South Africa: New General Anti-Avoidance Rule For South Africa?

Last Updated: 18 January 2006
Article by Emil Brincker

Most Read Contributor in South Africa, September 2016

During November 2005 a discussion paper was released by the South African Revenue Service ("SARS") with a view to tightening the provisions of the current general anti-avoidance rule ("GAAR") in a South African context. It is indicated that the current GAAR has proven to be an inconsistent and sometimes ineffective deterrent to the increasingly complex and sophisticated tax products that are being marketed by South African financial institutions. In particular, transactions incorporating the use of circular flows of funds, special purpose vehicles and other accommodating parties and the use of derivatives have been identified as being the source of anti-avoidance transactions. A distinction is made between impermissible tax avoidance and legitimate tax planning. Legitimate tax planning entails a transaction where a taxpayer takes advantage of a fiscally attractive option afforded to him by the tax legislation and generally suffers the economic consequences that the legislature intended to be suffered by those taking advantage of the option. An example of this type of transaction would be whether or not a new business would be operated through means of a company or a sole proprietorship. The concept of impermissible tax avoidance has been indicated to include the manipulation of the law and the focus on form and legal effect rather than substance. These transactions generally have little or no actual economic impact upon the taxpayer. The so-called badges of anti-avoidance schemes have been said to be –

  • the lack of economic substance;
  • the use of tax indifferent accommodating parties or special purpose vehicles;
  • unnecessary steps and complexity;
  • inconsistent treatment for tax and financial accounting purpose;
  • high transaction costs;
  • fee variation clauses or contingent fee provisions;
  • tax haven arrangements;
  • the use of derivatives.

The current GAAR contains four provisions, namely –

  • a transaction, operation or scheme;
  • a tax effect;
  • abnormality;
  • a sole or main purpose to obtain a tax benefit.

Although it is envisaged that these four requirements will be retained, a number of amendments have been proposed, especially in view of the Enron and Parmalat events that took place internationally. These amendments entail the following –

  • a non-excusive set of factors will be introduced in determining abnormality for schemes. In addition, the burden of proof will be on a taxpayer to disprove abnormality where certain of these factors are present;
  • GAAR may be applied to steps within a larger scheme and not only to the overall transaction;
  • GAAR may be applied in the alternative. In other words, SARS can rely on specific provisions of the Act and, in the alternative, argue that GAAR is applicable;
  • new penalties will be introduced for scheme promoters and for taxpayers that substantially underreport their income;
  • the purpose of the taxpayer is to be determined objectively by reference to the relevant facts and circumstances and no longer subjectively.

With reference to the relevant indicia of abnormality, some of them may have far reaching consequences. For instance, some of them are –

  • the time at which the arrangement or any step or part thereof was entered into and the length of period during which the arrangement or step was carried out;
  • the form and economic substance of the arrangement;
  • a circular flow of assets;
  • the participation of a tax indifferent party or a special purpose vehicle;
  • inconsistent treatment of any items or amounts for tax purposes by the parties to the arrangement (such as the payment of a deductible interest expense and the receipt of an exempt dividend);
  • the lack of any change in the financial position of any person resulting from the arrangement;
  • the absence of a reasonable expectation of a pre-tax profit.

It is to be welcomed that the abnormality requirement will be retained. However, it seems that, in most cases, even a financial lease will potentially be seen to be abnormal and it will be up to a taxpayer to discharge the burden of proof that the transaction is not abnormal given the circumstances in question. The problem is that, once abnormality is proven, the burden of proof is also on the taxpayer to discharge the onus what the sole or one of the main purposes to the transaction may have been. This requirement will now be tested objectively, which may be relatively difficult as a main purpose would more often than not be present, even though it may not be the predominant purpose in the circumstances.

The date of promulgation of the amendments is still to be finalised.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.