The Constitutional Court handed down judgment on 18 June 2015 in the case of the South African Reserve Bank and Minister of Finance v Mark Shuttleworth regarding the nature of the exit levy paid by Mr Shuttleworth to export capital from South Africa. That court also dealt with the broad discretionary powers conferred on the Minister of Finance to regulate the exchange control system of the country.
During 2001 Mr Shuttleworth emigrated to the Isle of Man on the basis that he wished to free up his funds for investment outside of South Africa. At that stage the Exchange Control Regulations did not permit Mr Shuttleworth to transfer his assets from South Africa. He applied to the South African Reserve Bank (“the SARB”) to transfer an amount of approximately R2.5 billion out of South Africa and the SARB agreed thereto on the basis that he was required to pay a so-called exit charge of 10% of that amount.
Mr Shuttleworth accordingly paid the exit levy of approximately R250 million and was later advised that the exit charge was a tax and had been imposed in a manner not permitted by the Constitution. Before the matter reached the Constitutional Court, the dispute was dealt with by the North Gauteng High Court and subsequently the Supreme Court of Appeal.
The High Court held that the exit charge was lawfully imposed and also decided that a few exchange control legislative provisions were unconstitutional. Subsequently, the Supreme Court of Appeal held that the levy paid constituted a tax and was therefore unlawful and should be refunded.
As a result of the fact that both parties to the case were dissatisfied with the decision of the Supreme Court of Appeal, the case was heard by the Constitutional Court, which delivered its judgment on the matter on 18 June 2015.
After the first democratic election in South Africa in 1994, the process of relaxing of the exchange control rules started. During 2003 the Minister of Finance reached the conclusion that the economy had become more resilient and decided that it was appropriate to commence with the relaxation of exchange controls previously in force.
The Minister confirmed that holders of blocked assets would be required to apply to the Exchange Control Department of the SARB to remit such funds and that approval would be subject to an exiting schedule and that an exit charge of 10% of the amount to be remitted would be payable. The Constitutional Court reached the conclusion that the decision to impose the 10% exit charge on persons wishing to export more than R750,000 was a decision made by the Minister and not the SARB.
The court stated that the Minister of Finance exercised the power to impose the levy in terms of regulation 10(1)(c) of the Exchange Control Regulations and imposed two conditions on persons wishing to remove funds from South Africa, namely, that they pay a 10% exit charge on the capital exceeding R750,000 and that the capital exported be subject to an existing schedule. Moseneke DCJ reached the view that the SARB was only responsible for implementing the policy decision made by the Minister of Finance and that it had no discretion when giving effect to his decision. The Supreme Court of Appeal had held that the exit levy constituted a tax and in light of the fact that it had not been introduced by way of a Money Bill in accordance with section 77 of the Constitution the levy was unlawful.
The court made the point that the government is not entitled to levy a tax or appropriate public money without due process and the express consent of public representatives and proceeded to analyse the provisions of section 77 of the Constitution and particularly the meaning of “national taxes, levies, duties [and] surcharges”. The court made the point that the fact that a charge or levy may be referred to as a tax does not imply that it must be introduced with compliance with the requirements of section 77 of the Constitution.
Moseneke DCJ reached the view that the exit charge was not aimed at raising revenue but that its purpose was to restrict the scale of capital exported from South Africa. Furthermore, the exit charge did not apply to the general population of the country but only to those persons who wish to externalise capital in excess of R750,000. The court recognised that the exit charge generated revenue of some R2.9 billion for the government but reached the view that the garnering of income by the Treasury was secondary to the primary purpose of regulating and discouraging the export of capital from South Africa.
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Ultimately the court therefore decided that the exit charge paid by Mr Shuttleworth was not one which fell within the constraints set out in the definition of a Money Bill in the Constitution. The court was also required to deal with the delegation of legislative power and whether plenary legislative powers had been assigned to the President.
The court reached the conclusion that the President did not delegate legislative power but that the power he had was to regulate by way of imposing conditions for the export of capital. The court took account of the particular circumstances regarding the movements in foreign currency and the possibility of funds being moved from one location to another and the need for special regulation thereof.
The court accepted that the nature of the power which the Currency and Exchanges Act, No. 9 of 1933, conferred on the President to make regulations relating to currency is unusually wide but that was justified taking account of the unusual circumstances of the subject matter. The court therefore held that the exit charge paid by Mr Shuttleworth did not constitute a tax and it had been lawfully imposed.
The court also had to deal with an application filed by Mr Shuttleworth seeking leave to cross-appeal the decision of the lower court refusing to impugn the constitutional validity of all or some of the provisions regulating exchange control in the country.
The court decided that it was not in the interests of justice to grant Mr Shuttleworth leave to cross-appeal against the decision of the Supreme Court of Appeal on the broad constitutional attack against the exchange control regulations.
Despite the court’s conclusion, Moseneke DCJ made the point that the specific provisions targeted by Mr Shuttleworth “are well and truly archaic and may very well be at odds with the tenets of our Constitution. The state parties are nudged to take appropriate steps to review the provisions in issue.”
Mr Shuttleworth also sought to impugn section 9(1) of the Currency and Exchanges Act and regulation 10(1)(c). The High Court had dismissed Mr Shuttleworth’s contention and Moseneke DCJ agreed with the view reached by that court that South Africa’s “exchange control system requires a flexible, speedy and expert approach to ensure that proper financial governance prevails”.
In the result the court held that regulation 10(1)(c) of the Exchange Control Regulations was valid. Thus, the Constitutional Court held that the exit levy paid by Mr Shuttleworth was lawfully imposed and this puts paid to the SARB having to make a refund to Mr Shuttleworth and indeed any other persons who paid the levy upon exporting capital from South Africa.
It is interesting to note that Froneman J did not agree with the conclusion reached by Moseneke DCJ and therefore handed down his own dissenting judgment. Froneman J reached the view that the exit charge raised revenue for the national government and reached the conclusion that it could therefore only be imposed by way of original legislation passed by Parliament. Froneman J therefore reached the conclusion that the imposition of the exit charge by announcement in Parliament was constitutionally invalid.
The decision of the Constitutional Court brings finality to the Shuttleworth saga which has been underway for a number of years and it is clear that the exit levy imposed on the export of capital was, in the view of the court, lawfully imposed. The Minister of Finance indicated in his 2015 Budget Speech that the SARB is in the process of simplifying the Exchange Control Manual and plans to finalise that during 2015. It is hoped that the SARB will take heed of the court’s views on the provisions contained in the Exchange Control Regulations and that those provisions will be reviewed to take account of the Constitution.
Dr Beric Croome is a Tax Executive at ENSafrica This article first appeared in Business Day, Business Law and Tax Review, July 2015.