During FY 2014 – 2018 a South African company, ABSA, on four occasions bought tranches of preference shares in another South African company, PSIC 3. This entitled ABSA to dividends. The dividends received from PSIC 3 by ABSA were declared as tax free.
The income in PSIC 3 was based on dividend payments on preference shares it owned in another South African company, PSIC 4. The income in PSIC 4 was from a capital outlay to an off shore trust, D1 Trust. The trust then lent money to MSSA, a South African subsidiary of the Macquarie Group, by means of subscribing for floating rate notes. The D1 Trust made investments by way of the purchase of Brazilian Government bonds. It then derived interest thereon. In turn, PSIC 4 received interest on its capital investment in D1 Trust.
The South African Revenue Service held that ABSA had been a party to a tax avoidance scheme covered by local anti-avoidance provisions and first issued a notice of assessment and later a tax assessment according to which the income was taxable.
According to the Revenue Service, the critical aspect of this series of transactions was the investment in Brazilian Government bonds by D1 Trust. This led to the view that Absa was a party to an arrangement comprising all these transactions and that ABSA had received an impermissible tax benefit in the form of a tax-free dividend. The proper result according to the Revenue Service ought to have been that interest income was received by Absa which would attract tax.
ABSA brought the case to court, disputing having been a “party” to an “impermissible avoidance arrangement” and procuring a “tax benefit”.
ABSA stated that it bought the preference shares in PSIC 3 on the understanding that PSIC 3 and MSSA had a back-to-back relationship and that the funds would flow directly to MSSA to repay debt to its parent the Macquarie Group. Absa was unaware of the intermediation of PSIC 4 and the D1 Trust, and of the D1 Trust’ s Brazilian transaction. Hence it could not, in this state of ignorance, have participated in an impermissible tax avoidance arrangement, nor did it have a tax avoidance motive in mind, and nor did it procure a tax benefit to which it was not entitled.
Judgement of the High Court
The court ruled in favour of ABSA.
The court observed that a taxpayer has to be, not merely present, but participating in the arrangement.
“The fact that it might be the unwitting recipient of a benefit from a share of the revenue derived from an impermissible arrangement cannot constitute “taking part” in such an arrangement.”
“That premise [that ABSA was a party to a tax avoidance scheme] was incorrect in law because the factual premise did not establish that Absa was a party to such arrangement nor that it had an intention to escape an anticipated tax liability nor that it received relief from a tax liability as result of acquiring preference shares in PSIC 3.”SARS vs ASBA Bank_SATC