The Reserve Bank reels from Shuttleworth’s victory in the Supreme Court of Appeal for the repayment
04 November 2014
Posted by: Author: PwC South Africa
Author: PwC South Africa
In 1999 Mark Shuttleworth,
a South African born entrepreneur, sold his internet consultancy company for
$575 million. He then formed a venture capital company that was to compete in
the world-wide marketplace. He also founded the Shuttleworth Foundation, a
non-profit organisation that supported social innovation in education, to which
he donated R180 million. In 2001 Shuttleworth emigrated to the Isle of Man, a
tax-efficient jurisdiction, and said that he had emigrated because the system
of exchange control in South Africa was severely restrictive and impeded
investment outside its borders.
The imposition of the ten per cent exit levy
Shuttleworth emigrated, South Africa’s Exchange Control Regulations, which had
been published in the Government Gazette on 1 December 1978 in terms of section
9 of the Currency and Exchanges Act 9 of 1993, had the effect of blocking the
expatriation of his assets. At that juncture, his blocked loan accounts were valued at over
The Reserve Bank granted him permission to remit
interest on his blocked loan account out of South Africa, but there could be no
transfer of capital without separate Reserve Bank permission.
When he applied to the Reserve Bank to transfer
R1.5 billion of his blocked
loan account (an application that he could not make directly, but that had to
be made through an authorised dealer bank, which was Standard Bank in this
case), his application was granted subject to the payment of a ten per cent
payment of the exit levy
was made under protest
At the time, Shuttleworth believed that this
exit levy was lawful. However, when he decided to transfer his remaining funds
out of South Africa, he applied to the Reserve Bank to do so under protest, in order to preserve his right to challenge the
imposition of the exit levy (which amounted to some R250 million) in respect of
In imposing the ten per cent exit levy, the
Reserve Bank relied exclusively on Exchange Control Circular D375 of 26
February 2003 which, at that juncture, explicitly provided that any approved
transfer of funds in excess of R750 000 would be subject
to a ten per cent exit charge.
legal challenge to the constitutionality
of the exit levy
challenged the constitutionality of the ten per cent exit levy, first in the
North Gauteng High Court and then on appeal to the Supreme Court of Appeal. The
judgment of the Supreme Court of Appeal was delivered on 1 October 2014.
response to Shuttleworth’s challenge, the Reserve Bank (see para  of the
Supreme Court of Appeal judgment) stood by the aforementioned Exchange Control
Circular as the basis for its decision to impose the levy.
significant was Reserve Bank ruling Section B 5(E)(iii)(e) of the Exchange
Control Rulings as reflected in Circular D380, which reads –
It was common cause that the ten per cent exit levy
was applied by the Reserve Bank on a generalised basis and without any exercise
of discretion. Shuttleworth’s counsel argued that the exit levy therefore ‘operated as a
generally applicable revenue raising mechanism’ – which the Reserve Bank (see
para ) of the judgment ) denied, though it admitted that, as a matter of
history, there had been no instance in which it had not imposed the exit levy.
other assets belonging to the emigrants at the time of their departure or
accruing to them thereafter will require to be brought under the control of an
Authorised Dealer. The Exchange Control Department of the South African Reserve
Bank will, on application, consider requests for the unblocking of the
emigrant’s remaining assets. Any approval will be subject to an exiting
schedule, at the discretion of the Exchange Control Department of the South
African Reserve Bank, and an exit charge of 10%.
basis of the constitutional
challenge to the exit levy
The core of the argument advanced by Shuttleworth’s
counsel (see para ) was that the exit levy was a tax and that taxation can
be imposed only in terms of an Act of Parliament, which must be passed in
accordance with the special procedure required by the Constitution for a ‘money
was further argued (see para ) that the regulation relied on by the Reserve
Bank did not authorise the raising of revenue because it had not been approved
by Parliament. Nor, it was argued, did the regulations in question provide that
the powers of the Minister that had been delegated to the Reserve Bank must be
exercised in accordance with the requirements of procedural fairness, thus
creating an unbridled discretion inconsistent with the constitutional right to
procedurally fair administrative action.
High Court had not been persuaded by these arguments; Legodi J held that the
ten per cent exit levy did not amount to a revenue-raising mechanism but was
intended to be a disincentive to the exporting of capital from South Africa and
that there was a legislative underpinning to its imposition
in the form of the regulations.
Shuttleworth’s counsel argued (see para )
that the regulations in question infringed everyone’s constitutional rights
because the prohibition contained in the regulations on transactions involving
currency, gold or other foreign currency interfered with everyone’s right to
deal with his property as he chose and infringed on the freedom to trade in placing
a limit on the transactions that can be undertaken in relation to his property
and in the pursuit of his trade.
decision of the Supreme
Court of Appeal
The Supreme Court of Appeal judgment noted (see para
) that Shuttleworth did not challenge the principle of exchange control,
for he accepted that controls were necessary; rather, he contended that many
facets of the exchange control regime were unconstitutional.
Reserve Bank defended the flat rate exit levy of ten per cent on the basis,
inter alia (see para ) that the levy was imposed at a flat rate in the
interests of consistency and certainty. The Reserve Bank rulings and circulars,
it was argued, were administrative measures that did not have the force of law,
but facilitated the application of the legislation and the execution of the
policy directives of government.
the Supreme Court of Appeal, the Reserve Bank (see para ) relied
exclusively on regulation 10(1)(c) as the basis of its professed enabling power
to impose the exit levy. This regulation provided that –
person shall, except with permission granted by the Treasury and in accordance
with such conditions as Treasury may impose enter into any transaction whereby
capital or any right to capital is directly or indirectly exported from the
Court ruled in this regard that, even though this regulation ‘served a
legitimate purpose’, it did not follow that it could be used as a revenue-
raising mechanism for the collection of revenue; taxes or levies had to follow
a prescribed procedure.
that the imposition of a ten per cent exit levy was applied rigidly and as a
blanket condition that did not involve Treasury in ‘assessing the peculiar
facts of the application before it’ and that it involved a mechanical
application of the policy decision of the
Minister, it followed, said the court
(at para 28]), that –
can thus hardly be in dispute that the levy was a revenue-raising mechanism for
Consequently, said the court, regulation 10(1)(c)
would be intra vires only if it legitimately authorised the raising of revenue
for the state. In this regard, it was not in dispute (see para ) that the
regulation had not been approved in terms of section 9(4) of the
Currency and Exchanges Act, which reads
as follows –
Minister of Finance shall cause a copy of every regulation made under this
section to be laid upon the Table of both Houses of Parliament within fourteen
days after the first publication thereof in the Gazette . . .
such regulation calculated to raise any revenue shall cease to have the force
of law from a date one month after it has been laid on the Table unless before
that date it has been approved by resolution of both Houses of Parliament.
It was undisputed, said the court (at para ),
that regulation 10(1)(c) had not followed the procedure for the imposition of
tax prescribed by section 9(4) of the Currency and Exchanges Act, quoted above.
The court said that –
A founding principle of Parliamentary democracy is
that there should be no taxation without representation and that the executive
branch of government should not itself be entitled to raise revenue but should
rather be dependent on the taxing power of Parliament, which is democratically accountable to the country’s tax-paying citizenry.
court went on to point out (see para ) that ‘Our constitution is careful to
ensure that the power of taxation is tightly controlled in that section 77(1)
of the Constitution defines what constitutes a ‘money bill’ and section 73(2)
provides that only the Minister of Finance may introduce a money bill in the
National Assembly’. Thus, said the court –
the ordinary power of the National Assembly and
the National Council of Provinces to initiate and prepare legislation does not
extend to the initiation or preparation of money bills . . . . All of these
constitutional provisions thus render it unconstitutional for taxes or levies
to be raised by delegated legislation which is not specifically authorised in a
money bill enacted in accordance with the money bill provisions of
The court noted
(at para ) that the
exit levy raised revenue for the state and that
while it was in force it had generated
approximately R2.9 billion. The
court went on to say that –
concluded (at para ) that –
levy thus fell within the category of ‘taxes, levies or duties’ contemplated by
sections 75 and 77 of the Constitution. The reference in regulation 10(1)(c) to
the power of Treasury to impose conditions on the export of capital from the
Republic cannot be construed to include the power to impose a tax or levy on
such export of capital. It must follow that the imposition of the ten per cent
levy was inconsistent with sections 75 and 77 of the Constitution and invalid
and ultra vires regulation 10(1)(c).
right to repayment
of the exit levy
the light of the conclusions reached it follows that the appeal in relation to
the imposition of the ten per cent exit levy must succeed.
Having established that the imposition of the ten
per cent exit levy was unconstitutional, the court turned to the question
whether Shuttleworth had a legal right to repayment. Such a claim is
categorised as a condictio indebiti, and the issue was whether the legal
prerequisites for such a claim were, in the circumstances of this case,
this regard, it was of critical importance that Shuttleworth had paid the levy
under protest, thereby reserving the right to seek a reversal of the payment.
Supreme Court of Appeal held (at para ) that there was no legal bar to the
court’s making an order that the exit levy be repaid to Shuttleworth with
interest, and proceeded (at para ) to make such an order.
implications for other persons who have paid in the past
Whilst the ten per cent exit levy was in force (see
the judgment at ), it raised approximately R2.9 billion for the fiscus.
Clearly, therefore, many people have, over the years, paid a levy that has now,
in hindsight, been declared unconstitutional and therefore invalid.
is unlikely, however, that any of these other persons have a legal claim for
Firstly, the exit levy was abolished as from
November 2010 – some four years ago – as part of the liberalisation of exchange
controls. Claims for the repayment of any exit levy imposed whilst it was in
force will thus have prescribed (which is to say that the right to claim
repayment will have been extinguished by the effluxion of time, the
prescriptive period in this case
being three years) unless legal proceedings for repayment had been instituted
before the claim prescribed. Even then, no legal claim for repayment will lie
unless the claimant had paid the levy under protest.
wider implications of the
The judgment did not hold – and indeed
Shuttleworth did not argue – that exchange controls are per se
unconstitutional. Nor did the Supreme Court of Appeal rule that the regulations
in terms of which the exit levy was imposed were inherently unconstitutional –
their flaw was that the levy constituted a tax and that the legislation in
terms of which the regulations had been issued had not been passed in the
manner required by the Constitution in respect of a money bill.
It is clear from the judgment that any levy imposed
by the Reserve Bank or other organ of state will be, in substance, a tax and
consequently will be unconstitutional unless the empowering legislation was
passed in the manner required of a money bill.
long as a levy imposed by an organ of state is categorised as a revenue-raising
measure, and thus as a tax (in other words, any levy for the benefit of the
fiscus) that is imposed on a blanket basis – that is to say, without the
exercise of a discretion that takes account of the individual circumstances of
the applicant – it will not be constitutionally valid unless two conditions are
satisfied. Firstly, the relevant regulation (such as regulation 10(1)(c) in
relation to the exit levy in issue in the Shuttleworth litigation) will have to
be approved in the manner required by section 9(4) of the Currency and
Exchanges Act, as explained in para  of the judgment. Secondly, the
legislation underpinning the regulation in question will have to have been passed
in accordance with
the process applicable to a money bill.
Conversely, any current or future levy that is
sanctioned by ordinary legislation (that is to say, legislation that has not
been passed as a money bill) and is imposed on a discretionary basis – that is
to say, a levy that is imposed on the basis of a discretionary decision by the
Reserve Bank or National Treasury or its agents on the basis of the
circumstances of the particular applicant – will be constitutionally valid if
the empowering legislation has been passed by Parliament in the ordinary way,
that is to say, not in the particular manner required for a money bill.
appeal to the Constitutional Court
Reserve Bank is no doubt mulling over whether to take the Supreme Court of
Appeal judgment on further appeal to the Constitutional Court, which has the
power to overturn that judgment and substitute its own.
It is reported that, for his part, Shuttleworth is
considering mounting a separate and frontal constitutional challenge to
exchange control itself. He is reported as saying that –
This article first appeared on pwc.co.za
controls benefit banks, but stifle the economy making products more expensive
and causing the most vulnerable to suffer. It is more expensive to work across
South African borders than almost anywhere else on Earth, purely because the
framework of exchange controls creates a cartel of banks authorized to act as
the agents of the Reserve Bank in currency matters. We all pay a very high
price for that cartel, and derive no real benefit in currency stability or
security for that cost.