South Africa’s courts hand down judgment on Sasol and substance over form

International Tax Review is part of Legal Benchmarking Limited, 4 Bouverie Street, London, EC4Y 8AX

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

South Africa’s courts hand down judgment on Sasol and substance over form

Sponsored by

sponsored-firms-ww.png
AdobeStock_88925886_ZA case 630  x570

South Africa's Supreme Court of Appeal (SCA) handed down an important judgment on the doctrine of simulation, or substance over form, on November 9 2018, putting to rest some significant confusion created by an earlier judgment of the Gauteng Tax Court.

The case concerned the purchase of crude oil by an Isle of Man company in the Sasol Group (SOIL), which in turn sold the oil to a UK intermediary (SISL), which in turn sold it to Sasol Oil in South Africa. All three companies were members of the Sasol group of companies. The South African Revenue Service (SARS) had challenged this supply chain, contending that the interposition of SISL was an artificial and unnecessary step designed to avoid certain South African controlled foreign company tax liabilities that would have arisen had SOIL sold the oil directly to Sasol Oil.

The Tax Court agreed with SARS that the back-to-back sales agreements involving SISL were simulated transactions, arguing that even if the agreements supporting the Sasol Group were genuine, the transactions were tax motivated and served no commercial purpose.

This is in conflict with well-established law: the key test for a simulated transaction is the intention of the parties, and whether there is a real intention that differs from the simulated intention. If, after detailed inquiry, it appears that the parties' real intention accords with the tenor of the agreements, the agreements are deemed genuine. If not, they are deemed simulated. However, the Tax Court seemed to suggest that a transaction can be both genuine and simulated at the same time (i.e. the test for a simulated transaction is not dependent on the genuineness of the agreements involved).

Statements made in a previous case between CSARS v NWK (2011 (2) SA 67 (SCA)) had suggested that even an honest transaction might be deemed to be simulated and fraudulent simply because it was motivated by a desire to avoid tax. However, prior to the Sasol case, the SCA had affirmed clearly in the case of CSARS v Bosch (2015 (2) SA 174) that NWK had not altered South African tax law on the subject and that a transaction cannot be classified as simulated simply because it may be tax driven.

This principle was again confirmed by the majority judgment in the Sasol SCA case. The SCA found that there were good commercial reasons for the SISL arrangement, and it was not created solely for the avoidance of tax. Importantly, it clarified the common law test for a simulation, confirming the approach taken by Wallis JA in CSARS v Bosch that:

"Simulation is a question of the genuineness of the transaction under consideration. If it is genuine, then it is not simulated, and if it is simulated it is a dishonest transaction, whatever the motives of those who concluded the transaction."

This does not mean that the purported artificiality or motivation underlying a transaction is irrelevant. Such artificiality or motivation could indicate that the parties have a real intention that is fundamentally inconsistent with the tenor of the underlying agreements. However, once it is established that the parties genuinely intended the agreements to be implemented in accordance with their tenor, as opposed to dressing up an underlying transaction to make it appear to be something that it is not, the resulting transaction cannot be found to be simulated.

more across site & shared bottom lb ros

More from across our site

India also brokered its first-ever multilateral APA last year, the Central Board of Taxes announced
A global tax framework may not materialise anytime soon, but a common set of principles is becoming increasingly necessary, Rudolf Winkenius also tells ITR
Kingsley Napley’s claimants are arguing that taxing the provision of education breaches the European Convention on Human Rights
While pillar two can progress without the US, it won’t reach the same heights without American involvement, argues Renáta Bláhová, founding partner of BMB Partners Taxand
There are unanswered questions as to how foreign investors could reclaim money via tax credits, advisers suggested
Amid an ever-changing tax environment, India’s advisory market is bustling with competition ahead of the 2025 World Tax rankings and ITR Awards
The deal comes after PwC had accused Paul McNab of using confidential information; in other news, McDermott hired a new London tax head from a US rival
Looking at transfer pricing simplification is “obviously helpful”, but it should be done in line with current standards, a senior government figure reportedly said
The UK Government’s plans to close the tax gap via increased HM Revenue and Customs investment have failed to impress local tax advisers
Under the merged scheme for R&D tax relief introduced last year, rules on contracted out R&D have changed. James Dudbridge argues for a proactive approach when reviewing companies’ commercial arrangements
Gift this article