The majority judgment

Penned by Majiedt J, concurred in by Mlambo DCJ, Kollapen J,

Mathopo J, Mhlantla J, Musi AJ, Savage AJ, Theron J and Tshiqi J, dismissed the appeal.

On the first issue, the majority judgment adopted a purposive and objective interpretation

of “party”. It held that participation in an avoidance arrangement did not require

knowledge of every step in the structure. The enquiry was whether, viewed objectively,

the taxpayer’s conduct formed part of the chain of transactions constituting the

arrangement. This reflected the design of the post-2006 GAAR, which deliberately shifted

the focus away from subjective intention and towards the objective effect and structure of

the arrangement as a whole.

The Court found that Absa’s capital investment was a constitutive element of the scheme.

Without that investment, the downstream transactions would not have occurred. Its role

was not incidental, but foundational to the operation of the structure. Absa therefore

participated in, and was a party to, the arrangement within the meaning of the Act. To hold

otherwise would permit a taxpayer to facilitate an avoidance structure while avoiding its

consequences by disclaiming knowledge of its inner workings.

On the second issue, the Court held that Absa did obtain a tax benefit. It emphasised that

the proper analysis required the arrangement to be assessed with its avoidance features

stripped away, so as to reveal its economic substance. This avoided an over-reliance on

the formal characterisation of the transactions and ensured that the enquiry was directed at

what the arrangement, in substance, achieved.

On that basis, the economic substance of the transaction was that of a loan generating

taxable interest, rather than a genuine preference share investment yielding tax exempt

dividends. The dividend form was the product of the structure, not its commercial reality.

The Court concluded that the arrangement converted what would otherwise have been

taxable income into tax exempt income, resulting in an enhanced return to Absa. This

constituted a tax benefit within the meaning of the GAAR, because the exemption flowed

from the structuring of the transaction rather than from any independent commercial

rationale.

The Court further held that, in any event, the GAAR permitted SARS to determine the tax

consequences for any party to an impermissible avoidance arrangement, and was not

confined to the party that directly obtained the tax benefit. This underscored the breadth

of the remedial powers conferred by the statute and ensured that the operation of GAAR

was not defeated by the use of intermediary entities or the fragmentation of complex

arrangements.

The majority judgment emphasised that the purpose of the 2006 amendments to the GAAR

was to strengthen the regime and to prevent sophisticated, multi-layered avoidance

schemes. A narrow interpretation requiring full knowledge of all steps would undermine

that purpose and enable avoidance through deliberate ignorance.