Abstract:
This research component evaluates the impact that the doctrine of substance over form has on the use of interest free loans. The research process has a two-tiered approach. The first part focuses on the loan concept, its history and development, and current application in South African law. The second part of the process focuses on the development and application of the doctrine of substance over form through the common law, with an emphasis on the judgment in CSARS v NWK Ltd.1
The judgment referred to above, introduced a new concept to the doctrine of substance over form. Lewis JA seemingly developing the test to consider what has been coined “commercial purpose” when using the principles of the doctrine to establish whether a transaction has been simulated between parties. The research therefore, in essence, focuses on the following statements by Lewis JA with regards thereto: “…In my view the test to determine simulation cannot simply be whether there is an intention to give effect to a contract in accordance with its terms. Invariably where parties structure a transaction to achieve an objective other than the one ostensibly achieved they will intend to give effect to the transaction on the terms agreed. The test should thus go further, and require an examination of the commercial sense of the transaction: of its real substance and purpose. If the purpose of the transaction is only to achieve an object that allows the evasion of tax, or of a peremptory law, then it will be regarded as simulated.”2
And:
“It should have asked whether there was actually any purpose in the contract other than tax evasion. This is not to suggest that a taxpayer should not take advantage of a tax-effective structure. But as I have said, there must be some substance – commercial reason – in the arrangement, not just an intention to achieve a tax benefit or to avoid the application of a law.”3
The purpose of the research is to test the doctrine of substance over form, against the concept of an interest free loan, with an emphasis on the impact that the ratio decidendi, of Lewis JA has on the implementation of the test. The research considers the application of the doctrine of a selected set of cases, and the development of the doctrine through the common law. In this regard, the research commences with a discussion of the concept of a loan, and its development in South African law. The research then proceeds to focus on the common law of substance over form, prior to the judgment in CSARS v NWK Ltd. An in depth analysis is then done on the CSARS v NWK Ltd matter, and developments after the judgment, and these are finally compared to some international standards.
The reasoning behind this structure is to focus on, and critically analyse the doctrine of substance over form, and the current development and application thereof in South African tax law.
