Commentary

A2.117 Principle 1—the facts must be realistically construed

Administration and compliance

A2.117 Principle 1—the facts must be realistically construed

A2.117 Principle 1—the facts must be realistically construed

The courts must construe realistically1 the facts to which the investigation of the question of whether the relevant taxing Act applies is directed. This is as much a principle of statutory construction as the construction of the statutory wording itself.

The 'reality' of a transaction is to be ascertained from the true legal rights of the parties to a transaction. It is those rights that determine the 'substance' of the transaction in the correct usage of that term; 'an annuity will not for the purposes of the taxing Acts be regarded as wages if it is in law an annuity'2.

If the true legal nature of a transaction emerges from a series or combination of inter-related transactions, intended to operate as such, regard may be had to that series or combination of inter-related transactions in ascertaining the true legal nature of the transaction in question3. This may require the court to take into account the composite or preordained nature of a series of transactions. This is not treat a transaction, or any step in a transaction, as though it were a 'sham'. Nor is this to go behind a transaction for some supposed underlying substance. What this does is to enable the court to look at a document or transaction in the context to which it properly belongs.

If the tribunal of fact finds, in proper evidence, that a party setting up a transaction has not established that it was a genuine transaction, it will

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