a large legal team and political justification are not a defence either.

The Court accepted that the City is under a constitutional obligation to expand infrastructural development and ensure the delivery of services across the city, in order to progressively improve the socio-economic conditions of all its residents. It did not accept that good intentions justify unlawful means, hence remarked that it must do so in a manner that accords with the law.

What the judgment actually permits

None of this means you cannot structure a practice tax-efficiently. The choice principle in South African tax law is well-established: you are entitled to arrange your affairs in the most tax-efficient manner the law permits. Planning is not avoidance. Avoidance is not evasion.

The difference is genuine commercial substance. Does the label reflect the reality? Would the arrangement survive scrutiny that strips away the paperwork and examines what is actually happening?

The Court was clear that the City was not prohibited from being creative within the law. It may still cross-subsidise poor households, differentiate between categories of users, and recover costs through properly structured tariffs and rates. The judgment does not prohibit innovation. It prohibits innovation that assumes a power or adopts a character the law does not permit.

When you feel the pull of a clever arrangement (for yourself or for a client) ask one question before you proceed: if the label gets stripped off, what does this look like underneath?

If the answer makes you uncomfortable, the label will not protect you. The City of Cape Town just proved that.

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