The nature of the purpose requirement of an impermissible tax avoidance arrangement

Abstract

The nature of an inquiry into the purpose requirement of an impermissible tax avoidance arrangement can either be objective or subjective. In essence, an objective inquiry has regard to the ‘effect’ of an arrangement, as opposed to a subjective inquiry which has regard to the taxpayer’s ipse dixit. Although the purpose requirement under section 103(1) was a subjective inquiry, case law decided under section 103(1) revealed that a taxpayer’s ipse dixit was weighed and tested against the surrounding facts and circumstances. This introduced an element of objectivity into the interpretation of the purpose requirement. Tax scholars have various opinions regarding the nature of the test in the new purpose requirement in sections 80A and 80G. It seems that the amendments to the purpose requirement merely confirm the approach which was applied by our courts under the repealed section 103(1). The nature of the purpose requirement, therefore, in essence, seems to have stayed unaltered.