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Is there Life After the Constitution for Interpretive Aids?

16 August 2016   (0 Comments)
Posted by: Author: Craig Miller
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Author: Craig Miller (PwC)

Historically, legal presumptions and aids such as the contra fiscum have been used by courts to interpret tax legislation, but following the introduction of the constitution, are they still relevant? 

South African courts have historically been inconsistent in the in how they have interpreted fiscal statutes. Even the introduction of the Constitution in South Africa has not resolved these inconsistencies.

Recently, the Supreme Court of Appeal  in the case of Natal Joint Municipal Pension Fund v Endumeni Municipality 2012 3 SA 593 (SCA) took upon itself the task of clarifying how courts should interpret legislation. The court concluded that all courts in South Africa should follow a "purposive approach” interpreting statutes. The court referred to various provisions in the Constitution which support this approach. 

Specifically the purpose approach states that, rather than only interpreting legislation in accordance with a strict, literal basis of the words used in a provision - consideration should be given to the language used in the light of the ordinary rules of grammar and syntax; the context in which the provision appears; the apparent purpose to which it is directed and the material known to those responsible for its production.

This article considers the future application of the contra fiscum rule which has historically been a fundamental part of South African tax law. Meyerowitz, Emslie and Davis (2008a: 162) have questioned whether the purposive approach will consign the contra fiscum rule to the scrap heap on the basis that this rule was often applied as a foil to the literal approach. 

What is the contra fiscum rule?

Meyerowitz (2006: 36) describes the contra fiscum rule (or more formally, interpretation contra fiscum adhibenda) as a rule that is applied where there is doubt in relation how a provision should be interpreted.

According to the rule,  a court is bound to give the taxpayer the benefit of the doubt as to his liability for tax.  Meyerowitz concludes that there is ample evidence of the contra fiscum rule being applied by the courts and therefore forming part of South African law but notes that this rule operates alongside the literal approach to interpretation (2008: 80).

Clegg and Stretch (2015: §2-8(2)) notes that the application of the contra fiscum rule is not a departure from existing common law but is rather an existing application of rule "semper in dubiis benigniora praeferenda sunt”, which means that where there is doubt, the more lenient interpretation should always be preferred. (Cleggand Stretch (2015:  §2-8(2)) support this view with reference to the judgment of Milne J in Badenhorst & Others v CIR 20 SATC 39, where the court held that in the context of an ambiguity, the court will interpret a taxing statute "as it does others” favourably to the subject).    

Do presumptions and aids of interpretation such as the contra fiscum rule have a role in South African law following the introduction of the Constitution?

Devenish (1992: 156) describes presumptions of statutory interpretation as being rebuttable "a priori guidelines and principles employed to assist the courts in the process of construing the law…”. 

Du Plessis (2005: 591) notes that in his view there is no overtly and explicitly recognised system for the classification of canons and aids to statutory interpretation.  However, it does appear that, in general, South African interpreters have arranged canons and aids to interpretation in a hierarchical order of primacy where the hierarchy tends to determine the manner and sequence in which canons and aids are applied.  In this regard, Du Plessis (2005: 592) records the approach of determining the clear and ordinary meaning of the words in deriving the intention of the legislature appears to rank highest in the order of primacy. Other canons or aids become helpful only where the language of a provision still leads to ambiguity.

Du Plessis (2005: 593) suggests that canons of statutory interpretation include rules, presumptions, and constitutional and statutory provisions that require observance of predefined meanings, values and procedures when statutes are interpreted. Du Plessis (2005: 593) is uncertain whether these canons constitute legal rules but concedes that this is practically irrelevant as all the canons carry interpretative weight, the extent of which is determined by the ranking in the order of primacy. One way or the other, the canons of interpretation form part of the common law or legislation which must be subject to interpretation which develops the "spirit, purpose and objects of the Bill of Rights”. Du Plessis (2005: 594) concludes that this provides an opportunity to infuse the canons of construction with the values, norms and principles of the Constitution which may mean that in certain circumstances these values, norms and principles may trump the canons of interpretation.

Botha (2012: 43) notes that common law is not sacrosanct or protected from constitutional considerations.  In terms of section 2 of the Constitution, common law which is inconsistent with the Constitution is invalid and in terms of section 39(2) of the Constitution, courts must promote the spirit, purport and objects of the Bill of Rights when they develop the common law.  Botha  refers to Judge Chaskalson J’s comments in Pharmaceutical Manufacturers Association of South Africa; In re: Ex parte Application of the President of the Republic of South Africa 2000 2 SA 674 (CC) where the judge held:

"I cannot accept this contention, which treats the common law as a body of law separate and distinct from the Constitution.  There are two systems of law, each dealing with the same subject-matter, each having similar requirements, each operating in its own field with its own highest Court. There is only one system of law.  It is shaped by the Constitution which is the supreme law, and all law, including the common law, derives its force from the Constitution and is subject to constitutional control.”

Botha (2012: 43) notes that this judgment reinforces the approach that the Constitution does not repeal all common law.  Rather, common law is merely trumped by the Constitution where it is inconsistent with the Constitution.  Botha (2012: 44) notes that presumptions of interpretation will still apply in the modern era to the extent that they do not conflict with the values of the Constitution. 

In this regard, Botha’s commentary implies that the following three categories of presumptions exist:

  • those which are codified in the Constitution;
  • those which conflict with the Constitution; and
  • those which are not impacted by the Constitution.

Botha (2012: 44) describes these presumptions as "preliminary assumptions as to the meaning of legislation” which may have also previously been described as a rebuttable "common law bill of rights”.  Botha (2012: 44) records that many of the presumptions have been incorporated into the Bill of Rights with the result that in future, these presumptions will play an increasingly lesser role in the interpretation of statutes.   

Du Plessis (2002: 152) disputes this approach – the courts never considered these presumptions as a common law "Bill of Rights”.  In this regard, Du Plessis refers to the Kentridge AJ’s judgment in S v Mhlungu & Others 1995 3 SA 867 (CC):

"I would lay it down as a general principle that where it is possible to decide any case, civil or criminal, without reaching a constitutional issue, that is the course which should be followed.”

Du Plessis (2002: 151) records that the Constitution is not a catalogue of every possible value which may have an impact on statutory interpretation. Consequently, it is possible that the presumptions may "stand in" for the Constitution where the Constitution does not specifically provide for certain values (and where the Constitution does not obviously usurp or contradict the presumption). On this basis, it may be possible that a presumption continues to serve its traditional purpose albeit in a different context (Du Plessis, 2002: 153).  In this regard, Du Plessis (2002: 159) concludes that the contra fiscum rule is not specifically covered, contradicted or usurped by any provision in the Constitution and should therefore continue to apply. 

Burns (1998: 85) notes that prior to the introduction of the Constitution, the presumptions of interpretation played a big part in supporting the rights and freedoms of individuals.  Burns (1998: 85) concludes that presumptions in conflict with the Constitution will no longer apply, thereby implying that those not in conflict or incorporated into the Bill of Rights will continue to apply.  

Van Staden (2015: 550) records that it may be erroneously contended that presumptions of interpretation, which were applied in the pre-Constitutional period as a means of protecting individual rights and freedoms and often in the context of a literal approach to interpretation, are no longer relevant given that South Africa now has a Constitution and that a purposive approach to interpretation has finally taken hold.  In arguing in favour of the continued application of the presumptions to the extent that they are not inconsistent with the Constitution or have been incorporated into the Constitution, Van Staden (2015: 551) states that presumptions are essentially manifestations of "moral” principles which invariably carry weight, albeit not conclusive, in the minds of judges when interpreting law.  These presumptions are based on values such as equity, reasonableness, equality, legality, legal certainty and public interest and unless inconsistent or subsumed by the Constitution, should continue to be relevant in the modern order. Van Staden (2015: 2015) concludes that the presumptions remain important and they are even more important than merely supplementing, facilitating and mediating resort to constitutional values, on the basis that they actually represent public and constitutional values. 

Goldswain (2012b: 45) concludes that the purposive approach to interpretation, which should remove some of the iniquitous results of adherence to a strict literal approach to interpretation, supports the concepts of fairness, justice and equity which are important principles underpinning the Constitution.

Goldswain (2012b: 45) argues that prior to the introduction of the Constitution, the judiciary always had access to various internal and external aids and presumptions relating to interpretation in the context of deriving the intention of the legislature. 

Section 8(3) of the Constitution specifically includes a presumption that common law rights are not reduced. With brief reference to the application of section 8(3) of the Constitution, Goldswain (2012b: 67) concludes that as part of South African common law, the contra fiscum rule should remain a valid part of the interpretation process. 

Goldswain (2012a: 35) considers whether there are any differences between the intention of Parliament and the purpose of legislation.  In this regard, Goldswain (2012b: 68) notes that Parliament was considered "supreme” and whatever it decreed could never be challenged.  The Constitution on the other hand introduced a different kind of supremacy on the basis that it essentially incorporates a set of values and in terms of section 2 of the Constitution, any law or conduct inconsistent with the Constitution is invalid.   Consequently, in the modern era, although Parliament is responsible for the preparation and introduction of legislation, all legislation must be subject to the purport and spirit of the Constitution.  Further, section 39(1) of the Constitution describes how the Bill of Rights should be interpreted and section 39(2) confirms that all legislation, including fiscal legislation, should be interpreted to promote the spirit purport and objectives of the Bill of Rights.  Section 39(3) of the Constitution requires, inter alia, that no common law may be recognised to the extent that it is inconsistent with the provisions of the Bill of Rights.

A fundamental difference, therefore, between the intention of Parliament and the purposive approach is that the purposive approach would require that the relevant common law rule is tested against the constitutional values and whether these are consistent with the Bill of Rights.  Goldswain (2012b: 54) concludes that when interpreting legislation, the judiciary is obliged to promote the principles of liberty of a person, his or her property and the enforcement of the principles of equality, fairness, and transparency by public officials.  Goldswain (2012b: 69) also notes that in terms of the Constitution, the judiciary may "read in”, "read down” and apply the presumption that a statute is always living to ensure its constitutionality.  In doing this, the judiciary is essentially making law which fits within the purport of the purposive approach but which was not encouraged by the proponents of the literal approach. 

Goldswain (2012b: 69) concludes that all the aids, including presumptions, are still valid tools to consider when interpreting legislation and it is submitted that this is correct.

Application of the contra fiscum rule by the courts and in the future

Meyerowitz (1995: 87) analysed various cases and notes that in many instances the judges did not rely on contra fiscum to find in favour of the taxpayer – rather, they relied on background information to support their position.  Meyerowitz (1995: 88) concludes that this indicates the contra fiscum rule is generally the last resort applied by a taxpayer in supporting his position and that generally the courts use this rule to bolster a construction in favour of the taxpayer which was reached without the aid of this rule. 

Dison (1976: 159) also reviewed a number of South African court cases in evaluating the application of the contra fiscum rule by South African courts until that time. He concluded that it was noticeable that the courts favoured taxpayers in several judgments on the apparent application of the contra fiscum rule yet never expressly mentioned the application of the rule. 

Meyerowitz, et al. (2008a:162) also points out that fiscal legislation is different to other legislation as it seeks to deprive a taxpayer of a portion of his funds. On this basis a court should take care not to resort to the purpose of the Act to arrive at simply imposing a liability on the taxpayer in every scenario. In this regard, a court should remain cognisant of the application of the anti-avoidance rules and what these rules deem to be acceptable or not.

Meyerowitz’s concern regarding the application of the contra fiscum rule is possibly illustrated by Botha JA’s judgment in Glen Anil Development Corporation Ltd v SIR  37 SATC 319 ("Glen Anil”) and the learned judge’s rather "broad brush” approach to the contra fiscum rule when considering the application of anti-avoidance issues. 

In this case, the court was required to consider the ability of the Commissioner to successfully invoke the provisions of section 103(2) of the Income Tax Act thereby disallowing the taxpayer from setting off their taxable income against an assessed loss brought forward from an earlier year.  The taxpayer had acquired shares in a holding company which ultimately held shares in a company which had the assessed loss. The purchase price mechanism provided for the purchase price for the shares to be increased to the extent that it was evidenced that the particular subsidiary, which previously carried on business as a distributor, enjoyed an assessed loss.  None of the companies acquired by the taxpayer held any assets. The purchaser transferred his township development business into the subsidiary which had a loss.  The taxpayer contended that the Secretary was not entitled to invoke the application of section 103(2) of the Income Tax Act on the basis that the court should follow a literal approach where an interpretation suggested that the provision, in these circumstances, could not apply on the basis that the change in shareholding occurred at a different level in relation to the company which ultimately received the income (which was offset against this company’s assessed loss). The taxpayer referred to the judgment of CIR v Simpson 16 SATC 268, in which the court had referred to the decision of the UK courts in Cape Brandy Syndicate 1921 1 K.B. 64, as compelling grounds of support for this approach.

In concluding on this issue at 726-8, Botha JA noted in Glen Anil with reference to the contra fiscum rule that:

"…I do not understand the rule to be that every provision of a fiscal statute, whether it relates to the tax imposed or not, should be construed with due regard to any rules relating to the interpretation of fiscal statutes.   Section 103 of the Act is clearly directed at defeating tax avoidance schemes.  It does not impose a tax, nor does it relate to the tax imposed by the Act or to the liability therefore or to the incidence thereof, but rather to the schemes designed for the avoidance of liability therefore. It should, in my view, therefore, not be construed as a taxing measure but rather in such a way that it will advance the remedy provided for the section and suppress the mischief against which the section is directed (Hleka v Johannesburg City Council 1949(1) SA 842 (A))… The discretionary powers conferred upon the Secretary should, therefore, not be restricted unnecessarily by interpretation.” 

Both Goldswain (2012b: 75) and Dison (1976: 180) criticise the court’s approach in Glen Anil on the basis that in CIR v King 1947 14 SATC 184 (hereafter King), the court also applied the contra fiscum rule in the context of an anti-avoidance rule (section 90) but the court in Glen Anil made no effort to distinguish why the principles set out in the King case should not be applied.  

On the basis that courts will follow a purposive approach going forward, it is submitted that courts will not distinguish between charging and non-charging provisions but rather to the purpose of the legislation.  Consequently, Goldswain’s criticism of the court in Glen Anil is probably academic. 

In the current era, courts may very well have concluded on the same basis as Botha JA in relation to the basis for interpreting anti-avoidance provisions in the Income Tax Act, but the difference between the "mischief rule” and the purposive approach is that the "mischief rule” is limited to seeking the defect in the previous law.  The purposive approach is far more all-encompassing in considering the background and surrounding facts which inform the purpose of a provision. 

In the most recent case involving the contra fiscum principle, the court in Shell’s Annandale Farm (Pty) Ltd v C: SARS 62 SATC 97 found in favour of the taxpayer where SARS sought to argue that compensation received by a taxpayer in respect of land which was expropriated constituted a "supply” on which output VAT was payable.  At that point in time, the VAT Act did not describe a supply or deemed supply with reference to expropriation. This case was heard by the courts at a time following the introduction of the Constitution in South Africa and the considerations of a new approach to the interpretation of statutes, yet the court never considered whether the contra fiscum rule remained a valid presumption in statutory interpretation in South Africa.  Rather, the court considered both arguments of taxpayer and the Commissioner to be plausible and ultimately held that the contra fiscum rule should ultimately weigh considerations in favour of the taxpayer. (Of interest is that the Fiscal Appeal Court of Zimbabwe in ITC 77 SATC 1874 considered the judgment in Shell’s Annandale and concluded that it was incorrect on the basis that "supply” was capable of an interpretation which covered passive actions such as an expropriation).

In an analysis of the judgment handed down in C: SARS v Airworld CC 2008 70 SATC 48, Meyerowitz, et al. records in The Taxpayer (2008b: 226) that there are many situations where a purposive approach to the interpretation of statutes may not result in a purpose being identified which is distinct from the provision that is being interpreted, alternatively two or more constructions could be subject to the same purpose and the purposive approach is not of any benefit. In these scenarios, the extent to which the purposive approach operates at the expense of the rules of statutory interpretation needs to be considered. 

In this regard, Meyerowitz, et al. (2008b: 228) possibly answers this issue raised previously by Meyerowitz in 2006 in questioning the continued existence of the contra fiscum rule by remarking that the purposive construction is a valuable and essential tool in the task of statutory interpretation but that it must be applied with reference to the language itself and that a court should guard against making unjustified assumptions as to the purpose of a statute. Instead, the purpose should be found in the meaning of the words of the statute, not the meaning of the words of a statute in the legislative purpose. This would also counter the risk of courts interpreting every provision in the Income Tax Act against the taxpayer on the basis that the reason for the legislation is to raise tax.

Conclusion: The contra fiscum rule lives on    

It is submitted that the contra fiscum rule still applies in South African law and that it would be wrong to conclude that the rule has no application in the context of an interpretation of a fiscal provision, anti-avoidance or otherwise. 

The rule is consistent with the values underlying the Constitution. It is conceded that in the modern era of a purposive approach to interpretation, this rule may have a reduced application when compared to the previous era which favoured a strict literal approach to interpretation which more easily appeared to lead to ambiguity. However should applying the purposive approach yield two constructions which are both equally plausible, it is submitted that the contra fiscum rule should apply and a court should ultimately conclude in favour of the taxpayer. 

REFERENCE LIST

Badenhorst & Others v CIR 1955 2 SA 207 (A), 20 SATC 39

Botha, C. (2005). Statutory interpretation. An Introduction for Students (4th Edition). Cape Town: Juta & Co. Ltd.

Botha, C. (2012). Statutory interpretation. An Introduction for Students (5th Edition). Cape Town: Juta & Co. Ltd.

Burns, Y. (1998). Administrative Law under the 1996 Constitution. Durban: Butterworths.

Cape Brandy Syndicate v Inland Revenue Commissioners, 1921 1 K.B. 64

CIR v King 1947 2 SA 196 (A), 14 SATC 184

CIR v Simpson 1949 4 SA 678 (A), 16 SATC 268

Clegg, D & Stretch, R. (2015). Income Tax in South Africa. Durban: LexisNexis.

C: SARS v Airworld CC 2008 2 All SA 593 (SCA), 70 SATC 48

Devenish, G.E. (1992). Interpretation of Statutes. Cape Town: Juta & Co. Ltd

Dison, L.R. (1976). The contra fiscum rule in theory and practice. The South African Law Journal, 93: 159-199.

Du Plessis, L.M. (1998). Jurisprudence of Interpretation in a new Constitutional Order. Acta Juridica, 1: 8-20.

Du Plessis, L.M. (2002). Re-interpretation of Statutes. Durban: Butterworths.

Du Plessis, L.M. (2005). The (re-)systematization of the canons of and aids to statutory interpretation. The South African Law Journal, 1: 591-612.

Du Plessis, L.M. (2011). Statute Law and Interpretation. In The Law of South Africa (2nd ed., Vol. 25: 209-417), edited by Joubert, W.A. & Faris, J.A. Durban: LexisNexis. 

Elliot v Rex 1911 EDL 514

Glen Anil Development Corporation Ltd v SIR 1975 4 SA 620 (A), 37 SATC 319

Goldswain, G.K. (2008). The purposive approach to the interpretation of fiscal legislation – the winds of change. Meditari Accountancy Research, 16(2): 107-121.

Goldswain, G.K. (2012a). Hanged by a comma, groping in the dark and holy cows – fingerprinting the judicial aids used in the interpretation of fiscal statutes. Southern African Business Review, 16(3): 30-56.

Goldswain, G.K., (2012b). The winds of change – an analysis and appraisal of selected constitutional issues affecting the rights of taxpayers. Pretoria: UNISA (LLD thesis).

Meyerowitz, D. (1995). Has the contra fiscum rule vanished? Acta Juridica, 79-88.

Meyerowitz, D. (2006). The Contra Fiscum Rule. The Taxpayer, 2: 36-37.

Meyerowitz, D, Emslie, T.E. & Davis, D.M. (2008a). The Evolution in the Interpretation of Tax Statutes. The Taxpayer, 9: 161-163.

Meyerowitz, D, Emslie, T.E. & Davis, D.M. (2008b). The Socalled Method of Purposive Construction of Legislation. The Taxpayer, 12: 224-228.

Natal Joint Municipal Pension Fund v Endumeni Municipality 2012 (4) SA 593 (SCA)

Pharmaceutical Manufacturers Association of South Africa; In re: Ex parte Application of the President of the Republic of South Africa 2000 2 SA 674 (CC)

Shell’s Annandale Farm (Pty) Ltd v C: SARS 1999 (C), 62 SATC 97

South Africa (Republic). Acts, statutes etc. (2015). The Income Tax Act (Act No. 58 of 1962) (as amended). Durban: LexisNexis.

South Africa (Republic). Acts, statutes etc. (2015). The Constitution of the Republic of South Africa. Durban: LexisNexis.

Van Staden, M. (2015). A Comparative Analysis of Common Law Presumptions of Statutory Interpretation. Stellenbosch Law Reports, (3): 550-582.

This article first appeared on the July/August 2016 edition on Tax Talk.


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