SARS sends a R46 million warning to these taxpayers

SARS has sent a clear warning to taxpayers after a recent court ruling upheld its use of anti-avoidance laws to include R46 million in a taxpayer’s income, signalling that certain taxpayers will no longer escape scrutiny.

According to Micaela Paschini, Team Lead: Tax Legal at Tax Consulting SA, South African taxpayers are learning the hard way that SARS’ patience with aggressive tax planning has run out.

“In a recent Tax Court decision, SARS successfully included R46 million in a taxpayer’s taxable income after invoking the General Anti-Avoidance Rules (GAAR),” Paschini said.

“The decision signals that even sophisticated structures are no longer safe. If SARS suspects an arrangement was designed primarily to avoid tax, it will not hesitate to act.”

Although the taxpayer’s identity remains confidential, the recent Tax Court judgment in Mr Taxpayer G v Commissioner for the South African Revenue Service lays bare the facts.

“Over several years, the taxpayer channelled remuneration through foreign entities, generated Secondary Tax on Companies (STC) credits, and re-characterised compensation as tax-exempt dividends rather than taxable income.”

SARS disagreed and applied GAAR to re-characterise the receipts as ordinary income. The court agreed with SARS’ arguement.

It found that the sole or main purpose of the structure was to obtain a tax benefit and that, “but for” the arrangement, substantial income tax would have been payable, which SARS ultimately succeeded in levying.

Paschini said the decision is the latest in a series of avoidance-related issues where taxpayers have attempted to find loopholes, often resulting in disputes with SARS.

“It reflects a clear trend of SARS becoming increasingly assertive in challenging perceived tax-driven arrangements.”

Sections 80A to 80L of the Income Tax Act empower SARS to disregard, combine or re-characterise any arrangement that results in a tax benefit and lacks genuine commercial substance.

“In this case, SARS demonstrated that the taxpayer’s structure, ostensibly designed to utilise STC credits and disguise income, lacked commercial substance.”

“The court agreed, holding that the steps were executed in a manner not ordinarily employed for bona fide business purposes.”

Notably, the court also confirmed that substance prevails over form. The fact that payments were styled as dividends did not prevent SARS from re-characterising them as income where the underlying reality supported that view.

The balance turns against taxpayers

The Tax Court’s application of the “but for” test proved decisive, Paschini said. The taxpayer held that the transactions had a legitimate business purpose.

However, this argument collapsed against the economic reality that, without the structure, ordinary income tax would have applied.

“The balance, therefore, turned squarely in SARS’ favour. In practice, SARS is becoming increasingly proactive, using legislative tools to dismantle what it regards as artificial arrangements.”

“This marks a clear shift from reactive enforcement to strategic, pre-emptive intervention,” Paschini added.

This ruling also lands against the backdrop of a broader enforcement trend. Earlier in 2025, the Constitutional Court heard arguments in the long-running Absa Bank Limited v SARS matter.

This case, which is still awaiting judgment, is expected to clarify key aspects of GAAR’s application, Paschini said.

“This latest Tax Court decision underscores the courts’ willingness to uphold SARS’ use of GAAR and reject tax-driven schemes lacking commercial rationale.”

According to Paschini, the implications of the new case extend far beyond this taxpayer. It shows that arrangements undertaken primarily for tax reasons, even when technically compliant, are now firmly in SARS’ sights.

This includes executive remuneration models, cross-border structuring, corporate reorganisations, and financing arrangements prioritising tax outcomes over economic substance.

“Put simply, where tax drives the transaction rather than follows it, the arrangement is at risk. SARS has made it clear that complexity and multiple layers of entities will no longer provide protection.”

“While the court acknowledged that the taxpayer’s arguments were not entirely unreasonable given GAAR’s complexity and limited precedent, that did not alter the outcome: R46 million was included in taxable income.”

With SARS intensifying its enforcement, Paschini stressed that taxpayers must ensure their transactions are commercially and legally defensible from inception.

“Those engaging in offshore structures, incentive planning, or complex financing should obtain professional advice early, before implementation.”

The principle is that nothing prohibits taxpayers from planning their affairs in a tax-optimal manner. However, tax should be the consequence of commercial reality, not its primary motivation.

The bottom line, Paschini said, is that GAAR is no longer a theoretical tool. “It is an active enforcement mechanism, and SARS is using it.”

“Before implementing any complex transaction, taxpayers should seek professional advice to ensure that their arrangements are commercially defensible and do not expose them to costly disputes.”