Although a taxpayer is fully entitled to plan his tax affairs in a manner so as to maximize his tax savings, it is important to note that if SARS is satisfied that the intention behind a specific transaction is different to that of the appearance of the transaction, the transaction can be deemed to be taxed according to the true substance and intention of the transaction rather than the legal form thereof.
SARS will rely on the substance over form principle, backed by Supreme Court of appeal cases, if a taxpayer’s legal form of a transaction does not reflect the true intention behind the transaction and the actual substance of the transaction.
An example of this would be the following: an individual is hired by a company as an “independent contractor” and the agreement between the two parties records it as such. However, this independent contractor is treated as an employee of the company whereby the independent contractor has the same working hours as the rest of the employees. Although the legal form of the relationship between the individual and the company is that of a client/ independent contractor relationship, SARS will use the substance over form principle to deem it as an employer/employee relationship in terms of which Pay As You Earn should be withheld from remuneration paid to the independent contractor.
When will SARS use the substance over form principle?
SARS will rely on the substance over form doctrine when it is to the receivers benefit and not the benefit of the taxpayer, as the principle is used to give effect to the true intention of the taxpayer where the taxpayer tried to disguise a transaction as something that it is not. SARS will only use the substance over form principle to argue the taxpayer’s true intention when it benefits the receiver.