GAAR Bites the Hand That Feeds: The Constitutional Court's Landmark Ruling in Absa Bank v SARS 2026 ZACC 15

On 22 April 2026, the Constitutional Court handed down its first substantive interpretation of South Africa's General Anti-Avoidance Rules ("GAAR") since they were amended in 2006. In a long-awaited judgment, delivered almost eight years after the SARS audit began, the majority judgment significantly broadened the scope of SARS's GAAR powers. The majority of judges held that a taxpayer can be assessed as a "party" to an impermissible avoidance arrangement and stripped of related tax benefits even without it having knowledge of how the arrangement actually generated the tax benefit. Any taxpayer, adviser, or institution that has relied on ignorance of a structure's inner workings as a GAAR defence should treat this judgment as an urgent call to review their position.

Background and Facts

Between 2011 and 2015, Absa Bank Limited and its subsidiary, United Towers (Pty) Limited (collectively "Absa"), invested approximately R1.9 billion in preference shares issued by PSIC Finance 3 ("PSIC3"), a Macquarie Group entity. The investment earned tax-exempt dividends. Unknown to Absa, the funds flowed further through PSIC Finance 4 ("PSIC4") and a foreign trust ("D1 Trust"). The D1 Trust used those funds to purchase Brazilian government bonds, earning interest that qualified as tax-exempt under the South Africa-Brazil double tax agreement and section 25B of the Income Tax Act (“ITA”). This conversion of taxable interest income into tax-exempt income, referred to in the judgment as the "Brazilian interest swap", was the critical step that rendered the arrangement impermissible in SARS's view. The resulting tax-exempt income flowed back through the structure and was ultimately paid to Absa as tax-exempt dividends.

Following an audit, SARS characterised the full arrangement as an impermissible avoidance arrangement under sections 80A to 80L of the ITA, recharacterised Absa's dividends as taxable interest, and issued additional assessments. Absa disputed the assessments on two grounds: (a) it was not a "party" to the arrangement because it had no knowledge of how the funds were applied beyond PSIC3; and (b) it had not itself obtained a "tax benefit" within the meaning of the ITA, that benefit having accrued at the level of the D1 Trust and PSIC4.

Issues

The Court was called upon to determine two issues: first, whether Absa was a "party" to an impermissible avoidance arrangement under section 80L of the ITA, despite its asserted lack of knowledge of the full structure; and second, whether Absa obtained a "tax benefit" as contemplated in the GAAR provisions.

Judgment

Majority (Majiedt J, concurred in by 8 justices)

On the party issue, the majority adopted a purposive and objective interpretation of "party" as defined in section 80L of the ITA. The provision defines a party as any person who "participates or takes part in an arrangement". The majority held that this formulation does not require knowledge of every step in the arrangement. The 2006 GAAR amendments deliberately moved away from the subjective purpose test under the repealed section 103(1). The Legislature chose non-mental-state language and notably omitted the familiar "knows or ought reasonably to have known" wording found in comparable legislation. The test is whether, viewed objectively, the taxpayer's conduct forms a constitutive link in the chain of transactions generating the avoidance result. Without Absa's capital injection, the arrangement could not have existed. Absa was therefore a party.

On the tax benefit issue, the majority applied a "strip the avoidance features" approach. Once the artificial elements are removed and the arrangement is assessed for its economic substance, what Absa had in reality was a loan, not a genuine preference share investment. The tax-exempt dividend form was the product of the artificial structure, not of any independent commercial rationale. The majority further held that section 80B empowers SARS to determine tax consequences for "any party" to an impermissible arrangement, not only the party that directly obtained the tax benefit.

Dissenting Judgement (Rogers J)

Rogers J dissented on both issues.

On the party issue, he held that knowledge is an inherent component of participation; one cannot participate in an arrangement one does not know exists. This is not about the intent to avoid tax, but it is about whether the definitional element of participation is satisfied at all. The objective shift introduced by the 2006 GAAR, he argued, relates only to determining the purpose of an arrangement, not to identifying who its parties are. On the facts set out in the assessment letter, Absa's involvement was limited to its preference share subscription and the contractual arrangements directly connected to it. The Brazilian interest swap, the step that rendered the arrangement impermissible, was unknown to Absa. Treating Absa as a party to that step was, in Rogers J's view, a legal error.

On the tax benefit, Rogers J held that the benefit accrued to the D1 Trust and PSIC4, not Absa. Applying the correct counterfactual (thinking away only the Brazilian swap), Absa would still have received tax-exempt dividends from PSIC3, merely at a lower quantum. The contrast is between different levels of exempt income, not between exempt and taxable income. An economic advantage flowing indirectly from another party’s tax benefit is not itself a “tax benefit” under the GAAR.

Practical Implications

The majority judgment creates an unfortunate precedent of which we cannot reconcile ourselves with. We agree with the dissenting judgment on both issues – having knowledge of an “arrangement” is critical. It is inconceivable how a taxpayer can be attacked for another’s tax benefit, of which it had no knowledge. The judgment also highlights once more the perceived disdain for structured finance and preference shares, which is frequently used and a fundamental funding tool. Given the intended bill changes (which were withdrawn) and this judgment now, it seems that preference shares can no longer be used with certainty. This in itself will cause a disruption to a significant industry.

Taxpayers can no longer rely on a lack of knowledge as a defence where they form part of a structure that delivers a tax benefit. Participation in the broader economic chain, coupled with a tax benefit, may be sufficient to trigger exposure.

The Court also reaffirmed that substance prevails over form, with returns characterised according to their commercial reality rather than their legal label. The principle itself is not new, however the case highlights the extraordinary steps taxpayers need to take to ensure that the behavior and what is intended is reflected in the agreements.

Practically, this judgment places structured finance and preference share arrangements under immediate scrutiny, particularly where intermediary or conduit entities are involved. Taxpayers and their advisers should also consider whether prior advice on similar arrangements remains sound. Given the long delay between the assessments and the final judgment, prior advice that relied on ignorance of how funds were deployed within the wider structure or on the absence of a direct tax benefit should now be revisited. Going forward, robust due diligence is essential, with a clear understanding of the full structure required, as contractual protections alone will not mitigate GAAR risk. It will be interesting to see how this approach is balanced with the practice prevailing. 

How We Can Help

Our tax team advises on GAAR exposure, structured finance transactions, and SARS disputes at all stages of the assessment and litigation process. If you have a structured arrangement that may be affected by this judgment, whether current or historic, feel free to contact us.