An analysis of the South African general anti-avoidance rule : lessons from New Zealand case law

Abstract

Tax is a major source of revenue for most countries worldwide and non-compliance by taxpayers in the form of tax avoidance causes a significant loss of tax revenue. South Africa has legislated a GAAR into its tax legislation in an attempt to combat tax avoidance. However, the effectiveness of the South African GAAR has been criticised since it was first introduced. This criticism continues even after its most recent amendment and is compounded by the fact that there is limited guidance on its interpretation and application, as there has only been one reported case in which the GAAR has been applied since its amendment in 2006. This study followed a qualitative research approach known as ‘structured pre-emptive analysis’ to use lessons from the New Zealand GAAR to propose reform to the South African GAAR to improve its efficacy. The structured pre-emptive approach combined both doctrinal and reform-oriented research and allowed for a triangulation of the findings to improve quality and rigour of the research. The findings of this study revealed the following notable areas of improvement for the South African GAAR. Firstly, a different interpretation is required when determining whether a taxpayer may be considered party to an arrangement where motive and volition should not inform whether or not a taxpayer is party to an arrangement. Secondly, the inquiry into the purpose of an arrangement should be amended from the current sole or main purpose requirement to requiring a purpose that is more than merely incidental to the arrangement. This requirement should be further improved by interpreting it as solely objective, thus disregarding the taxpayer’s stated intention. Thirdly, the current fourth requirement of the South African GAAR (the tainted elements) should inform the tax benefit requirement, which would result in the South African GAAR containing three instead of four requirements, making it less onerous to apply. Lastly, further guidance should be provided regarding the interpretation and application of the South African GAAR by defining undefined terms in areas where uncertainties could give rise to a level of subjectivity and inconsistent judicial interpretation.