The efficacy of the South African general anti-avoidance rule : using lessons from New Zealand

Abstract

The general anti-avoidance rule (GAAR) has been adopted by South Africa as one of its methods to combat tax avoidance schemes into which taxpayers enter. Since 1941 when the South African GAAR was first introduced into the tax legislation, it has been amended various times as a result of the weaknesses that were highlighted by its failures to stand up to the rigours of the courts. However, since the most recent amendment to the South African GAAR in 2006, its efficacy remains unknown due to the fact that it has not been tested by the courts in its entirety. This study aims to address this concern by determining the effectiveness of the South African GAAR when compared to its New Zealand counterpart. This study employed a ‘structured pre-emptive analysis’ research methodology, which is a combination of doctrinal and reform-oriented approaches. The doctrinal approach was used in Phase 1 of the research whereby a doctrinal analysis of the South African and New Zealand GAARs were performed. This approach allowed an understanding of the interpretation and application of the two GAARs to be obtained, as well as to allow for the identification of weaknesses in the South African GAAR, while simultaneously making suggestions for improvement. The reform-oriented approach was used in Phase 2 of the study in which the South African GAAR was applied to the facts of a case from New Zealand. Phase 3 of the study contained the triangulation of the findings from both Phases 1 and 2 of the study, thereby validating the findings of the study. The findings from Phases 1 and 2 highlighted various weaknesses that exist in the South African GAAR which indicate that additional guidance should be provided to address the existing uncertainties currently contained within the interpretation and application, in order to prevent inconsistencies that may limit its efficacy. The findings of this study indicate that for a taxpayer to be considered party to an arrangement, they do not need to be aware of the entire arrangement nor all of its details. Furthermore, it was noted that the sole or main purpose requirement should be amended to rather require that obtaining the tax benefit was one of the purposes, provided it is not merely incidental, as opposed to requiring the tax benefit to be the sole or main purpose of the arrangement. In addition, it is suggested that the sole or main purpose test be amended to being a purely objective test and not considering subjective intent of the taxpayer.