Mind over matter? Developments in the GAAR ‘purpose’ debate

By Stephan Zaaiman & Dewald Pieterse

Introduction

In recent weeks, there have been significant developments relating to the interpretation and application of the General Anti-Avoidance Rule (GAAR) as contained in sections 80A-80L of the Income Tax Act 58 of 1962 (the ‘ITA’). Most notably, the Constitutional Court has heard arguments in what is certain to be the landmark case of Absa Bank Limited and Another v CSARS (Case Number CCT 72/24) (hereinafter Absa), which may yet have far-reaching implications for the scope and enforcement of the GAAR. In addition, the Tax Court delivered a remarkably detailed judgment in Mr Taxpayer G v CSARS (IT 24502) [2025] ZATC 12 (3 September 2025) (hereinafter IT 24502), addressing several fundamental aspects of the GAAR (many of which are also currently under consideration by the Constitutional Court in Absa).

Both the judgment in IT 24502 and the court papers in Absa make for a riveting read and will undoubtedly inspire extensive commentary. Although several fundamental aspects of the GAAR are addressed in both of these matters, we will, for present purposes, focus on a key issue which was ruled on in IT 24502, being whether the so-called ‘sole or main purpose’ enquiry  in section 80A of the ITA calls for a subjective or an objective test.

It is relevant to note that the GAAR affords extraordinary powers to the South African Revenue Service (SARS) to impose tax consequences on parties to an arrangement which would not otherwise attract tax on the ordinary application of the ITA. SARS may avail of these powers, afforded under section 80B, only where the following four requirements of the GAAR have been met, namely where –

• there is an ‘arrangement’ as defined in section 80L;
• which ‘arrangement’ results in a ‘tax benefit’ as defined in section 1 (and is therefore an ‘avoidance arrangement’ as defined in section 80L);
• which ‘avoidance arrangement’ has the sole or main purpose of obtaining that ‘tax benefit’; and
• which ‘avoidance arrangement’ is accompanied by one of the so-called ‘tainted elements’ described in paragraphs (a) to (c) of section 80A.

It is further pertinent to note that, prior to the enactment of sections 80A to 80L of the ITA in 2006 (the so-called ‘new GAAR’), the GAAR was contained in section 103(1) of the ITA, which underwent several iterations from its initial introduction in 1962 until its repeal in 2006.

The sole or main purpose test

How one approaches the sole or main purpose enquiry has profound implications on the application of the GAAR. Should the test be purely objective, the taxpayer’s own subjective intentions become irrelevant, as one would be concerned solely with the objective effect of the arrangement. On the contrary, should the test be subjective, one is concerned with the taxpayer’s personal intentions and objectives (noting that, with reference to the presumption of purpose contained in section 80G of the ITA, a taxpayer’s subjective intentions will inevitably derive from both its stated intentions and objective factors).

The sole or main purpose enquiry has been a fundamental feature of the GAAR since its earliest iterations and, insofar as the earlier versions of the GAAR were concerned, our courts consistently held that the enquiry was a subjective one. Following the promulgation of the new GAAR, the view that the enquiry under the new GAAR remained subjective found widespread support within the tax advisory community. This view appeared to be vindicated in the judgement handed down in CSARS v Absa Bank Limited and Another 2024 (1) SA 361 (SCA) where the Supreme Court of Appeal stated the following:

‘In CIR v Conhage this court held that the effect, purpose and normality of a transaction are essentially questions of fact. What must be determined in every case is the subjective purpose of the taxpayer. In that matter the court was dealing with s 103(1) of the ITA which contained an anti-avoidance provision predating the comprehensive GAAR provisions now set out in the ITA. Nevertheless, similar considerations relating to the determination of the purpose and effect of the transaction or arrangement applied.’ (our emphasis.)

A view which favoured a ‘more objective standard’ emerged from a SARS ‘Draft Guide on the GAAR’ (Draft Guide) which surfaced in 2010. The Guide was never formally published by SARS. A similar notion found favour with the authors of Silke on South African Income Tax, Lexis Nexis, Electronic Edition who observed at 19.38 that the wording of section 80A of the ITA broke ranks with the old GAAR in a ‘radical way’, and that the requisite purpose ‘is that of the ‘arrangement’ itself, and not the subjective purpose of the taxpayers who entered into it.’

The judgment handed down in IT 24502 on 30 September 2025 firmly endorsed the ‘more objective purpose test’ contemplated in the Draft Guide. It seems that, although the taxpayer in IT 24502 appears (for reasons unclear) to have conceded on this issue, the Tax Court nonetheless dealt with the question at length. In this regard, the Tax Court referred to both the Draft Guide and the above extract from Silke to support its conclusion that the wording in section 80A of the ITA contemplates a ‘more objective test’.

Questions relating to the interpretive justification of the ‘objective purpose’ test

The authors of the Draft Guide argue that section 80A of the ITA broke with the subjective test (as endorsed by CIR v Conhage (Pty) Ltd 61 SATC 391 (SCA) and other authorities in relation to the former 103(1) of the ITA) on the basis of a subtle distinction between the wording used in these provisions. The Draft Guide juxtaposes an extract from section 103(1) of the Act (as it read since 1978 until the time of its repeal) which states that the GAAR could apply ‘[w]henever the Commissioner is satisfied that any transaction, operation or scheme…(c) was entered into or carried out solely or mainly for the purpose of obtaining a tax benefit…’ (our emphasis) against the corresponding  phrase used in section 80A of the ITA which now provides that ‘[a]n avoidance arrangement is an impermissible avoidance arrangement if its sole or main purpose was to obtain a tax benefit…’ (our emphasis).  The authors of the Draft Guide then proceed to draw the following conclusion:

‘By virtue of changes made to the wording of the purpose requirement in the GAAR, the purpose test under the GAAR is therefore a more objective test. Although the onus of proof has not changed substantially, the sole or main purpose of the arrangement itself is the relevant purpose and no longer the subjective purpose of the taxpayer.’ (our emphasis.)

The argument above appears to have found favour with the Tax Court in IT 24502 and, whilst recognising that the evidence of a taxpayer’s subjective purpose is not entirely excluded, the tax court concluded as follows:

‘It would, therefore, appear that the correct way to determine the purpose of the arrangement is to view the arrangement holistically, taking all relevant facts and circumstances into account. Thus to include a definite shift in the weight afforded to the factors previously considered under section 103, and a definite shift away from the subjective purpose of the taxpayer being paramount to the objective purpose of the arrangement (while retaining, as one of the factors, the stated subjective purpose of the taxpayer).’ (our emphasis.)

A potential problem with the above argument (which is the same argument propounded by the Draft Guide) emerges when one considers the wording originally used in section 103(1) of the ITA as it read since it was first promulgated up until the time of its amendment in 1978.  Whereas the 1978 amendment introduced the wording used in support of the Draft Guide’s interpretation, the original wording used in section 103(1) read as follows prior to such amendment: ‘the [Commissioner] is of the opinion that the avoidance or the postponement of such liability, or the reduction of the amount of such liability was the sole or one of the main purposes of the transaction, operation or scheme…’ (our emphasis). In other words, the linguistic features upon which the Draft Guide’s justification for a ‘more objective’ interpretation relies were also present in the original wording of section 103(1).  The cases which were decided under the 1962 version of the GAAR did not seem to have any difficulty in concluding that the wording signified a subjective enquiry (see SIR v Geustyn, Forsyth & Joubert 1971 (3) SA 567 (A) and Ovenstone v SIR 1980 (2) SA 721 (AD)). For example, in SIR v Gallagher 1978 (2) SA 463 (A),  Corbett JA, with the full bench of the Appellate Division concurring, stated the position as follows:

‘In the circumstances it is appropriate to state that, in my view, the test is undoubtedly a subjective one […] If the subjective approach be adopted (as it must), then it is obvious that of prime importance in determining the purpose of the scheme would be the evidence of respondent, the progenitor of the scheme, as to why it was carried out.’ (our emphasis.)

It is therefore unclear why the purpose enquiry should, on this basis, be approached any differently than proposed by such earlier judgments. One has to assume that, at the time of drafting sections 80A and 80G of the ITA, the legislature would have had the full benefit of the legislative record and related jurisprudence and that, if a radical break with the subjective enquiry contemplated in the earlier versions of section 103(1) of the ITA was intended (such that precedent established by the Appellate Division in Geustyn, Gallagher and Ovenstone would no longer apply), it would have been an easy task to state this clearly. As such, the significance attributed to the linguistic distinctions between section 103(1) of the ITA, as it read at the time of its appeal, and section 80A of the ITA seems unwarranted.

Conclusion and general observations relating to the approach to GAAR

In its heads of argument in Absa, SARS once again refers to an apparent ‘move away from a purely subjective approach to an objective purpose requirement’ (presumably on the same grounds posited by the Draft Guide as discussed above) and it is clear from the court papers that SARS considers the new GAAR to generally embody a singular objective thread. SARS finds support for its interpretation in the Explanatory Memorandum which accompanied the new GAAR and quotes the following extract: ‘The GAAR has proven to be inconsistent and, at times, ineffective deterrent to the increasingly sophisticated forms of impermissible tax avoidance schemes that certain advisors and financial institutions are putting forward and some taxpayers are implementing’.  When it comes to questions relating to the determination of a ‘tax benefit’, SARS argues that the counterfactual must be determined on a purely objective basis and, more importantly, that the GAAR can be invoked against a party to an impermissible avoidance arrangement which did not itself derive any tax benefit and which had no knowledge of the underlying impermissible features of the arrangement. Based on this approach, the taxpayer’s sole or main purpose seems by implication to be of little relevance, if any.

There are several fundamental concerns which arise from the above approach. For one, the apparent need for the extreme interpretation put forward by SARS in Absa largely arises as a consequence of the manner in which they have chosen to enforce the GAAR (e.g. pursuing taxpayers with no apparent knowledge and having derived no apparent tax benefit). Where the GAAR is applied against the ‘correct’ parties (i.e. those who in fact anticipated and who derived a tax benefit), a subjective purpose enquiry gives effect to the apparent legislative intent as derived from the passage quoted from the Explanatory Memorandum above, and does so without the extensive collateral damage which would inevitably arise from the (extreme) objective approach apparently championed by SARS.

It is incumbent upon our courts to ensure that the interpretation of the new GAAR developed by them scales across all instances, and to guard against unanticipated downstream consequences of an unconstrained approach. In this regard, as relates to the rule of law, it is not insignificant to note that countless transactions and arrangements have been concluded over the past two decades on the basis of the subjective approach (as apparently endorsed by the Supreme Court of Appeal in the Absa matter). Over the same period, the legislature has had ample opportunity to clarify the law, and SARS has had ample opportunity to enforce and galvanise its favoured interpretation through the courts. To endorse the objective approach championed by SARS at this belated stage would effectively spring a decades-old trap on unwitting taxpayers and their investors who, by the time these matters typically come to a head, may well be a very different set of individuals than those who initially stumbled inadvertently into its grasp.