Tax avoidance

As a general rule a transaction agreement or arrangement must have a commercial purpose in order to be classified as acceptable for the purpose of income tax. Also such a transaction agreement or arrangement must be based on actual facts and circumstances and must be legally enforceable within the parameters of the South African law generally.

More specifically the Income Tax Act contains provisions to curb tax avoidance schemes. For the purpose of this article we deal with only two examples of such provisions namely general tax avoidance and gratuitous dispositions.

General Tax Avoidance Schemes
Normally the Commissioner has a certain amount of discretion when it comes to levying interest on unpaid taxes. Up to 1996 there was no downside to a tax avoidance scheme because there was normally no interest levied against schemes that were classified as tax avoidance schemes. However as from 1996 the Commissioners discretion to waive interest was removed. Currently all schemes that are proved to be tax avoidance schemes will be subject to interest.

When arrangement will be classified as a tax avoidance scheme and what action the Receiver of Revenue will take are briefly as follows

Whenever the Commissioner is satisfied that any transaction operation or Scheme has been entered into or carried out which has the effect of avoiding or postponing the liability for the payment of any tax duty or levy imposed by Income Tax Act and
was entered into or carrying out _

in the case of a transaction operation or scheme in the context of business in a manner which would not normally be employed for bona fide business purposes other than the obtaining of a tax benefit and
in the case of any other transaction operation or scheme by means of or in a manner which would not normally be employed in the entering into or carrying out of a transaction operation or scheme in question or
Has created rights or obligations which would not normally be created between persons dealing at arms length under a transaction operation or scheme of the nature of the transaction operation or scheme in question and
Was entered into or carried out solely or mainly for the purposes of obtaining a tax benefit The Commissioner shall levy tax duty or levy as if the transaction operation or scheme had not been entered into or carried out.

Gratuitous dispositions
It always seems tempting to shift the burden of income tax from one person to another. There are certain circumstances however where income is deemed to have been received by a person.

Married couples.
Where one spouse makes a donation to the other spouse with the sole or main purpose of reducing the tax burden of the donor any income in consequence to such a donation is deemed to be that of the donor.

Minor children.
Income is deemed to have been received by the parent of any minor child if by reason of any donation made by that parent of that child it has been received by that child or it has been accumulated for the benefit of that child.

Other persons.
If any person has made a donation to a trust to the effect that the beneficiaries thereof shall not receive the income until the happening on an event such income shall until the happening of the event be deemed to be the income of that person.