Tax Court Judgment on General Anti-Avoidance Rules (GAAR) – G v The Commissioner for the South African Revenue Service (September 2025)

The Tax Court handed down judgment in a GAAR related matter, where the tax benefits that were conferred to the creator of these impermissible arrangements, were successfully assessed. Sections 80A to 80L of the Income Tax Act, 58 of 1962 (“ITA”), the provisions of the GAAR, confers upon SARS the authority to investigate transactions and to raise additional assessments to counteract the consequences of impermissible avoidance arrangements.

Case law throughout the years made it clear that tax avoidance is permissible in that taxpayers are free to structure their affairs so that they pay the minimum amount of tax for which they are liable . However, Taxpayers may not evade or impermissibly avoid tax.

In this matter, the taxpayer sold distributable reserves and was found to have been engaged in a complicated tax-driven scheme, the purpose of which was to create a pool of secondary tax on companies (“STC”) credits. In order to sell distributable reserves, there had to be companies that wished to acquire distributable reserves, alternatively companies that needed distributable reserves for the purpose of declaring dividends on preference shares issued by them. The companies that had distributable reserves in which shares were purchased and the companies in the structure that received the incoming dividend from the aforesaid companies, had to meet the following five requirements:

1. they had no liabilities.
2. they had no assets other than cash or possibly negotiable instruments or loans to a shareholder, preferably in the form of a promissory note.
3. they had no contingent liabilities.
4. they had no undisclosed liabilities.
5. they had no trading history.

STC liabilities arising on future dividend declarations by third-party South African companies that received the dividends from the scheme could then offset these STC credits. The scheme, if successful, so SARS contended, could be used to create a potentially endless pool of STC credits that could be “sold” (transferred in return for a fee) to South African entities by way of receiving dividends. The purchasers, in turn, would be able to use the STC credits to reduce their anticipated liabilities for STC when in turn declaring dividends to their shareholders, thus reducing their true tax liability.