Tax Avoidance

Question 1

Tax Avoidance general principles

Answer 1

Triggers:

• Connected persons
• illegal transactions
• Abnormal tax and conditions
• Making use of tax exempt entities
• Always mention s80G link s102 of TAA
• Do not apply GAAR for a specific anti avoidance
• s103(2) and (5) take precedence over GAAR

2. GAAR is the last one you consider
   - Arrangement
   - Tax benefit
   - Sole or main purpose to avoid tax (link s102 of TAA)
   - Tainted element
   * Then apply 80B if all requirements are met

Question 2

Specific anti avoidance provisions

Answer 2

s7, s7C , s103, par 68-72 of 8th schedule, s80A-80L

Question 3

Utilization of assessed losses s103(2)

Companies and trusts

Answer 3

• s103 is the most relevant anti-avoidance section since the scenario relates to utilising assessed loss
  1. Agreement and change in shareholding
  2. As a result of which income accrued to Company
  3. Entered solely to utilise an assessed loss
• Assessed loss, and another co or trust and change in shareholding
• SARS prevents you from using the assessed loss
• It is only applicable if tax on income or Capital gains is reduced or avoided exclude estate duty or donations tax
• Cannot apply where unsuccessful business with an assessed loss takes over successful business

Question 4

Utilization of assessed losses

Answer 4

Individual s20/20A

Question 5

S103(5)/ s103(2)

Answer 5

Exchange income for dividend income
- SARS taxes you as if you’re still receiving other income

s103(2)

• Section 103(2) deals with avoidance or postponement of tax in the extent of assessed losses
• Section 103(4) places the onus on the taxpayer to prove that the sole or main purposes was not to utilize the assessed loss.
• May be able to discharge the onus on the basis that it did not have the required finance to effect the improvements themselves
• X may have difficulty discharging the presumption of purpose test as set out in section 103(4).
• Therefore S103(2) may be successfully applied/NOT against YY (Pty) Limited.

Question 6

Can they invoke provisions s103(2)

Answer 6

• scope
• The change in shareholding enabled Kate Investments to increase its rental income (after acquiring finance from PropCo, the new shareholder)
• PropCo in turn will convert taxable interest into exempt dividends thereby reducing its taxable income.
• Vusi, in turn, will convert exempt dividends into taxable interest income.
• They wanted to secure financing to enable the return of the company to profitability.
• On balance of probabilities Kate Investments are likely to be able to discharge the presumption of purpose test as set out in section 103(4).

Question 7

Discuss status of assessed loss

Answer 7

-Assessed loss of RXXX at 29 February 2020 may be carried forward by Co to the 2021 year of assessment due to the fact that:
-Co is trading and,
• It has earned income from that trade (section 20(1))
-The Commissioner may however try to invoke section 103(2) to disallow the assessed loss to be set off against income received or accrued in the 2022 year of assessment
-The problem that the company is facing possible application of section 103(2) by the Commissioner which may then result in the set-off of the assessed loss against the income of Co being disallowed.
-An analysis of the criteria of section 103(2) is therefore necessary.

*Based on the above it would seem that xxx may successfully defend an application of section 103(2) against it.
*The assessed loss should thus be able to be set off against the 2021 income.
*The Commissioner may in the alternative try to invoke section 80A – 80L.
*It is submitted that for the reasons furnished above he would be unsuccessful.
• the arrangement was entered into for bona fide business purposes other than to obtain a tax benefit and it does not lack commercial substance
• the sole or main purpose was not to obtain a tax benefit.

Question 8

Can they apply GAAR

Answer 8

-In terms of section 80A the transactions will be considered to be an impermissible tax avoidance arrangement

Question 9

SARS argues that expenditure is excessive and not in production of income

Answer 9

-There is some merit in SARS submission in that numerous court cases have stated that excessive expenditure is not for trade purposes and also not in the production of income.
-Can prove (the onus is on the taxpayer in terms of section 102 of the Tax
Administration Act) that the contractual arrangement with the Company is bona fide and the expenditure reasonable in relation to the services rendered by the Holding company a section 11(a) deduction
-It could be submitted that it is trade expenditure and not merely the transfer of income to the holding company.

Question 10

Tax avoidance and evasion

Answer 10

1. A tax clearance certificate must be obtained if you emigrate
2. Taxes must be in order before you leave

Trigger: agreement and change in shareholding