The High Cost of Tax Avoidance: R46M Judgment Against ‘Dividend’ Scheme
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Tax Court: IT 24502
You’ve probably heard the saying: if something sounds too good to be true, it probably is. That’s exactly what the Tax Court ruled in a recent case involving a taxpayer who tried to earn millions and paying no tax, through a clever financial structure. SARS saw through it, and now the taxpayer is facing over R46 million in additional tax assessments. Here’s what went down.
The Setup: Tax-Free “Dividends” as Compensation
Between 2008 and 2014, a South African tax advisor ( Mr G) developed and implemented several complex offshore company structures. These structures weren’t built to run a business, sell a product, or create jobs. Their goal was to generate and sell tax credits, specifically STC credits (Secondary Tax on Companies).
Mr G, instead of being paid a normal consulting fee (which would be taxed) was “paid” in dividends from these shell companies. These dividends were exempt from income tax.
How the Scheme Worked
We can explain the scheme this way in a simplified manner:
Mr G set up foreign companies (in tax havens like the Isle of Man) with large paper-based reserves.
These companies declared dividends to South African companies, which then declared more dividends up a chain of other SA companies.
No cash was really exchanged, just journal entries and promissory notes.
This created STC credits, which were then “sold” to other SA companies so they could reduce their tax when paying dividends.
Mr G got paid through these structures in the form of dividends, not salary.
What SARS Argued
SARS believed the scheme was built purely to avoid tax. Their key arguments were:
Mr G structured everything to avoid income tax. His “dividends” were actually fees for services.
The structures lacked any real commercial purpose as they weren’t doing business, just moving numbers around.
He earned huge sums but paid no tax, which is exactly what the General Anti-Avoidance Rules (GAAR) were designed to stop.
What the Court Found
The Tax Court agreed with SARS. In a detailed ruling, the judge said:
“The arrangements were entered into or carried out by means or in a manner which would not
normally be employed for bona fide business purposes, other than for the appellant obtaining
a tax benefit, and that they created rights and obligations which would not normally be created
at persons dealing at arm’s length.”
In other words:
The arrangement had no business substance as it was built to avoid tax.
Mr G was paid for designing the scheme, even if he called it a “dividend.”
The structures were artificial, not something normal businesses would do.
Why This Matters
This case is a big reminder that clever tax planning can quickly turn into illegal tax avoidance. If your structure is all paperwork and no real economic activity, SARS has the tools to reclassify it and come after you.
If you’re earning income, especially in unusual ways, make sure your structure can hold up under scrutiny. Because SARS is watching, and the courts are backing them.
