Tax practitioners draw a sharp distinction between tax avoidance and evasion — the latter is cheating, amounting to fraud, while the former boils down to a taxpayer arranging his or her affairs openly to minimise tax. Much of the tax practitioner’s work consists of drawing contracts to minimise the tax burden.
Tax fraud may simply be non-disclosure of income or claiming non-existing expenditure as a deduction. But it can take a more sophisticated form — of creating a “simulated transaction”. A practitioner may call a contract a sale, while closer examination will show it really amounts to a lease.
The courts must satisfy themselves that there is a real (as opposed to simulated) intention, writes University of KwaZulu-Natal professor Bob Williams in PricewaterhouseCoopers’ Synopsis newsletter. Williams adds it is not always easy to apply the principle.
Williams considers the case of Michau v Maize Board, finally decided in the Supreme Court of Appeal. The starting point was a Marketing Act stipulation that a farmer must pay a levy to the Maize Board if he sells his maize, but is exempted if he uses the maize in his own farming operations. In this case, the farmer decided not to sell his maize outright to Rainbow Chickens.
Instead, he arranged to hire a broiler site from Rainbow, buy its entire stock of day-old chicks at the beginning of each growing cycle, feed them with his own maize, and resell the mature birds to Rainbow at a higher price.
The court, ruling in favour of the board, found that the payments were related to the delivery of maize, not to the delivery of mature chickens. In other words, the contract was not what it claimed to be and the levy was payable.
Besides the fact that the contract was not adhered to, the farmer’s conduct was found to be inconsistent with a real intention to farm chickens. All physical activities required for farming were carried out by Rainbow under what was really a management agreement, and the real transaction was simply a disguised maize sale.
Williams suggests as an alternative a partnership agreement, in which each partner contributes to the enterprise and shares in the profits. While not a watertight solution, it would have had an excellent chance of acceptance for tax purposes, he argues.
It is a fine line. But the ability to walk it explains why tax practitioners are so well-paid.