Hand-to-hand combat: The controversial judgements of Lewis JA

Recently, the tax profession has been up in hand-to-hand combat. And we are not even engaging the usual enemy, SARS, but rather we are squabbling amongst ourselves over the recent judgements of Lewis JA in the Supreme Court of Appeals ‘SCA’.

CSARS v NWK (Pty) Ltd

On 1 December 2010 came judgment in CSARS vs NWK. The case deals with the parameters of tax planning, or, in short, how far can taxpayers push their luck when tax planning.

Years ago, the great tax mind Pierre du Toit explained the parameters of tax planning with reference to ‘Bloemfontein Blush’. No, that’s not getting caught taking pee under the bridge on the N1, but rather someone who has window-dressed the facts in a tax case and blushes when called on to explain it all to the SCA.

Du Toit cleverly connects ‘Bloemfontein Blush’ to the famous judgement in Zandberg versus van Zyl, 1910,..’ – the parties to a transaction endeavour to conceal its real character. They call it by a name, or give it a shape, intended not to express but to disguise its true nature. And when a court is asked to decide any rights under such an agreement, it can only do so by giving effect to what the transaction really is, not what in form it purports to be. The maxim then applies plus valet quod agitur quam quod simulate concipitur.

Now, more than 100 years later Lewis JA holds that the Courts should take it even further where ‘a transaction is only to achieve an object that allows the evasion of tax … then it will be regarded as simulated’.

Many in the tax profession are not happy with the judgment. They ask, “Why was it necessary to do that? Why did Lewis JA not simply find the transaction was disguised and tax according to the true agreement between the parties?”

CSARS v Founders Hill (Pty) Ltd

Then up comes CSARS v Founders Hill (Pty) Ltd, 5 May, 5 may 2011. For years the tax profession has used so-called ‘realisation companies to sell off capital assets. We base the practice on the judgments of Berea West Estates (Pty) Ltd v. SIR, 1976 and Natal Estates Ltd v SIR, 1975.

Now Lewis JA again takes things further and enquires into what constitutes a realisation company, and also finds there is more to the taxation of property developments than ‘crossing the Rubicon.’

Again some tax nerds say it was not necessary for Lewis JA to go so far. Others argue that Lewis JA contradicted the earlier SCA in CIR v Pick ‘n Pay Employee Share Purchase Trust.’

SARS is currently enjoying great fortune in the SCA and must be delighted with Lewis JA.  And taxpayers ‘looking for their day in Court’ are well advised to take along extra Imodium to Bloemfontein. Or pray that their leave to appeal to the Constitutional Court will even be granted.

Perhaps Lewis JA is trying to put get the important message through ‘don’t expect any quarter to be asked or given in the SCA.’ And I can live with that.


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