The law gives effect to the real transaction entered into between parties, and disregards a disguised or simulated transaction.
Under what circumstances will a transaction be a "simulated" transaction that SARS is entitled to ignore in favour of the "real" transaction?
No sophisticated legal system can allow itself to be blinded by the label that parties to a transaction choose to append to it. Our common law is clear that the courts must have regard to the real transaction, and not to any disguised or simulated transaction.
For example, just because two parties describe their transaction as a loan is not conclusive of the fact that it is, indeed, a loan (which may be subject to donations tax, but is not subject to income tax). It may, for example, be a disguised reward for services rendered, in which event the law will not treat it as a loan, but as a quid pro quo for services, and it will be subject to income tax.
What is a "simulated" or "disguised" transaction? In Erf 3183/1 Ladysmith (Pty) Ltd v Commissioner for Inland Revenue 1996 (3) SA 942 (SCA) the Supreme Court of Appeal quoted with approval from the decision of the Appellate Division in Zandberg v Van Zyl 1910 AD 302 at 309 where Innes JA said-
Not frequently, however (either to secure some advantage which otherwise the law would not give, or to escape some disability which otherwise the law would impose), the parties to a transaction endeavour to conceal its real character. They call it by a name, or give it a shape, intended not to express but to disguise its true nature. And when a Court is asked to decide any rights under such an agreement, it can only do so by giving effect to what the transaction really is; not what in form it purports to be
The Supreme Court of Appeal also quoted with approval from the decision in Commissioner of Customs and Excise v Randles, Brothers & Hudson Ltd 1941 AD 369 at 395 - 396 where it was held that (emphasis added) -
[a] transaction is not necessarily a disguised one because it is devised for the purpose of evading the prohibition in the Act or avoiding liability for the tax imposed by it. A transaction devised for that purpose, if the parties honestly intend it to have effect according to its tenor, is interpreted by the Court according to its tenor, and then the only question is whether, so interpreted, it falls within or without the prohibition or tax.
According to these criteria, therefore, a transaction cannot be said to be simulated or disguised if the parties intend to give effect to the transaction "according to its tenor", that is to say, in accordance with the provisions of their agreement
However, in Commissioner for South African Revenue Service v NWK Ltd  ZASCA 168 the Supreme Court of Appeal handed down a judgement on 1 December 2010 which radically changes the concept of a "simulated transaction".
In the latter case, the unanimous judgement of the court, given by Lewis JA, held at paragraph  that (emphasis added) -
In my view the test to determine simulation cannot simply be whether there is an intention to give effect to a contract in accordance with its terms. Invariably where parties structure a transaction to achieve an objective other than the one ostensibly achieved they will intend to give effect to the transaction on the terms agreed. The test should thus go further, and require an examination of the commercial sense of the transaction: of its real substance and purpose. If the purpose of the transaction is only to achieve an object that allows the evasion of tax, or of a peremptory law, then it will be regarded as simulated. And the mere fact that parties do perform in terms of the contract does not show that it is not simulated: the charade of performance is generally meant to give credence to their simulation.
In terms of the latter criterion, therefore, the fact that the parties to a transaction intend to give effect to the agreement in accordance with its terms is not conclusive of the fact that it is not a "simulated" transaction. Indeed, even if they actually carry out their obligations under the transaction, it is possible that the transaction will still have been "simulated".
This new criterion will make it much more difficult for commercial lawyers to predict (and advise their clients) whether a contract entered into by them will be attacked by the South African Revenue Service on the grounds that it is "simulated". If SARS's contention in this regard were to be upheld by the courts, the result would be that SARS would tax the parties, not on the basis of their "simulated" transaction, but on the basis of the "real" transaction.