SIMULATED TRANSACTIONS – IMPORTANT JUDGEMENT BY THE SCA
18 Jan 2019
The Supreme Court of Appeal (SCA) handed down an important judgement on 9 November 2018 in the case of Sasol Oil v CSARS (923/2017)  ZASCA 153 which deals with simulated transactions and anti-avoidance schemes.
Whilst the in-depth facts of this case are rather complex, it basically involved the sale of oil from a group company resident in the Isle of Man to Sasol Oil South Africa. However, at the time of setting up the transaction, early in 2001 prior to residency tax taking effect in South Africa, a commercial decision was made by the group to sell the oil from the company situated in the Isle of Man to a UK group company which in turn sold the oil to Sasol Oil South Africa.
SARS argued that this indirect sale of goods resulted in the transaction falling outside the Controlled Foreign Company (“CFC”) rules and accordingly raised additional assessments in respect of Sasol Oil South Africa for the 2005, 2006 and 2007 tax years on the basis that the indirect sales was a simulated transaction and fell within the ambit of section 103 of the Income Tax Act, being a general anti-avoidance provision.
Whilst the tax court found that the transactions were simulated and SARS was entitled to raise the additional assessments, the SCA considered various factors which include:
- the circumstances leading to the conclusion of the impugned contracts,
- the terms of the contracts, the evidence of officials of Sasol Oil,
- the time when the contracts were concluded (2001), and
- the period when Sasol Oil may have become liable for the income tax (2004).
Judge Lewis made reference to the C:SARS v NWK Ltd case and further quoted the C:SARS v Bosch case where it was held that “simulation is question of genuineness of the transaction under consideration and if such transaction “is genuine it is not simulated and if it is simulated then it is a dishonest transaction” (i.e. effectively the substance over form principle).
Based on the abovementioned cases and the various evidentiary factors considered by the SCA it was held that there was genuine commercial substance to the transaction and such the provisions of section 103 cannot be applied. The indirect sales were not regarded as simulated transactions and accordingly SARS was not entitled to issue the additional assessments.