SIMULATED TRANSACTIONS:

In Sasol Oil v CSARS [1] the Supreme Court of Appeal overturned the decision of the Tax Court, confirming the historic principles of substance over form by taking into account all the evidence holistically, instead of approaching it piecemeal. It must be noted that it was a 3:2 split in judgment.

BACKGROUND

Sasol Oil is in the business of acquiring and refining crude oil. Prior to 2001 it received its supply of crude oil from Sasol Trading International Limited (STI) a subsidiary company of Sasol Investment Holdings (SIH). STI was based in the Isle of Man, strategically positioned to purchase crude oil from the Middle East sources for sale to Sasol Oil in South Africa. The crude oil purchased from the Middle East sellers, was transported by STI with the assistance of a shipping and marketing company, Sasol International Services UK (SISL), another subsidiary of SIH.

During the year 2000 and through to 2001, the Sasol Group recognised the need to restructure the foreign based enterprise to avoid duplication of costs between the subsidiaries, STI and SISL.

The supply agreements provided that STI in the Isle of Man would purchase crude oil from sources in the Middle East and sell it to SISL in the UK with SISL in turn on-selling the crude oil and ensuring its delivery to Sasol Oil in South Africa. This entailed SISL buying the crude oil, arranging the shipping insurance, inspections etc and assume the risk. The one supply agreement provided for the first leg of the sale transaction between STI and SISL and the other for the sale and delivery transaction between SISL and Sasol Oil. Unlike before, STI no longer supplied the crude oil directly to Sasol Oil.

By 2005, STI had been replaced by another company in the Sasol Group, Sasol Oil International Limited (SOIL), where STI assigned SOIL the role of purchasing the crude oil from the Middle East sources for sale to SISL.

Throughout the restructuring, the Board was cautioned that there had to be sufficient commercial justification for SISL to sell the crude oil to Sasol Oil and to undertake the shipping of the crude oil. If not, the use of SISL could be seen as a scheme to avoid tax in SA and the new structure could be disregarded for SA tax purposes.

The Tax Court found that the transactions were indeed simulated and that SISL’s role in the scheme was a sham.

PRINCIPLES APPLIED UPON APPEAL

Minimizing tax liability

The Commissioner held that the Sasol Group’s purpose was to minimize the Group’s tax liability, and in particular the newly introduced residence-based tax in effect from June 2001. The court held that the fact that parties have followed professional advice in order to minimize the tax payable by them is not wrong nor does it point to deceit. The real question is whether they actually intended a sale by STI (then later SOIL) to SISL and whether SISL intended to acquire ownership of the crude oil from STI (SOIL), or whether they dishonestly purported to do so solely for the purpose of avoiding the tax that would be payable by Sasol Oil.

Ownership

The Commissioner argued that SISL had no right to acquire the crude oil as there was no ownership in the true sense. SISL could not change the port of destination, it did not determine the quantity or quality of the crude oil. The Commissioner further reasoned that SISL was a mere shipper and that had ownership passed, SISL would have borne the risk and not Sasol Oil as per the supply agreement.

However, Sasol Oil maintained that the Sasol entities had intended that once STI (SOIL) had procured crude oil, it would sell it to SISL, which acquired ownership of the oil while it was shipped to Sasol Oil. In turn SISL transferred ownership pursuant to its supply agreement to Sasol Oil in South Africa. Sasol Oil relied on invoices between the respective parties to show the sales figures and prices at which STI sold to SISL and SISL sold to Sasol Oil.

Substance over Form

The Commissioner argued that it was a shipping contract dressed up to look like a sale.

The Commissioner claimed that had the parties intended ownership to pass, their contract would have made provision for delivery in the supply agreement. It was held by Sasol Oil that there was constructive delivery to STI and then to SISL in both the Isle of Man and London, and actual delivery to Sasol Oil in Durban. The court held that whether there is actual or constructive delivery is a matter of law. There is no need to provide for the mode of delivery in the contracts of sale.

The Court held that it must ascertain the intention of the parties having regard not only to the terms of the impugned transactions but also to other factors, including the improbability of the parties intending to give them effect. It was suggested that simulation was to be established not only by considering the terms of the transactions but also the probabilities and the context in which they were concluded.

CONCLUSION

1. The court considered that Sasol Oil had discharged the onus of proving that the supply agreements between STI (SOIL), SISL and Sasol Oil were genuine transactions and the transactions had a legitimate purpose.
2. There was nothing impermissible about following the advice, and so reducing Sasol Oil’s tax liability. The transactions were not false constructs created solely to avoid residence-based taxation.
3. Considering the history and background, the genesis and conclusion of the agreements in accordance with their terms, made perfect sense. The evidence must be looked at holistically and the Tax Court approached the evidence piecemeal.

[1] (923/2017) [2018] ZASCA 153 (9 November 2018)