What Recent GAAR Judgments Mean for Taxpayers
By Michelle Phillips
For years, taxpayers have taken comfort in the idea that if each step of a transaction is technically compliant, the overall structure should withstand scrutiny.
Recent judgments suggest that SARS, and the courts, are increasingly taking a different view.
On 22 April 2026, the Constitutional Court delivered a landmark judgment in Absa Bank Ltd and Another v CSARS, marking the first time South Africa’s highest court interpreted the modern General Anti-Avoidance Rule (GAAR) following its substantial overhaul in 2006.
Just over two months later, on 3 July 2026, the Cape Town Tax Court (Francis J) delivered judgment in seven consolidated appeals (IT 76725, and IT 76750 to IT 76755), applying many of the principles articulated in Absa Bank to a different factual context.
Taken together, these decisions materially strengthen SARS’ ability to challenge tax-driven arrangements by looking beyond legal form and focusing on commercial reality.
The message is becoming increasingly clear: SARS is not confined to the labels used in transaction documents, and sophisticated tax structures will be assessed holistically.
GAAR Has Entered a New Era
South Africa’s modern GAAR, contained in sections 80A to 80L of the Income Tax Act, applies where an arrangement results in a tax benefit, has the sole or main purpose of obtaining that benefit, and contains one or more statutory “tainted elements”. These include abnormality, a lack of commercial substance, non-arm’s-length rights or obligations, or the misuse or abuse of provisions within the Income Tax Act.
In Absa Bank, the Constitutional Court confirmed that a GAAR enquiry cannot be confined to individual agreements or isolated transaction steps. Instead, the arrangement must be assessed as a whole.
Importantly, the Court recognised that modern avoidance structures are rarely straightforward. They often involve multiple interconnected steps where tax-driven elements are embedded within what may otherwise appear to be legitimate commercial transactions.
The result is a more robust framework for SARS to challenge arrangements that achieve outcomes inconsistent with the purpose of the legislation.
“I Didn’t Know” Is Becoming a Difficult Defence
Perhaps the most significant aspect of the Absa Bank judgment relates to the Court’s interpretation of who constitutes a “party” to an arrangement.
The majority held that a taxpayer may be regarded as a party to an impermissible avoidance arrangement even where they claim not to have known every downstream step or mechanism used to generate the tax benefit.
Section 80L focuses on objective participation in the arrangement rather than complete knowledge of every aspect of its implementation.
For taxpayers, the implication is significant.
Investors, funders, trusts, family offices, corporate groups and participants in cross-border structures can no longer assume that their exposure is limited to the agreement they signed. Where funding, guarantees, distributions, shareholdings or other elements form part of a broader tax-engineered structure, SARS may evaluate the arrangement in its entirety.
The Court also clarified how a tax benefit should be identified. The relevant comparison is not between the arrangement and doing nothing, nor between the arrangement and an alternative structure that was never implemented. Instead, the comparison must be made between the arrangement that was actually implemented and that same arrangement stripped of its tax-driven features.
In Absa Bank, this meant that once the avoidance features were removed, the economic substance of the preference share return could be viewed as taxable interest rather than exempt dividends.
Importantly, the judgment confirms that a tax benefit extends beyond simply avoiding tax. Generating an enhanced tax-free return where a taxable return would ordinarily have arisen may itself constitute a tax benefit for GAAR purposes.
Commercial Reality Matters More Than Labels
The Cape Town Tax Court judgment demonstrates how these principles operate in practice.
The case concerned a composite share-sale structure in which shareholders extracted value through a pre-closing dividend funded by the purchaser’s subscription for new shares. The original shares, having effectively been stripped of value, were subsequently sold for a nominal amount.
The taxpayers treated the amounts received as exempt dividends, resulting in negligible capital gains tax consequences.
SARS challenged the arrangement under GAAR, disregarding the dividend and subscription steps and treating the transaction as a disposal of shares for full value. The Tax Court agreed.
The Court found that the commercial reality of the arrangement was a complete exit from the company for consideration funded by the purchaser. Once the dividend and subscription steps were disregarded, what remained was a sale of shares that would ordinarily have attracted capital gains tax.
The Court also rejected the taxpayers’ attempt to compare the arrangement with an earlier restructuring proposal that was never implemented. Consistent with Absa Bank, the appropriate comparison was the transaction actually carried out, stripped of its fiscal features.
Dividend Stripping Remains High Risk
The judgment serves as a strong reminder that dividend-stripping and value-extraction structures remain an area of significant SARS focus.
While dividend declarations and share subscriptions are ordinary commercial mechanisms, the Tax Court concluded that their combined use in this instance was not.
The target company lacked the cash required to fund the dividend. The purchaser subscribed for shares, the subscription proceeds funded the dividend, and the original shares were then transferred for a nominal amount. In substance, the funds moved in a closed circle, leaving the company’s net financial position largely unchanged while converting what was effectively sale consideration into an exempt dividend.
The Court found that the arrangement displayed classic indicators of an impermissible avoidance arrangement, including abnormality, lack of commercial substance and rights or obligations that would not ordinarily exist between arm’s-length parties.
Importantly, the Court also held that the arrangement misused the dividend exemption contained in section 10(1)(k)(i). The exemption exists to prevent multiple layers of taxation within resident corporate groups, not to convert disposal proceeds into tax-free receipts.
Penalties May Be Mitigated, But Interest Remains Payable
The Tax Court’s treatment of penalties provides an equally important lesson.
Although SARS imposed understatement penalties of 75%, the Court remitted these penalties in full. In reaching its decision, the Court considered factors such as full disclosure, the absence of concealment, the taxpayers’ reportable arrangement disclosure, and their reliance on professional tax advice.
The judgment draws an important distinction between the objective GAAR enquiry and the penalty enquiry.
An arrangement may ultimately be found to be impermissible under GAAR while the taxpayer nevertheless acted in good faith in an area of genuine legal uncertainty.
However, taxpayers should take limited comfort from this outcome.
While penalties may, in appropriate circumstances, be reduced or remitted, the Court confirmed that interest remained payable. Once GAAR is successfully invoked, the scope for obtaining relief from interest becomes significantly restricted.
The Question Every Taxpayer Should Be Asking
These judgments do not signal the end of legitimate tax planning.
They do, however, reinforce a principle that is becoming increasingly important in South African tax law:
Would the arrangement still make commercial sense if the tax benefit did not exist?
The further the answer moves towards “no”, the greater the potential GAAR risk.
The message from the courts is becoming increasingly difficult to ignore.
Technical compliance alone may no longer be enough.
In an environment where SARS is looking beyond legal form and focusing on economic substance, taxpayers should ensure that commercial rationale, supporting evidence and tax outcomes remain aligned long before a transaction reaches implementation.
At Arro, we help clients navigate complex tax matters with clarity, commercial practicality and a strong focus on managing risk before it becomes a dispute. Whether assessing existing structures, reviewing proposed transactions or navigating SARS engagements, our focus remains on helping clients make informed decisions in an increasingly sophisticated tax environment.
A well-structured transaction should do more than achieve a tax outcome. It should make commercial sense without one.
