The number of cases before South African courts involving the general anti-avoidance rules (the GAAR) have increased noticeably in the last two years. This clearly demonstrates that SARS applies the GAAR in practice. Tax practitioners and professionals must have a solid grasp of when and how sections 80A to 80L of the Income Tax Act may apply to a transactions. This article and the related episode of my Tax Break podcast (episode 73) consider the key requirements of the GAAR at a high level.
The structure of the GAAR
The general anti-avoidance rules operate through a series of interconnected provisions that target arrangements entered into for tax avoidance purposes. Section 80A defines an impermissible avoidance arrangement. This definition refers to, amongst others, sections 80C to 80E in making this determination. Section 80B is the key provision that sets out the powers of the Commissioner when it comes to impermissible avoidance arrangements.
Key aspects of the GAAR
The GAAR applies to ‘arrangements’, a term defined to encompass agreements, understandings, schemes, transactions and series of transactions. This wide scope means that many commercial structures could potentially fall within the rules’ ambit. The second requirement of the GAAR is that this arrangement should result in a tax benefit. An arrangement that results in a tax benefit is an avoidance arrangement.
The requirement that an arrangement’s sole or main purposes is to obtain a tax benefit is central to the GAAR. If an arrangement results in a tax benefit, this is presumed to be its sole or main purpose. The burden rests on taxpayers to prove the contrary. Under the revised GAAR that came into effect in 2006, this test involves both subjective and objective assessments, as the Tax Court also suggested in the Taxpayer G case in September 2025.
Lastly, an arrangement that meets all three of the above requirements will only be an impermissible avoidance arrangement if it satisfies one of the tainted element indicators in section 80A. While some of these are very similar to requirements in the earlier version of the GAAR (previously n section 103(1)), others have not yet been considered by the South African courts. The tainted element requiring an assessment as to whether a provision of the Income Tax Act was misused or abused is one such a requirement not yet tested in the South African courts.
Process and implications
The GAAR contains detailed procedural requirements that SARS must follow when applying the rules. These include notification requirements and the taxpayer’s right to object to proposed adjustments. These requirements have been the subject of most of the cases on the revised GAAR to date.
If SARS applies the GAAR, the assessment ultimately issued will reflect an outcome in accordance with section 80B. The behaviours for USP purposes explicitly lists an impermissible avoidance arrangement. These arrangements attract a penalty at a rate of at least 75% of the tax, depending on the circumstances.
You can listen to Episode 73 of my podcast, Tax Break, where I deal with the GAAR is more detail.
