Absa will have to exhaust Sars’ internal remedies in its multiyear battle with the tax agency over the so-called “impermissible tax avoidance arrangement” it has been accused of being engaged in, after the Supreme Court of Appeal (SCA) set aside a high court decision that ruled in its favour.
The SCA on Friday said the North Gauteng High Court lacked jurisdiction to hear the matter, essentially remitting it back to the tax court should the parties not come to an agreement in the interim.
“The high court predicated its finding that it had jurisdiction to review the assessments on the basis that the challenge to the assessments involved solely a question of law. That, as I have indicated, was incorrect. Since the dispute did not involve solely a question of law, no exceptional circumstances existed to justify the high court assuming jurisdiction in the matter,” reads the SCA’s judgment.
“It follows that in relation to the assessment review, it did not have the required jurisdiction to deal with the matter. The high court ought therefore to have dismissed the application. In the circumstances, the orders granted by the high court cannot stand. The merits of any challenge to the notices of assessment must be adjudicated in accordance with the dispute resolution process provided by section 104 of the Tax Administration Act.”
The dispute between the company and the tax agency is centred on transactions that took place between 2014 and 2018.
Absa in this period bought tranches of preference shares in an SA company, referred only as PSIC 3 in the court papers, the acquisition of which shares entitled Absa to dividends when declared.
Declare dividend
PSIC 3 then bought preference shares in another SA company, referred to as PSIC 4, which then invested in an offshore trust (DI Trust). DI Trust also made investments through the purchase of Brazilian government bonds, regarding which DI Trust received interest income.
Axiomatically, PSIC 4 was able to declare a dividend payable to PSIC3 and PSIC 3 declared a dividend payable to Absa.
Sars argued that the dividends received by Absa from PSIC 3 were not supposed to be tax free. Absa in its defence said it was unaware of the intermediary role fulfilled by PSIC 4 and DI Trust.
The group, worth about R156bn on the JSE said it could not have been aware of the Brazilian investment made by DI Trust.
The bank said because of this, it could not, in a state of ignorance, have participated in an impermissible tax avoidance arrangement. The lender also said it did not have a tax avoidance motive when it acquired the preference shares in PSIC 3.
After a back-and-forth between the parties, Sars issued Absa with a section 80J notice, which it issues to taxpayers when it believes an “impermissible tax avoidance arrangement” has been implemented.
Absa asked Sars to withdraw the notice, which invitation the receiver of revenue declined. Absa approached the high court requesting a review of Sars’ decision not to withdraw its notices issued under section 80J of the Income Tax Act as requested by Absa in terms of section 9 of the Tax Administration Act.
The high court agreed with Absa’s submission that if there is a pure point-of-law-dispute, a party to the dispute is entitled to approach the high court directly, without following the dispute resolution proceedings provided for in the act. Sars appealed against that ruling, which the SCA has now set aside.
Absa said it will comply with the ruling.
“In the ordinary course of business, there are often differences in interpretation of complex tax matters and we will continue to engage Sars constructively on such [matters],” the bank’s spokesperson said.
Updated: October 02 2023
This article has been updated to include comment from Absa
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