Tax Avoidance

Question 1

There are two sections to anti avoidance, what are they?

Answer 1

1. General anti avoidance section

2. Specific anti avoidance section

Question 2

Discuss tax avoidance and tax evasion?

Answer 2

Tax avoidance is legal and it is by regulating affairs to pay minimum tax.
Tax evasion is the illegal means to reduce tax liability (non disclosure or falsification), it will lead to penalties.

Question 3

What is the penalty for default or omission of tax?

Answer 3

1. Providing information late = fine of R50 per day
2. Omitting amounts return = additional tax = 2x the difference between the tax on submitted taxable income and actual taxable income (same for incorrect statements)

Question 4

What is the sham transaction concept?

Answer 4

1. A sham in fact = which is a fictional transaction that never actually occurred
2. A sham is substance = a transaction that actually occurred but which lacked the substance the form allegedly represented

Question 5

Discuss substance versus form

Answer 5

Tax is always based on the substance of a transaction rather than its form

Question 6

What is the general avoidance provision?

Answer 6

It provides that if an arrangement is an impermissible tax avoidance arrangement, the commissioner may raise tax as if the arrangement has not been entered into. This implies that tax avoidance is not impermissible but only certain types of arrangement are impermissible.

Question 7

What are the two requirements for an arrangement to be impermissible?

Answer 7

1. A sole or main purpose is to obtain a tax benefit

2. It is abnormal, lack of commercial substance or has created non arms length like rights or obligations

Question 8

What is the summary of s80A impermissible tax avoidance arrangement?

Answer 8

An arrangement is an impermissible tax avoidance arrangement if its sole or main purpose was to obtain a tax benefit and one of the following also applies:

1. If it was a business arrangement
   
   • it was entered into or carried out by means or in a manner which would not normally be employed for bona fide business purposes
   • lacks commercial substance or
   • it has created rights and obligations that would not normally be created between persons dealings at arms length, or
   • it would result directly or indirectly in the misuse or abuse of the provision of the Act
2. If it was not a business arrangement
   
   • it was entered into or carried out by means or in manner which would not normally be employed for a bona fide purpose other than obtaining tax benefit
   • it has created rights and obligations that would not normally be created between persons dealing at arms length or
   • it would result directly or indirectly in the misuse or abuse of the provisions of the Act

Question 9

What is s80G presumption of trade?

Answer 9

Section 80G deems the taxpayer to have had a tax avoidance purpose if the arrangement in fact avoids tax.
The onus is then on the taxpayer to proof that his sole or main purpose was not to avoid tax or obtain any other tax benefit.
Purpose must be looked at in regard to the whole arrangement and steps in arrangement.
The taxpayer has to show that reasonably considers tax avoidance was not the sole or main purpose of the arrangement.

Question 10

Under what circumstances would the anti avoidance provision apply?

Answer 10

The purpose of the arrangement must be to avoid tax and the means or manner or the rights or obligations must be abnormal.
Even if the arrangement is not abnormal the following will also be tested:
- lack of commercial substance
- misuse or abuse of provisions of the Act

Question 11

What is an arrangement?

Answer 11

Any transaction operation or scheme, agreement or understanding (whether enforceable or not) including all steps therein or part thereof, and includes any of the foregoing involving the alienation of property.

Question 12

Section 80C deals with the meaning of the term lack of commercial substance, when is an arrangement lack commercial substance?

Answer 12

1. If it results in a significant tax benefit for a party but does not have a significant effect in the business risks or net cash flows of that party. (Person obtained the significant tax benefit)
2. The significance of a tax benefit would indicate that tax avoidance was a persons main purpose.

Question 13

Characteristics of an avoidance arrangement that are indicative of a lack of commercial substance include but are not limited to any of the following being present…

Answer 13

1. The legal substance or effect of the avoidance arrangement as a whole is inconsistent with or differs significantly from the legal form of its individual steps
2. The inclusion or presence of round trip financing
3. The inclusion or presence of an accommodating or tax indifferent party
4. The inclusion or presence of elements that have the effect of offsetting or canceling each other

Question 14

Lack of commercial substance may be indicated by the following…

Answer 14

1. The presence of round trip financing
2. Offsetting or canceling elements of transaction
3. Legal form significantly differs from legal substance or effect

Question 15

What is round trip financing?

Answer 15

An arrangement where funds are transferred between or among the parties and the transfer significantly reduces, offsets or eliminates any business risk incurred by such party and in connection with the avoidance arrangement in addition to giving rise to tax benefit

Question 16

What are the two requirements for a party to be considered as an accommodating or tax indifferent party?

Answer 16

1. The amount derived by that party (in connection with the arrangement)
   - is not subject to normal tax, or
   - is significantly offset by:
   
   • any expenditure, or
   • loss incurred, or
   • any assessed loss
     Of the party in connection with the arrangement
2. Any one of the following applies:
   - an amount which would have been included as gross income or a capital receipt of one party is included , instead, in the hand of the accommodating or tax indifferent party
   - the participation of the accommodating or tax indifferent party has made a non-deductible expense or loss deductible in the hands of the other party
   - the participation of the accommodating or tax indifferent party has had the result that what would have been taxable income of another party is either not included in its gross income or is exempt from normal tax
   - another party makes a repayment as a direct or indirect result of the participation of the accommodating or tax indifferent party

Question 17

Section 80J deals with the notice for anti avoidance provision, what does it provide?

Answer 17

SARS must give the taxpayer an opportunity to explain why the anti avoidance provisions should not be applied to a particular transaction or scheme.
The taxpayer has 60 (business) days to give reasons and SARS has 180 (business) days to ask for additional information or raise an assessment or advise the taxpayer that the anti avoidance provision will not be applied.

Question 18

Discuss the utilization of assessed loss in companies or trusts.

Answer 18

• whenever the commissioner is satisfied
• than an arraignment affecting any company or trust or any changes in shareholding in a company or changes in members interest in a CC or change in the trustees or beneficiaries of any trust has been effected
• has resulted directly or indirectly in income or any capital gain accruing to the company, CC, or trust
• solely or mainly for the purpose of utilizing any assessed loss, any capital loss or any assessed capital loss
• in order to avoid or reduce liability for any tax, duty or levy on the income on the part of that company or any other person
• the utilization is disallowed

Question 19

What is also important to note with regards to the disallowance of utilization of assessed loss?

Answer 19

The commissioner is not restricted to the year in which the arrangement was entered into but he should be restricted to the balance of assessed loss that exist at the time.

Question 20

Restriction of utilization of assessed loss will only apply if the following occurs

Answer 20

When the changes of shareholding or agreement is carried out solely or mainly to utilize the assessed loss and thereby reduce or avoid tax.

Question 21

What is the treatment of connected persons and accommodating or tax indifferent parties?

Answer 21

The commissioner may:

• treat connected persons as a single party
• disregard any accommodating or tax indifferent party or combine such party with any other party

Question 22

What are the three steps approach in answering general tax avoidance question?

Answer 22

1. Was an arrangement entered into?
   - give definition of arrangement
   - apply scenario
2. Is the arrangement an avoidance arrangement?
   - give definition of avoidance arrangement
   - discuss what tax benefit is resulted from the arrangement
   - conclude that it is an avoidance arrangement
3. Is it an impermissible avoidance arrangement?
   - give definition, go through the list
   - provide the sole or main purpose from the scenario
   - give proof that it is or is not

Question 23

What is the three steps approach to answer the utilization of assessed loss in companies or trust?

Answer 23

Determine whether s103(2) is applicable:
1. Changes in shareholding?
- always yes, but make it applicable to the question
2. As a direct or indirect result thereof income has been received by the company?
3. Was the arrangement concluded solely or mainly for the purpose of utilizing any assessed loss?
NB always provide the theory and make it applicable to the question