The highest court in the land dismissed an appeal by Absa Bank and its subsidiary, United Towers, confirming the South African Revenue Service’s (Sars) power to challenge sophisticated avoidance schemes even where taxpayers claim limited knowledge of how those schemes operate.
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The Constitutional Court (ConCourt) has delivered a significant judgment clarifying how far tax authorities can go in tackling complex financial arrangements designed to reduce tax liability.
In a ruling that could reshape corporate tax planning, the highest court in the land dismissed an appeal by Absa Bank and its subsidiary, United Towers, confirming the South African Revenue Service’s (Sars) power to challenge sophisticated avoidance schemes even where taxpayers claim limited knowledge of how those schemes operate.
At the heart of the dispute was a series of transactions entered into between 2011 and 2015. Absa invested nearly R1.9 billion in preference shares through a structure introduced by the global financial group Macquarie. These investments generated dividends that Absa treated as tax-exempt.
However, Sars argued that the broader arrangement was engineered to convert what would ordinarily be taxable interest into tax-free income through a chain of intermediary entities.
According to Sars, the structure involved multiple layers, including offshore trusts and financing vehicles, ultimately creating a circular flow of funds. This arrangement allowed income to be transformed into a form that attracted little or no tax.
On that basis, Sars invoked South Africa’s General Anti-Avoidance Rules (GAAR), reclassifying the dividends received by Absa as taxable interest and issuing additional tax assessments for the 2014 to 2018 financial years.
Absa challenged the assessments, arguing that it was not a “party” to the alleged avoidance scheme because it had no knowledge of the downstream transactions.
The bank maintained that its involvement was limited to investing in preference shares and that any tax benefit arose at the level of other entities within the structure. It further contended that it had not itself obtained a “tax benefit” as required under the law.
However, the Constitutional Court rejected these arguments.
In a majority judgment on Wednesday, the court adopted a broad and purposive interpretation of the tax legislation. It held that participation in a tax avoidance arrangement does not depend on whether a taxpayer had full knowledge of every step in the scheme.
Instead, the key question was whether the taxpayer’s actions formed part of the overall arrangement that produced the tax advantage.
The court emphasized that limiting liability only to those with complete knowledge would undermine the purpose of the General Anti-Avoidance Rules (GAAR). Such an approach, it warned, would allow companies to benefit from tax avoidance structures while deliberately remaining ignorant of their details.
“Participation does not require omniscience,” the judgment noted, underscoring that objective involvement in the transaction chain is sufficient.
On the question of “tax benefit,” the court also sided with Sars. It found that even if the immediate tax advantage arose elsewhere in the structure, Absa benefited through enhanced returns generated by the scheme.
The court held that Absa did obtain a tax benefit. It stressed that the arrangement must be assessed with its avoidance features stripped away to reveal its economic substance, avoiding over-reliance on form and focusing the enquiry on what the arrangement truly achieves.
The court concluded that the GAAR allows Sars to act against any party linked to an avoidance arrangement, not just the entity that directly avoids tax.
Importantly, the ruling reinforces Sars’ authority to “re-characterise” transactions—effectively looking beyond their legal form to their economic substance. This means that even carefully structured deals may be unwound if their primary purpose is to secure a tax advantage in a manner inconsistent with the spirit of the law.
The judgment is expected to have wide-reaching implications for financial institutions and multinational corporations operating in South Africa. It signals a tougher stance against aggressive tax planning and places a greater onus on companies to understand the full implications of the structures they invest in.
While the court acknowledged that taxpayers are entitled to arrange their affairs in a tax-efficient manner, it drew a clear distinction between legitimate planning and impermissible avoidance. In doing so, it affirmed that the GAAR is designed not just to catch obvious abuses, but also to address increasingly complex schemes that exploit gaps in the tax system.
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