ConCourt sets precedent with first GAAR interpretation, Absa loses appeal

Image source: Le Moal Olivier – 123RF.com

This judgment is significant because it marks the first time any court has interpreted the General Anti-Avoidance Rules (GAAR) in sections 80A to 80L of the Income Tax Act since their 2006 amendment.

The facts

Absa invested approximately R1.9bn in preference shares in a special purpose vehicle, PSIC3, receiving tax-exempt dividends.

Unbeknown to Absa, the funds flowed downstream through further entities and were deployed in a complex swap transaction designed to convert taxable interest into tax-free income, ultimately funding the dividends paid back to Absa.

Sars assessed Absa under the GAAR, re-characterising its exempt dividends as taxable interest.

The majority (Majiedt J, 9–1)

The majority ruled against Absa on both central issues:

• A taxpayer does not need to know about something to be a ‘party’ to it: A taxpayer ‘participates’ in an avoidance arrangement if its conduct objectively forms part of the causal chain. Knowledge of downstream steps is not required. Requiring knowledge would incentivise deliberate ignorance and undermine the purpose of the GAAR.
  
• Absa obtained a ‘tax benefit’: Stripped of its avoidance features, Absa’s return was economically equivalent to interest, not an exempt dividend. The correct counterfactual is the transaction without its avoidance dressing as opposed to no transaction at all.

The dissent (Rogers J)

Rogers J disagreed on both points. He held that one cannot ‘participate’ in an arrangement one does not know exists, and that the tax benefit was obtained by the downstream entities, not Absa. His view is that Absa received only an economic advantage, which is not equivalent to a ‘tax benefit’.

Rogers J noted that the majority’s approach appears to be unprecedented internationally.

(5/5) CCT 72/24 Absa Bank Ltd and Another v Commissioner for the South African Revenue Service pic.twitter.com/YxPs7Zyjy6

— Constitutional Court (@ConCourtSA) April 22, 2026

Key takeaways

Investors and financial institutions should take immediate note: ignorance of downstream steps in a structured arrangement is not a defence to a GAAR assessment. Enhanced due diligence into how funds are deployed, and the tax treatment of each step in an investment chain, is now essential.

Existing structured finance arrangements should be reviewed for potential GAAR exposure in light of this judgment.