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  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
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.
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
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
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.
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.
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.
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.