ABSTRACT
The Economic Substance Doctrine in US federal law and the general anti-avoidance rules of Australia, New Zealand, South Africa and Canada. The ESD arises from US federal case law which considers whether a business purpose exists in determining if a transaction is genuine and the economic reality of the arrangement. Therefore, it is useful to examine how the common law evolved and brought about the ESD. The tendency to objectively consider the economic substance of arrangements was introduced in Knetsch v US. The taxpayer acquired deferred annuity saving bonds from a life insurance company and borrowed in excess of his debt. The determination of whether cases are genuine is processed through a “deceptively rule-based” two-stage test wherein both parts must be satisfied to escape tax liability. In determining whether a transaction satisfies both stages of the test within the ESD, there is a general rule that courts are permitted to consider the “potential for profit of a transaction”.
