Since the judgment of the Supreme Court of Appeal (SCA) in CSARS v NWK 73 SATC 55 there has been a bone of contention as to the real meaning of a simulated arrangement. In the NWK case it was indicated that “[i]f the purpose of the transaction is only to achieve an object that allows the evasion of tax, or of a peremptory law, then it will be regarded as simulated. And the mere fact that the parties do perform in terms of the contract does not show that it is not simulated: the charade of performance is generally meant to give credence to their simulation.”
The SCA had occasion to consider the meaning of simulation in a non tax-related matter in Roschon (Pty) Ltd v Anchor Auto Body Builders CC  (4) SA 319 (SCA). However, everybody waited with bated breath for the judgment of the SCA in the matter of CSARS v Bosch 75 SATC 1.
On 19 November 2014, in the judgment of the SCA in the matter of CSARS v Bosch 75 SATC 1, the SCA held in favour of the taxpayer. Apart from a number of other issues that were dealt with in the judgment (which will be considered in other articles), it was indicated that the approach of the Commissioner, to the effect that dishonesty is not a requirement for simulation and that a transaction is simulated if it results in a significant tax benefit, was not correct. It was indicated that simulation is a question of the genuineness of the transaction. If it is genuine it is not simulated. If it is simulated then it is a dishonest transaction, whatever the motives of the parties to the transaction may be. It was stressed that a court will examine the entire transaction, including all surrounding circumstances and any unusual features of the transaction, as well as the manner in which the parties intended to implement it. One of the features will be the income tax consequences of the transaction.
It was impliedly acknowledged that the reference to the evasion of tax in theNWK case may have been unfortunate. It was indicated that tax evasion is impermissible and, if a transaction is simulated, it may amount to tax evasion. However, there is “nothing impermissible about arranging one’s affairs so as to minimise one’s tax liability, in other words, in tax avoidance.” To the extent that any particular form of tax avoidance may be seen to be undesirable by the South African Revenue Services (SARS), the legislation should be amended.
In the current instance it was indicated that there was no advantage that the parties would gain by entering into a conditional contract of purchase to the extent that they were free to enter into an unconditional contract. The judgment of the SCA should thus be welcomed in clarifying the principles pertaining to simulation and the fact that one can still rely upon prior case law in establishing whether a transaction is simulated. Taxpayers are free to structure their affairs so as to minimise their tax liability for so long as they intend to give effect thereto. However, in entering into a transaction, one should guard against unusual features or provisions that may be indicative of a simulated arrangement.