Clever Structure, Wrong Purpose: The R432 GAAR Case
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IT 76725; IT 76750; IT 76751; IT 76752; IT 76753; IT 76754; IT 76755
The case concerned seven companies that were shareholders in RASS Investments (Pty) Ltd, a profitable self-storage business. They sold their interests to SRIA Investments (Pty) Ltd, a wholly owned subsidiary of ANCIENT Ltd.
What happened?
In 2017, the seven companies sold their investment in RASS for around R432 million. Instead of doing a straight share sale, which would have triggered significant capital gains tax (CGT), their tax advisers designed a four-step structure:
RASS declared a dividend of R274.6 million to the existing shareholders, payable once the buyer's money arrived.
The buyer subscribed for new shares in RASS, paying R280 million into the company.
RASS used that money to pay the dividend to the sellers.
The sellers then sold their original, now nearly worthless, shares to the buyer for R1,000.
The sellers received the value attributable to their shares through a tax-exempt inter-company dividend, while the shareholder loans were acquired separately and the original shares were sold for R1 000. No CGT was declared. The structure was disclosed to SARS as a reportable arrangement. SARS disagreed, applied the GAAR, and issued additional assessments treating the transaction as a normal share sale for CGT purposes. SARS also imposed 75% understatement penalties and interest.
What is the GAAR?
The General Anti-Avoidance Rule (GAAR - sections 80A to 80L of the Income Tax Act) gives SARS the power to look past the legal packaging of a transaction and tax it according to its real economic substance. If a structure has no genuine commercial purpose beyond reducing tax, SARS can strip away the artificial steps and assess tax as if they never happened.
What did the court decide?
The court ruled in favour of SARS on the main tax question. It found the structure was an impermissible avoidance arrangement for three reasons:
Abnormal means. A genuine pre-sale dividend is ordinarily funded from the company's own resources. Here, RASS had never paid a dividend and had no cash to do so. The buyer put money in, it went straight back out as a dividend, and RASS was left exactly as valuable as before. The money went around in a closed circle, which is not how arm's-length parties normally structure a sale.
No commercial substance. The mechanism made no real difference to anyone's commercial position. A straight share sale would have produced exactly the same result. The only thing the mechanism changed was the tax label on what the sellers received.
Abuse of the dividend exemption. The exemption for inter-company dividends exists to prevent the same profits being taxed multiple times up a corporate chain. It was not designed to allow sellers to receive business sale proceeds tax-free by routing money through a dividend.
The court also found that the main purpose of the structure was to avoid CGT. The sellers' own documents said so. Their circular to shareholders stated no CGT would be payable, and their advisers' opinions were focused on achieving a single layer of tax. The commercial objective could have been achieved by a straight share sale. The elaborate mechanism served no additional commercial purpose.
What about SARS's alternative case?
SARS tried during the appeal to argue a different version of events, treating only some of the steps as the avoidance arrangement. The court rejected this, following the recent Erasmus judgment. SARS is bound by the arrangement it identified when issuing its assessments and cannot reframe its case during the appeal. A procedural win for the taxpayers, though it made no difference to the outcome.
What happened to the penalties?
The 75% understatement penalties were overturned. The court distinguished between the objective GAAR analysis and the penalty analysis, which looks at how the taxpayers actually behaved. The taxpayers obtained a written opinion from specialist advisers, disclosed the arrangement to SARS before any audit, and genuinely believed the structure was lawful. On the particular facts, the court found that the taxpayers' reliance on specialist advice, together with their full disclosure of the arrangement and the unsettled state of the law, meant the understatement resulted from a bona fide inadvertent error.
The provisional tax underestimation penalties were sent back to SARS for reconsideration, with the court directing SARS to weigh the quality of advice obtained, the voluntary disclosure, the unsettled state of the law at the time, and the absence of any concealment.
The interest was confirmed. The law does not allow interest to be remitted where the GAAR has been applied, regardless of good faith.
Costs
Each party pays its own costs. The outcome was divided. Taxpayers won on the procedural point and on penalties. SARS won on the main tax question. Neither side's conduct was unreasonable.
Key lessons for practitioners
Substance beats structure. A closed circle of funds that changes only the tax label on proceeds, without changing commercial risk or cash flow, will be seen as artificial.
A genuine commercial purpose for the deal does not save the structure. The GAAR question was why this particular mechanism was chosen, not why the deal was done. The answer was tax, and that was enough.
Good advice and early disclosure matter for penalties, even when the tax position fails. The taxpayers escaped the 75% penalties because they acted in good faith and came forward voluntarily.
SARS must plead its case accurately from the start. It cannot shift to a different avoidance argument once assessments have been issued.