South Africa’s highest court has ruled that investors can be taxed on avoidance schemes they knew nothing about. The Constitutional Court’s judgment in Absa Bank Ltd and Another v C:SARS is significant in our tax landscape and every investor should consider the ruling.
What was it about?
Absa Bank invested R1.9 billion in a Macquarie-designed structure between 2011 and 2015 and received tax-free dividends every year. The downstream chain, via two companies, an offshore trust, and Brazilian bond transactions, was, on Absa’s version, entirely unknown to it. SARS assessed Absa for additional tax covering 2014 to 2018. The case spent five years in the courts before the Constitutional Court gave its final answer in April 2026.
The Constitutional Court ruled on two matters:
The first was whether Absa was a “party” to the avoidance arrangement pursuant to section 80L of the Income Tax Act (“the Act”) despite contending the downstream steps was not made known to them. The second was whether Absa obtained a “tax benefit” for purposes of the General Anti-Avoidance Rules as contained in the Act (“GAAR”) because of the downstream investments.
In other words, the court decided whether you can be part of a tax scheme you did not know about, and then also if Absa in this case received a “tax benefit” as a result.
On the first matter, the concept of “party” was widely interpreted and the court held that that in terms of our tax laws it is irrelevant what you knew. It must be determined whether your investment was a necessary part of the structure, i.e. without Absa’s R1.9 billion, none of the downstream transactions could have happened. This means, in terms of the ruling, Absa was a “party”, whether it knew about it or not.
One judge, Rogers J, disagreed strongly. He argued that you cannot participate in something you do not know exists. Just as you cannot be a party to a contract you never agreed to, you cannot be a party to a tax scheme you had no knowledge of.
On the second point, Absa’s lawyers argued that even if it was technically part of the scheme, the actual tax saving happened at the level of the offshore trust and the special-purpose companies, and not at Absa’s level. Absa just received dividends, which are tax-free in the ordinary course.
The court looked entirely through the structure and ruled that what Absa really held was a loan to a Macquarie company. A loan earns interest, and interest is taxable. The effect of the court’s ruling is that the “dividend label” was a product of the structure itself and therefore you cannot use the structure to avoid tax and then also rely on the structure to say you did not benefit.
The dissenting judge again disagreed. He said the correct comparison is simpler: remove only the one problematic step (i.e. the Brazilian bond swap) and leave everything else in place. On that basis, Absa still would have received tax-free dividends, but slightly less. The contrast is between two levels of tax-free dividends, not between tax-free dividends leading to an economic advantage (and not a tax benefit).
What does it mean for you?
- If your investment facilitates a tax-driven structure, you carry the tax risk even if you are kept in the dark about the details. Being a passive investor at the top of a chain is not automatic protection. SARS can hold you liable for the tax.
- Unusually high tax-free returns deserve scrutiny. Understand the commercial rationale and structure before you invest.
- If you are currently invested in structured products that deliver tax-free or advantageous returns, review them with the input of a tax practitioner.
- Ask for a plain-language explanation of how the tax-free or advantageous return is generated.
- Find out whether there are any offshore entities, trusts or special-purpose vehicles involved that you were not made aware of at the time of investment.
- Consider whether the structure has been reviewed by independent tax counsel.
- Contact a tax practitioner the moment you are under audit for GAAR purposes.
Please contact us if you wish to discuss. This article is not to be construed as tax advice.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)