n Business Tax and Company Law Quarterly - Will the real NWK please stand up!

Volume 4, Issue 1
  • ISSN : 2219-1585


It is trite law that where parties enter into a contractual relationship that gives rise to a particular legal result, our courts will give effect to that contractual relationship if they are satisfied that such relationship properly and truly reflects the intention of the parties - notwithstanding that the legal result may give rise to a tax benefit for the parties. Where, however, the court ascertains that the true, real intention of the parties to a contractual arrangement is something other than it purports to be, it will give effect to what the transaction really is and ignore the simulation. The doctrine is known as 'substance over form'.

For many years this doctrine has been tempered by the caveat that the courts will give effect to the tenor of a contractual arrangement even if achieves a tax benefit, provided that the parties to the arrangement in fact really mean that it will have effect according to its tenor. That is, a tax avoidance purpose will not necessarily make a contractual arrangement something other than what it purports to be if, in fact, the contractual arrangement reflects the real intention of the parties.
In 2011 the Supreme Court of Appeal in a unanimous judgement in appeared to reject the test to determine simulation as being the determination of the true intention of the parties and giving effect to such intention - even if it results in a tax benefit. The court seemed to modify the doctrine by holding that if 'the purpose of [a] transaction is only to achieve an object that allows the evasion of tax, or peremptory law, then it will be regarded as a simulated'.
Many commentators are critical of the judgment, arguing that in allowing the tax purpose of a contractual arrangement to trump the true intention of the parties, the court had gone well beyond the well established doctrine of substance over form, and had in fact created new law.

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