South Africa: Recent Case - Containers : What is a Normal Transaction?

In ITC 1712 63 SATC 499, heard in the Gauteng Special tax Court and reported in the most recent issue of SA Tax Cases Reports, the court was required to decide on the normality or otherwise of a transaction. This is of course an important consideration in the application of section 103(1), the general anti-avoidance section of the Income Tax Act.

The taxpayer in this case leased four tank containers from a bank for a five year period, and in turn entered into an agreement with another person who was to lease them to third parties overseas. The bone of contention was the rate at which rental payments to the bank fell due. The first annual amount payable was R230 258, followed by instalments of R197 364, R98 682, R98 682 and finally R32 894 respectively in the next four years. The effect of this structure was that 43% of the total rental was paid in the first year.

The taxpayer duly sought to claim the deduction of the rental payments as expenditure incurred in the production of income in the respective years in which they were paid, but Revenue spread the entire amount of rental evenly over the lease period, applying the anti-avoidance provisions of section 103(1) in order to do so. The taxpayer appealed against this decision and the matter went before the Gauteng Special Court.

It was common cause that there had been a transaction, operation or scheme. It was clear, too, that the structure of the agreement had had the effect of postponing the liability of the taxpayer for tax compared with the result under Revenue’s approach. The first two requirements for application of section 103(1) having therefore been met, the court was left to decide whether the transaction was abnormal in the context of business and whether the sole or main purpose of the taxpayer had been to achieve the postponement of the tax liability.

On the abnormality issue, the taxpayer argued that in the context of business it was normal in the circumstances to set up a rent structure that provided for so much to be paid in the first year. He produced evidence to the effect that it was common for banks do so unless the borrower put up substantial security. The reason was that, because containers could at any time be anywhere in the world, they did not provide much security and so the banks sought to minimise their exposure by loading the initial rent payment. The taxpayer had in any event had no choice in the matter, as the bank had insisted on the terms.

Revenue submitted no evidence to rebut this plausible explanation for the structure beyond contending that the spread of the interest was abnormal. The court found that this argument did not discharge the onus on Revenue to show abnormality, and the taxpayer prevailed.

This case illustrates the significant shifts in onus that take place in the course of considering section 103(1). Section 82 places the onus on the taxpayer in any tax dispute. However, once the taxpayer has produced prima facie evidence as to the normality of the transaction, a burden of rebuttal shifts to Revenue. If Revenue then puts forward an argument that places the court in doubt, the taxpayer will have failed to discharge the onus upon him. He will then need to discharge his onus as to the purpose in order to prevail under section 103(1). In the present matter, Revenue failed to meet the burden of rebuttal in regard to the normality evidence of the taxpayer. This is a lesser burden than that required to discharge an onus.