Test for a simulated transaction avoiding the payment of tax

A transaction is not necessarily a disguised one because it is devised for the purpose of avoiding liability for tax. If the parties honestly intend the contract to have the effect stated in the contract then the only question is whether there is liability for the tax or not. The court will ascertain the intention of the parties having regard not only to the terms of the transaction but also the probabilities and the context in which the contracts are concluded. The court examines the transaction as a whole, including all surrounding circumstances, any unusual features and the manner in which the parties intend to implement the transaction. There were two contracts for the sale of crude oil sourced in the Middle East and acquired by a company in the Isle of Man, sold to another group company based in London and, in turn, sold and shipped to the South African company in Durban. It was held not to be simulated transactions nor did the transaction fall under section 103(1) of…

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