The recent Tax Court judgment in Mr Taxpayer G v Commissioner for the South African Revenue Service (IT 24502, 30 September 2025) is one of the clearest explanations yet of how South Africa's General Anti-Avoidance Rules (GAAR) actually work in practice. For business owners, directors, and financial managers, this case shows where SARS (and, for now, the Tax Court) draws the line between acceptable tax planning and impermissible tax avoidance.
At its core, the case dealt with a relatively common theme: trying to turn taxable income into tax-exempt dividends through structuring. SARS 'saw through' the arrangement and treated the amounts as normal taxable income. An approach that the Tax Court agreed with.
WHAT THE CASE WAS ABOUT
The taxpayer received R46.6 million over several years. On paper, these amounts were presented as tax-free dividends. Dividend tax for individuals only began in 2012; before that, STC was a company-level tax, so dividends were exempt in the hands of a natural person. But SARS argued that these amounts were not dividends at all, but payments for services.
To get the "dividend" outcome, the taxpayer used a set of agreements and rights dating back to 2008 and 2011. These were shifted, ceded, and reworked through a series of entities that never actually traded in any meaningful way. Promissory notes and journal entries were used to create paper reserves so that these entities could declare "dividends" without real business activity behind them, with cash only entering the wider structure much later when the external company bought in.
Part of this machinery also generated STC credits (under the old Secondary Tax on Companies system). These credits allowed the companies in the structure to declare dividends without triggering STC, which in turn meant that the amounts flowing up to the taxpayer could be presented as dividends and received by him in tax-exempt form—effectively converting his fee into a tax-free receipt.
SARS invoked GAAR, arguing that the arrangement was abnormal, lacked commercial substance, and existed mainly to obtain a tax benefit. The Tax Court agreed, re-characterising the receipts as fully taxable income.
The Tax Court found that, despite the technical structuring, the economic reality was straightforward. The taxpayer was being paid for services, and the "dividend machinery" had no genuine commercial purpose other than to reduce tax.
WHY GAAR APPLIED: THREE KEY PRINCIPLES
The judgment illustrates three practical GAAR concepts that taxpayers should understand.
1. The correct comparison isn't "doing nothing"
To apply GAAR, SARS must show that the taxpayer received a tax benefit. The taxpayer argued that because the arrangement was "take-it-or-leave-it", the correct comparison to ascertain whether there was a tax benefit was between:
- the structured dividend arrangement, and
- having no transaction at all.
The Court said that was not the correct comparison. They elaborated on this position by saying if taxpayers could always compare their structure with "doing nothing", GAAR would never apply.
Instead, the Court said the correct comparison is:
- what the tax would have been if the same result were achieved in a normal, commercially sensible way, versus
- what the tax was under the artificial structure.
Under the normal arrangement, the R46.6 million would have been taxable income. Under the structured version, the taxpayer paid little to no tax. That difference was the tax benefit.
2. Tax-Driven Arrangements are distinguished by objective features, not the taxpayer's stated intentions
The establishment of a tax benefit is not the end of the matter. GAAR only applies where the sole or main purpose of the arrangement was to obtain a tax benefit.
The establishment of a tax benefit is not the end of the enquiry. GAAR applies only where the sole or main purpose of the arrangement was to obtain that tax benefit. Under the old section 103 regime, courts focused on the taxpayer's subjective intent. The modern GAAR provisions shift the enquiry to the purpose of the arrangement itself, which the Court confirmed to be a predominantly objective test.
In determining purpose, the Court looked at:
- How the steps were sequenced and designed;
- How the money moved in the transaction;
- What actually happened in practice when the arrangement was implemented; and
- What was the outcome of the arrangement.
The Court found that where those objective features point to a tax-avoidance purpose, the arrangement is regarded as tax-driven for GAAR purposes—regardless of how the taxpayer later seeks to characterise his intentions.
3. Artificial structures with no real commercial substance will fail GAAR
This part of the judgment deals with the "tainted element" under GAAR — whether the arrangement lacked commercial substance. If the arrangement has no real commercial purpose apart from obtaining a tax benefit, it is tainted and GAAR can apply.
The court had no difficulty finding that the arrangement was artificial. Classic warning signs were present:
- movement of value mainly through journal entries rather than real cash
- a company incurring large "debts" despite having no assets and no ability to repay
- The taxpayer giving up contractual rights worth millions for no commercial reason
- A set of linked transactions that made sense only because of the tax outcome
The court held that the arrangement had no commercial substance. The taxpayer would have been in exactly the same economic position had he simply been paid a fee or commission. In other words, the structure added no commercial value — it existed solely to reduce tax. That's exactly the type of scheme GAAR is designed to stop.
WHY THIS ARRANGEMENT FAILED THE GAAR TEST IN A NUTSHELL
Although much of the technical analysis had already been resolved through the GAAR principles, the court still had to consider how the taxpayer's specific structure operated in practice. When it looked at the three linked schemes it found that they were essentially vessels with no real trading activity, no meaningful assets and no commercial rationale apart from enabling the taxpayer to extract his remuneration in dividend form. The companies relied on paper reserves, historic rights and promissory notes that could never realistically be honoured, and the internal movements between them added nothing of economic substance.
Once the noise of the restructuring was stripped away, the taxpayer was in the same financial position as if he had simply been paid for his services in the ordinary way. No genuine risk shifted, no cash was genuinely generated within the entities, and no business purpose was advanced. The only feature that changed was the tax outcome.
On that basis, the court concluded that the R46.6 million was taxable income. The structure's design and effect showed that its main purpose was to secure a tax advantage, and SARS was therefore entitled to apply GAAR. The taxpayer's appeal was dismissed.
WHAT THIS MEANS FOR SOUTH AFRICAN BUSINESSES
This judgment should serve as a warning for any taxpayer - who makes use of sophisticated tax-driven structures. If the main difference between one option and another is the tax outcome, SARS will scrutinise it. Calling something a dividend does not make it one, and reshuffling entries, reserves or debt on paper will not protect a structure that has no commercial purpose in practice.
For SMEs, owner-managed businesses, and high-net-worth individuals, this decision confirms that SARS is willing (and now has clear judicial backing) to unwind structures that turn normal income into tax-exempt receipts through artificial steps.
Intellectual property disclaimer:
The contents of any article published by Pieterse Sellner Erasmus should not be construed as professional legal advice.
Intellectual property disclaimer:
The contents of any article published by TRM Tax Attorneys should not be construed as professional legal advice.
