Monday, 14 May 2018

E-filing and Submission of Tax Returns

Until 2007 taxpayers had no choice but to file paper-based tax returns with SARS. This required the completion of a paper-based return and also the submission of the taxpayers’ supporting documents and tax certificates. SARS then introduced e-filing, whereby taxpayers could register for e-filing and submit their tax returns electronically. With e-filing it is not possible to submit supporting documents when, for example, an individual files their tax return, the ITR12.

Furthermore, taxpayers have a choice to register for e-filing personally and file their returns themselves or they can appoint a registered tax practitioner to act on their behalf and file their returns. The Tax Administration Act (‘the Act’) sets out who must register as a tax practitioner, as well as the statutory obligations arising where a person is a registered tax practitioner.

A registered tax practitioner must be a member of a SARS Recognised Controlling Body or a body recognised by the Act. All registered tax practitioners must adhere to the code of professional conduct prescribed by their controlling body. If the practitioner does not comply with their code of conduct or the provisions of the Act, SARS can lodge a complaint against the practitioner.
The failure to file returns on time can give rise to action being taken by SARS
against the taxpayer or tax practitioner.

Image bought from i-Stock "Compliance Diagram" by stuartmiles99

Although a taxpayer appoints a tax practitioner to submit tax returns on their behalf, the taxpayer retains the legal obligations imposed by the Act. Thus, if the tax practitioner fails to submit a tax return at all or on time, the taxpayer can be subjected to the administrative penalties for late submission of returns, which can range from R 250 per month to R 16 000 per month that the return remains outstanding. The penalty amount depends on the taxpayer’s level of income.

The failure by a tax practitioner to file returns on time can give rise to action being taken by SARS against the tax practitioner. However, this does not detract from the taxpayer’s personal liability for the failure to lodge a return. SARS can still subject the taxpayer to the administrative penalty and prosecute the taxpayer for non-submission of a return.

Should a taxpayer be dissatisfied with the service received from a tax practitioner, they should terminate the agreement with the tax practitioner. The taxpayer may have a basis on which to lodge a formal complaint with the practitioner’s controlling body or with SARS itself where the practitioner has violated the Act.  If a practitioner delays the submission of a return they can face action by SARS itself. In addition, the taxpayer must remember that the e-filing profile belongs to the taxpayer and can be retrieved from the tax practitioner at any time. 

SARS indicated recently that it will use the National Prosecuting Authority to prosecute taxpayers in the Tax Court for the failure to submit tax returns. It must be remembered that the failure to submit a return when required to do so constitutes a criminal offence, which can give rise to a fine or a period of imprisonment. This will, on a successful prosecution, result in the taxpayer having a criminal record.

Taxpayers using e-filing must ensure that they do not allow unauthorised persons to obtain their login and password details. The Office of the Tax Ombud has in its various annual reports indicated that there have been too many cases of identity theft where taxpayers have been duped into making  their passwords available to unauthorised third parties.

Once a return is filed via e-filing, SARS will often request that the taxpayer submits the documents to support the filed return. The taxpayer should receive notice of such verification requests via e-mail or SMS. The taxpayer is entitled to receive proper notice of SARS requests and, in my opinion, it is not sufficient for SARS to merely post a letter on the taxpayer’s e-filing profile.

E-filing has allowed SARS to enhance its data matching processes to ensure that taxpayers properly declare all income derived by them. Should a taxpayer choose not to declare all income received or accrued they will be subject to the understatement penalty, which can range from 10% to 200% of the income tax underpaid.

E-filing has its advantages to both taxpayers and SARS in that returns can be processed far more quickly than paper-based returns.  However, taxpayers must still submit their tax returns on time. Where a tax practitioner is appointed, that person must act professionally and should not delay the filing of returns without a good reason. 

Whether returns are filed via e-filing or manual submission, or managed by a tax practitioner or the taxpayers personally, the taxpayer remains liable for the failure to submit a tax return on time.  

Dr Beric Croome is a Tax Executive  at ENSafrica. This article first appeared in Business Day, Business Law and Tax Review, May 2018.

Monday, 9 April 2018

SARS has Legal Powers to Seize Your Income

After a taxpayer has filed their tax return they will receive an assessment from SARS which will reflect either a refund due to the taxpayer or an amount of tax payable to SARS. The assessment will reflect the date by which the tax must be paid, failing which SARS will use its recovery powers to enforce collection of the tax due.

This article deals with SARS’ powers contained in section 179 of the Tax Administration Act (‘the Act’), whereby SARS can appoint a third party holding any funds of the taxpayer, such as a bank, the taxpayer’s debtors or the taxpayer’s employer, to pay the funds to SARS and not to the taxpayer. The power is draconian but has been held to be lawful under the Constitution.

Before SARS may use section 179 it is legally required to issue a final demand to the taxpayer reminding them of the tax due to SARS. The law requires that the final demand must be issued ten business days before the letter appointing the third party is issued. SARS is not required to issue the final demand where the collection of the tax will be prejudiced.

It must be noted that SARS can appoint the taxpayer’s bank as a third party under section 179 and this will have the result that any funds in the taxpayer’s account must be to SARS and not the taxpayer until the tax debt is settled. 

In the case of an employee, SARS can instruct the employer to deduct the amount from the taxpayer’s salary and pay that to SARS instead of to the employee. The Act recognises that an employee needs funds to live on and if the third party appointment or garnishee is too onerous the taxpayer can, within five business days of the appointment, request that the monthly amount deducted is reduced to take account of the taxpayer’s basic living costs.
Failure to engage will result in SARS using its powers to ensure collection of tax due.
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ID:157682422 "Money Squeeze" by sekulicn 
In the case of a taxpayer other than a natural person, SARS may vary the third party instruction on the basis that it will cause serious financial hardship if the SARS instruction is not revised.

If the person appointed is unable to comply with the third party appointment instruction they must inform SARS thereof, as well as the reasons therefore. SARS may then withdraw or amend the instruction.

The person appointed as the third party by SARS must adhere fully to the instructions set out in the letter appointing the bank, employer or other person as the third party. Failure to comply with SARS’ instructions can result in the third party becoming personally liable to SARS for the amount of the tax debt. In addition, the failure to comply with section 179 as required can give rise to a criminal offence under section 234(n) of the Act. If convicted, the third party can face either a fine or a period of imprisonment.

It is important that taxpayers pay their tax debts as and when they fall due. If they are unable to settle the amount due to SARS they should talk to SARS and make arrangements with SARS to pay the tax due over a period of time. The failure to engage with SARS will result in SARS using the powers it has in the Act to ensure collection of the tax due. 

It is clear that SARS can appoint the taxpayer’s bank or employer or any other person as a third party under section 179 of the Act. It is critical that the person appointed by SARS complies with section 179 and pays the specified amount of tax to SARS, failing which the third party can be held personally liable for the amount due to SARS by the taxpayer and worse still could face prosecution under section 234 of the Act.

Dr Beric Croome is a Tax Executive  at ENSafrica. This article first appeared in Business Day, Business Law and Tax Review, April 2018.

Monday, 12 March 2018

Tax Court decides that SARS must issue a letter of audit findings

In Tax Case IT 13726, as yet unreported, the Tax Court in Port Elizabeth had to determine if the 2012 assessment issued to the taxpayer was valid. The taxpayer claimed farming expenditure amounting to R 1 781 604 and reflected an amount of some R 7 million as a retrenchment payment which the taxpayer contended should have been taxed not at the normal marginal rate of tax but at the special rate applicable to retrenchment lump sums.

SARS issued an additional assessment for 2012 on 31 January 2013 disallowing the farming expenditure and treating the retrenchment lump sum as normal income. The taxpayer lodged objections to the adjustments made to the assessment by SARS. The objections were disallowed and the taxpayer filed an appeal against SARS’ decision to disallow the objections.

On 25 May 2017 the Registrar of the Tax Court was informed that the parties would only argue the following points:

·         As a point in limine, whether the audit conducted by SARS before the issue of the additional assessment was valid and if the additional assessment was itself valid;
·         Whether the lump sum received by the taxpayer upon his termination of employment constituted a ‘severance benefit’ as envisaged in the Income Tax Act.

The taxpayer argued that the amount of R 7 million should have been taxed according to the tax tables applicable to retrenchment and retirement lump sums. SARS contended that it conducted a personal income tax audit on the taxpayer during January 2013 and came to the conclusion that the amount was incorrectly reflected in the 2012 tax return as a retrenchment lump sum on the basis that the amount was paid because the taxpayer was dismissed and not retrenched.

The court indicated that if the taxpayer’s point in limine is upheld and the assessment is held to be invalid that will resolve the dispute without needing to determine if the payment was a retrenchment lump sum or not.

Employees with tax problems are distracted and unhappy employees. 
Image purchased iStock_000031119668 "Knowledge of the law is crucial for a fair trial - PeopleImages"
The court decided that SARS could not rely on a procedurally flawed audit conducted without the taxpayer’s knowledge as a new ground in its Rule 31 statement and is thus mpermissible as this would violate the principle of legality.

The court stated that the issue of an additional assessment is administrative action as dealt with in section 33 of the Constitution  which confers the right of just administrative action on taxpayers. That section also requires that any person whose rights have been adversely affected  by administrative action is entitled to be supplied  written reasons for the decision made. The court indicated that an assessment was issued  and SARS’ failure to provide reasons therefore offends the principle of legality as dealt with in various court decisions.

Section 40 of the Tax Administration Act (‘TAA’) provides that SARS may select a taxpayer for inspection, verification or audit. Section 42 of the TAA places a legal obligation on SARS to keep the taxpayer informed as to the status of the audit. Furthermore, upon conclusion of the audit SARS must, within 21 business days,  issue a document which is generally referred to as the letter of audit findings whereby SARS should advise the taxpayer of the adjustments to be made to the taxpayer’s assessment and provide reasons in writing for those adjustments.

In the case at hand SARS failed to provide a report on the status of the audit and also did not provide reasons as required by the TAA. Thus, the court decided that SARS had violated section 42(2)(b) of the TAA and as a result the taxpayer was denied the opportunity to respond to the issues raised by SARS, especially regarding the circumstances giving rise to the lump sum of R 7 million.

The court also reviewed the law dealing with severance benefits in order to establish if the lump sum of R 7 million was in fact a retrenchment lump sum. Revelas J stated in the judgment that had SARS granted the taxpayer the opportunity to explain the nature of the payment it would have satisfied SARS that the lump sum was related to a retrenchment process as required by the Income Tax Act.

SARS argued that the taxpayer had not been retrenched but that the payment related to the taxpayer’s dismissal which meant the lump sum would be taxed as normal income. SARS relied on a letter issued by the taxpayer’s employer that the payment was for dismissal and not retrenchment. The court stated that SARS reliance on the letter in question was selective and decided that the payment was made for termination of employment as a result of retrenchment.

The court was also critical of the manner in which SARS decided to disallow the farming expenditure. The judgment states that had SARS conducted a proper audit there would have been a different result, that is, the expenditure would not have been disallowed.

Revelas J decided that the audit was invalid and SARS non-compliance with section 40 and 42 of the TAA offends the Constitution and  the principle of legality. Thus, the court set the additional assessment aside as it did not comply with the law.

In the result the entire 2012 additional assessment was set aside and the interest levied on the tax reflected as due was remitted. Furthermore, the court ruled that SARS must pay the taxpayer’s cost of the appeal. It must be noted that in the Tax Court, costs are not always awarded to the successful part as is the case in other courts. Section 130 of the TAA prescribes when costs should be awarded by the Tax Court but the court did not refer to those requirements. Costs can be awarded where, for example, the taxpayer’s grounds of appeal are unreasonable or SARS grounds of assessment are unreasonable.

This case is important for taxpayers as it serves as a useful reminder of the rights taxpayers have when SARS conducts an audit into their affairs. Taxpayers are entitled, by law, to be advised as to the status of an audit and more importantly when an audit is completed they are entitled to a letter of audit findings setting out the adjustments made to the taxpayers assessment as well as the reasons for those assessments. If SARS fails to adhere to its statutory obligations the court will set any such additional assessment aside and more likely than not award costs against SARS for not complying with the law.

Dr Beric Croome is a Tax Executive  at ENSafrica. This article first appeared in Business Day, Business Law and Tax Review, March 2018.

Tuesday, 6 February 2018

Employer and employees’ tax obligations

Any employer paying remuneration to an employee is required, under the provisions of the Fourth Schedule to the Income Tax Act, 58 of 1962, (‘the Act’), to deduct and withhold Pay As You Earn (‘PAYE’) or employees’ tax from the remuneration paid. 

The employer must pay the  tax collected over to the Commissioner: South African Revenue Service (‘SARS”). It does not matter whether the remuneration is paid in cash or in kind. Certain payments may be exempt from tax, but those fall outside of the scope of this article.

The employer must deduct the tax from the remuneration and pay that over to SARS by the 7th of the month following the month in which the tax was deducted. If the 7th falls on a weekend or public holiday, the PAYE must, together with the other employment related taxes, be paid on the preceding business day.

The tax year for natural persons commences on 1 March of each year and ends on the last day of February of the following year. The employer is required by law to provide their employees with a tax certificate, the IRP5 certificate, reflecting the amount of remuneration paid to the employee and the PAYE deducted from that remuneration. The IRP5 must cover the full tax year or, if the employee only worked for a part of the tax year, only that part.

The employee will receive the tax certificate around July and then has the personal obligation to complete and submit an income tax return to SARS, subject to certain exceptions.

If the employee fails to file their tax return within the prescribed period SARS will impose administrative penalties on the employee for the late filing of the return. 

The penalty is determined by taking account of the level of taxable income reflected by the taxpayer and can range from R 250  to R 16 000 per month until the tax return is filed. Where SARS is aware of the taxpayer’s latest address the penalty can be imposed for up to 36 months and where SARS does not have the taxpayer’s latest details the penalty can be levied for up to 48 months. 

In addition, SARS can institute criminal proceedings against a taxpayer for the failure to submit a tax return in time and has indicated that in future it intends to use the Tax Court to expedite the prosecution of defaulting taxpayers. In such cases, the taxpayer will remain liable to pay the administrative penalty to SARS as well as whatever fine the court may impose.

Thus, where a taxpayer is required to submit a tax return and fails to do so the penalty will be imposed and can add up to a substantial amount due to SARS. It is critical therefore that taxpayers file their tax returns timeously.

The first time a taxpayer may become aware of a debt due to SARS is when they receive a letter of demand from SARS or if SARS instructs the taxpayer’s employer to withhold amounts of the taxpayer’s salary to settle the debt due to SARS by way of a garnishee.
Employees with tax problems are distracted and unhappy employees. 
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Employers do not have a legal obligation under the Act to assist or inform their employees that they must complete and submit an annual income tax return to SARS. However, in practice it appears that employees are not always aware of the obligation to file an income tax return.  This is especially true of school leavers or graduates who may be employed for the first time and are not aware of the tax rules in the country.

Those schools that do not teach basic financial skills, including basic tax rules, to their pupils should do so, thereby enabling pupils to be properly equipped to become compliant tax paying citizens when they embark on a business venture for their own account or enter into employment and receive remuneration.

Whilst employers may not have a statutory duty to advise their employees to register and submit an annual income tax return, many employers do assist their employees in this regard. When a new employee commences employment with an employer the employer should remind the employee of the obligation to register and submit annual tax returns to SARS.

Ideally, the employer should arrange for tax information sessions whereby employees are reminded of the obligation to file a tax return and are taught how to do so. 

Most people fear SARS and are loathe to deal with their tax affairs.  This is often as a result of ignorance of how the tax system in the country works and how a tax return should be completed.

Employers should empower their employees by educating them on the need to submit tax returns and furthermore assist employees by providing information as to how tax returns should be completed. This will alleviate employees receiving a nasty shock at the end of the month when they receive their pay slip and, for the first time, become aware of an amount deducted on behalf of SARS for the failure to pay an income tax debt on time and/or as a result of  an administrative penalty imposed for late or non-submission of a tax return.

Employees who have debts due to SARS will be distracted and may not be as efficient as they could be if their tax affairs are in order and up to date. 

It is contended that if an employer assists its staff in attending to their personal tax obligations that will contribute to a content work force and encourage tax compliance in the country.

Dr Beric Croome is a Tax Executive  at ENSafrica. This article first appeared in Business Day, Business Law and Tax Review, February 2018.

Saturday, 16 September 2017

Street Smart Taxpayers: A Practical Guide to Your Rights in South Africa

I have always felt that my PhD thesis and legal text Taxpayers' Rights in South Africa (Juta Law, 2010) should be made available as a less technical guide to educate the ordinary South African taxpayers of their rights.  For years I tried to find the right person to translate my legal text into a fun and easily understandable text that would make the complex tax laws of South Africa more accessible to the ordinary South Africa taxpayer. In 2013 my wife, author and poet, Judy Croome approached Juta Law with the proposal that we work together on this book.  The journey to publication was at times as challenging as it was exhilirating but, finally, after four and a half years "STREET SMART TAXPAYERS: A Practical Guide to Your Rights in South Africa" was revealed for the first time at the Tax Indaba 2017. 
You can order your copy of Street Smart Taxpayers from Juta Law by clicking here
Simplifying complex legal language and tax terminology, the book attempts to reduce the fear factor and frustrations that many taxpayers experience when dealing with tax matters.
Street Smart Taxpayers explains the processes SARS must follow when working with taxpayers throughout the various stages of the tax process, and identifies the remedies available to taxpayers. Together with interesting tax stories and a useful glossary for taxpayers to better understand tax lingo, Street Smart Taxpayers explores the following taxpayers’ rights:

• the right to property
• the right to equality
• the right to privacy
• the right of access to information
• the right to administrative justice
• the right to remain silent
• the right of access to courts

Combining humour, expert knowledge and anecdotes about the troubles taxpayers encounter in their dealings with SARS, the authors also investigate taxpayers’ obligations, how tax and religion intersect and the important question of ethics from the point of view of both SARS and the taxpayer. It is hoped that this book will enable taxpayers to be street smart and competent in handling their tax affairs.

    With Judge Bernard Ngoepe the Tax Ombud before joining him in panel discussion 
    on "The Psychology of Tax Behaviour in Times of Recession" Tax Indaba 2017

Contents Include:
  • A history of South African taxation
  • Taxpayers and the tax process
  • Seeking help as a taxpayer
  • What are your taxpayer rights?
  • Taxpayers’ right to property
  • Taxpayers’ right to equality
  • Taxpayers’ right to privacy
  • Taxpayers’ right to access to information
  • Taxpayers’ right to administrative justice
  • Taxpayers’ right to remain silent
  • Taxpayers’ right of access to courts
  • Taxpayers’ obligations
  • The ethics of paying tax
  • Taxpayers’ rights — an international work in progress
  • Taxpayers’ remedies in South Africa
  • The future of taxpayers’ rights
  • Glossary 
At Tax Indaba 2017 - panel discussion on "The Psychology of Tax Behaviour in Times of Recession" Speakers from left to right: 
Dr Beric John Croome (ENSafrica), Dr Randall Carolissen (SARS), Judge Bernard Ngoepe (Tax Ombud SAand Patricia Williams (Bowmans)
(Photograph courtesy of Thyann Delport of
 Street Smart Taxpayers is of interest and benefit to:
  • South African taxpayers
  • Law students
  • Tax practitioners 
  • Government officials

Monday, 14 August 2017

SARS must provide grounds for Assessments issued

The Eastern Cape High Court was recently required to adjudicate a dispute between a taxpayer and the Commissioner: South African Revenue Service regarding the manner in which the Commissioner: SARS had dealt with the taxpayer.

In the case of V Z Nondabula v The Commissioner: SARS & Another (case no. 4062/2016  Eastern Cape Local Division: Mthatha, as yet unreported), the taxpayer applied for an interdict preventing SARS from invoking the provisions of section 179 of the Tax Administration Act (“the Act”) pending the final determination of the taxpayer’s objection to his additional income tax assessment. 

SARS had issued a notice to a third party under section 179 of the Act directing that the party had to pay whatever funds it held for the taxpayer to SARS in settlement of the tax allegedly due.

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The taxpayer conducted business as a sole proprietor of a service station and received various assessments for the 2014 tax year. The assessments issued to the taxpayer were paid timeously in respect of the assessments issued in 2015. Subsequently, SARS issued a further assessment to the taxpayer reflecting a debt allegedly due amounting to R1 422 637.83. The first time that the taxpayer became aware of the tax debt was by way of a letter dated 29 September 2016 demanding payment of the tax within ten days, failing which, further action would be taken.

It would appear that SARS provided a statement of account reflecting the amount payable, but did not inform the taxpayer as to how the amount due was arrived at.

The taxpayer called on SARS to provide details regarding the additional assessment issued for the 2014 tax year and how the amount of the tax debt was arrived at.

In the papers before the court, SARS did not explain how the additional assessment issued to the taxpayer was arrived at. The taxpayer objected to the additional assessment through the offices of his accountants and SARS responded to the objection by advising that the objection did not comply with the rules.

The accountant submitted a further objection challenging the assessments issued by SARS but the objection filed by the accountants were not responded to, and even where there was a response the court indicated that it was not a substantive response to the taxpayer’s objection.

The court pointed out that SARS is a creature of statute and is therefore required to operate within the statutory provisions which empower it.

The court reviewed the statement of account provided by SARS to the taxpayer and other documents provided and reached the conclusion that SARS had not provided the taxpayer with a statement of the grounds for assessment as required in terms of section 96(2)(a) of the Act. The court pointed out that SARS is an organ of state and SARS exercises a public power or performs a public function in terms of the Act. 

Under section 195 of the Constitution SARS must be accountable and must comply with the Constitution. At paragraph 25, Acting Judge Jolwana stated:

“There is no doubt the first respondent dealt with the applicant in an arbitrary manner contrary not only to the Act but most importantly the values enshrined in the Constitution were not observed by the first respondent. The applicant is a business man and employs quite a number of people in our country where the unemployment rate is alarmingly high. The first respondent’s actions had the potential to close down applicant’s business with catastrophic results not only for the applicant and his family but also for all of his employees in a situation in which unemployment is rampant and reaching crises proportions.”

The court concluded that SARS must comply with its own empowering legislation and most importantly it must promote the values of the Constitution of the Republic of South Africa when exercising its powers. The court further concluded that SARS has failed to do so and particularly failed to provide the taxpayer with information prescribed in section 96 of the Act. 

The court therefore decided that SARS acted unlawfully and unconstitutionally and thus set the third party notice aside and also directed SARS to pay the taxpayer’s legal costs.

Unfortunately there are too many instances where SARS issues an assessment to a taxpayer without explaining the basis of that assessment and then proceeds to collect the tax on that additional assessment. 

Furthermore, SARS often fails to properly deal with objections lodged to an assessment, rejecting the objection as invalid. Taxpayers must be aware of the right that they have to be informed of the details of the assessment issued to them and failing SARS’s adherence to the Act they can either lodge a complaint with the office of the Tax Ombud, or alternatively, approach the court for relief.

Dr Beric Croome is a Tax Executive  at ENSafrica. This article first appeared in Business Day, Business Law and Tax Review, August 2017.

Monday, 10 July 2017

The Lawfulness of Retrospective Amendments in Tax Law

On 29 May 2017 Judge Fabricius delivered judgment in the Gauteng High Court  in the case of Pienaar Brothers (Pty) Ltd vs Commissioner for the South African Revenue Service and the Minister of Finance, as yet unreported 87760/2014 [2017] ZAGPPHC231 (29 May 2107) in a case dealing with The Taxation Laws Amendment Act No. 8 of 2007 (“the Amending Act”) which inserted section 44(9A) into the Income Tax Act (“the Act”)

The taxpayer sought an order declaring that section 34(2) of the Amending Act is inconsistent with the Constitution and invalid to the extent that it provides that section 44 (9A) of the Act shall be deemed to have come into operation on 21 February 2007 and to be applicable to any reduction or redemption of the share capital or share premium of a resultant in company, including the acquisition by that company of its shares in terms of section 85 of the Companies Act, on or after that date.

Pienaar Brothers approached the Court  seeking a declaration that the amendment to section 44, the so-called amalgamation section in the Act was unconstitutional and invalid on the basis that the amendment was retrospective. 

The company concluded an amalgamation transaction in terms of section 44 of the Act in which it acquired all of the assets of the company then known as Pienaar Brothers (Pty) Ltd on 16 March 2007 with effect from 1 March 2007 in terms of the sale of business agreement. 

Later, on 3 May 2007 the Board of Directors of the Company resolved under the Companies Act to make a distribution to its shareholder’s pro-rata to their shareholding of an amount of R29 500 000.00 out of the taxpayers’ s share premium account. 

On the date of the resolution the tax law excluded from its ambit any amount distributed out of a company’s share premium account. 

The company therefore argued that on 3 May 2007 when the distribution was made it did not constitute a dividend as defined in the Act and thus no secondary tax in companies was due and payable on the distribution on the basis that it was made out of the share premium account. 

The Commissioner, however assessed the amount of R29 500 000.00 to secondary tax on companies on the basis that the amount fell within the amendments introduced to section 44 by way of the Amending Act which was only promulgated on 8 August 2007.

The Court  examined the process whereby section 44 of the Act was amended. It was pointed out that in the 2007 Budget Speech presented  on 20 February 2007 that the then Minister of Finance indicated the intention to pass retrospective legislation to deal with anti-avoidance arrangements relating to STC. 

Subsequently, on 21 February 2007 the Commissioner issued a press-release stating that the STC exemption for amalgamation transactions contained in section 44(9) of the Tax Act was to be withdrawn with immediate effect, that is, from 21 February 2007. On 27 February 2007, SARS and National Treasury released for public comment the Draft Taxation Laws Amendment Bill 2007. 

That Bill proposed the amendment of section 44 addressing the concerns raised by the Minister in his Budget Speech. As pointed out above, the amalgamation transaction, the distribution as well as the introduction of the BEE partner in the company was completed in early May 2007. 

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Thereafter, on 7 June 2007, the 2007 Taxation Laws Amendment Bill was published but instead of proposing the deletion of sections 44(9) and (10) of the Act, it proposed the insertion of a new subsection (9A). 

The Bill also indicated that the amendment would be retrospective to 21 February 2007. 

The company contended that it concluded the amalgamation transaction in May and only later in June 2007 did it become aware that the transaction concluded by it could be covered by the amendment.

On 8 August 2007 The Taxation Laws Amendment Act 2007 was promulgated giving effect to the amendments announced in the February 2007 Budget Speech. 

The company argued that the amendment was invalid under the Constitution because it was retrospective and offended against the principle of legality of the rule of law. 

The company contended that when it completed the transaction in May it was not possible to know that the amount would be subject to secondary tax on companies by virtue of the fact that there was no law in place and that it could not be held liable for interest for this reason and similarly could not be subject to penalties or criminal prosecution for not having submitted an STC return reflecting the reduction of share premium as a dividend liable to STC. 

The judgment deals with both the legal arguments of the company and the Commissioner at length and refers to the position in South African law as well as a number of other countries.

The case is a very useful summary of the legal position regarding retroactive amendments, not only in the tax arena.

The Commissioner’s counsel contended that the taxpayer was given notice of a proposal to amend the law and that it was not correct to argue that there was no prior notification of the proposed amendment to plug the perceived loophole in the STC legislation. 

The Commissioner’s counsel referred to the process whereby the amendment was given effect to and the Court  made it clear that the history of the amendment made it clear that the Minster, SARS and Parliament were determined to close the STC loophole with effect from 21 February 2007. 

The Court  analysed the rule of law in the Constitution and various academic writings dealing with that topic. The Court  referred to the general principle that an amendment to a law should only apply prospectively, that is from a future date unless the amendment makes it clear that it applies from an earlier date. 

The Court  reviewed the position of retroactive amendments in the United States, United Kingdom, Canada and other countries and came to the view that those constitutional democracies do not specifically prohibit retroactive amendments to tax laws. 

The Court  indicated that it is also necessary to weigh up the public interest and the needs of the Treasury when considering retroactive amendments to legislation even though such amendments may adversely effect particular taxpayers. At paragraph 63 the judge stated as follows:

“I am not aware of any authority or legislative provision that provides that a fairly precise warning needs to be given before the legislature can pass retrospective legislation, whether in general, or in the case of a tax statute. In the latter instance, economic demands must be considered in the context of the purpose and effect of an intended statute. If the tax statute is rationally connected to a legitimate purpose, no precise warning is required, if one at all.”

The court pointed out that the Constitution itself does not contain a provision prohibiting retrospective legislation. The court  accepted that Parliament may not legislate with retrospective effect as it pleases but to do so must meet the standard required for the constitutional validity of retrospective amendments. It indicated that reference must be made to the rationality test and the second standard relating to reasonableness or proportionality.

The court referred to various judicial decisions and came to the conclusion that in the particular instance the standards set by the court  had not been violated and therefore decided that the amendment to section 44 was lawful and the taxpayer was liable to the STC as assessed by the Commissioner.

The taxpayer also argued that its right to property had been violated as a result to the manner in which the amendment was enacted and the court  dismissed this contention on the basis that the amendment did not constitute the unlawful deprivation of property.

The court  came to the conclusion that it is not necessary that exceptional circumstances must exist for Parliament to pass retrospective legislation. The court  decided that there was no overriding duty to give notice of intended legislation. It was decided in the present case that there was sufficient notice of general impact and that there is no over-riding duty to give notice that indicates precisely what the intended legislation will encompass.

 In the result the court  dismissed the company’s application to find that the amendment was unlawful under the Constitution. By virtue of the fact that the case related to constitutional issues it made no orders as to costs. It remains to be seen if the case will proceed on appeal to a higher court . 

The judgment is important in that it sets out clearly for the first time the consequences of retrospective amendments to legislation in the tax arena and taxpayers and advisors are well advised to study the comprehensive judgment which is a good summary of the law in South Africa and around the world.

Dr Beric Croome is a Tax Executive  at ENSafrica. This article first appeared in Business Day, Business Law and Tax Review, July 2017.