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The South African GAAR: who guards the guards?

15 September 2012   (0 Comments)
Posted by: SAIT Technical
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By Johan van der Walt (DLA Cliffe Dekker Hofmeyr Tax Alert)

When a revenue authority applies the General Anti- Avoidance Rule (GAAR) in a tax dispute it effectively rolls out the heavy artillery. Presumably, the revenue authority believes that the ordinary taxing provisions (and available specific anti-avoidance provisions) will fall short of what is needed to adequately deal with the taxpayer's tax planning devices (or is it vices?).

Because the GAAR is so powerful a tool, most GAAR regimes contain checks and balances to ensure that it is applied only where really warranted. Certain jurisdictions therefore require the revenue authority to first refer a matter in respect of which it intends applying the GAAR to a so-called 'GAAR panel'. This is the case in both Australia and Canada. In both these jurisdictions, the GAAR panel has no statutory basis – its role is consultative and aimed at achieving consistency in relation to cases where the GAAR is invoked. The recent Aaronson report that proposes a 'narrowly focussed GAAR' for the United Kingdom similarly advocates an advisory GAAR panel as well as the publication (in anonymous form) of its GAAR advice.

Different jurisdictions have different reasons why a GAAR panel is necessary. The Aaronson report proposed such a panel for the UK "to ensure that the centre ground of responsible tax planning is effectively protected". In Australia, the GAAR panel was originally known as the Part IVA panel. In 2000, the Australian Tax Office (ATO) published the mandate of its Part IVA panel. It was to consider the use and development of the general anti-avoidance provisions as a whole (ie not 'driven by individual cases') and to ensure that Part IVA was only applied as a measure of last resort, where clearly appropriate. In 2005, the ATO redefined the role of its GAAR panel: "The primary purpose of the Panel is to assist the Tax Office in its administration of the GAARs in the sense that decisions made on the application of GAARs are objectively based and there is a consistency in approach to various issues that arise from time to time in the application of the GAARs".

The Australian GAAR panel consists of "business and professional people chosen for their ability to provide expert and informed advice" as well as senior ATO officials. The Canadian panel is constituted of senior officials from the Canadian Revenue Authority, the Department of Justice and the Department of Finance.

Justice Pagone (Judge of the Supreme Court of Victoria, Australia) recently remarked that "Public confidence is also promoted by the pressure of external members on the GAAR Panel ... The presence on the GAAR Panel of reputable external members exposes a critical aspect of tax administration to some measure of direct external review and accountability ... The mere fact of having to explain the proposed application of the anti-avoidanceprovisions to an 'outsider' capable of adverse advice or comment is likely to encourage self discipline in the tax official proposing the application of the provision".

The South African GAAR regime is found in Part IIA (s80A - s80L) of the Income Tax Act, No 58 of 1962. Section 80J requires SARS to give prior notice (including reasons) to the taxpayer in circumstances where SARS believes the GAAR may apply in respect of an arrangement. The taxpayer has 60 days within which to convince SARS not to apply the GAAR. Subsequently SARS has 180 days to either request further information, to abandon its GAAR attack or to determine the tax liability in terms of the GAAR. SARS Draft Comprehensive Guide to the GAAR states that s80J "...introduces a statutory safeguard to taxpayers against the arbitrary application of the GAAR".

A search on the SARS website under 'GAAR panel' yields no result. There is also no information available regarding how (and who exactly in) SARS decides which cases are potential GAAR targets and on precisely which basis. The s80J process set out above is all that protects a taxpayer staring down the barrel of a SARS GAAR attack. The GAAR case selection methodology lacks transparency and this could result in the GAAR being applied inconsistently.

Contrast the above to the Australian GAAR model: there is external representation on the GAAR panel (see above) and, to assist the deliberative process of the ATO's GAAR Panel, a taxpayer (and/ or representative of the taxpayer's choice) would usually be invited to attend a Panel meeting and address the Panel. On occasions, the promoters or facilitators of the targeted arrangement may also be invited. Prior to the Panel meeting the taxpayer is provided with a 'position paper' so that he can "... be informed of the contentions of fact giving rise to the issue referred to the Panel, and of the substance of the Tax Office's approach to the application of the GAAR". All of this is detailed in a 97 page ATO Practice Statement available on the ATO website.

The GAAR is a powerful weapon in SARS's hands and will be used increasingly. The question is who guards the guards?



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