Capital Gains Tax in South Africa: Lessons From Australia
In the budget review of 23 February 2000, the South African Minister of Finance announced that a capital gains tax (`CGT') would be introduced into South Africa, the anticipated start date at that point being 1 April 2001.Pursuant to the Taxation Laws Amendment Act 5 of 2001, a CGT of general operation was introduced into the South African Income Tax Act 58 of 1962 (the `ITA 1962') through the insertion of the Eighth Schedule,1 read together with s 26A of the Act. Section 26A is the charging provision that states that a person's taxable income included their `taxable capital gain'.
As discussed below, the start date was revised to 1 October 2001.The new regime uses as its two key components the notions of `asset', defined in terms of property in s 1, and `disposal', broadly defined in terms of the `creation, variation, transfer or extinction of an asset' in s 11(1).
The two notions `asset' and `disposal' also provided the basis of the original version of the capital gains legislation in Australia.This was effected through the Income Tax Assessment Amendment (Capital Gains) Act1986 and the Income Tax (Rates) Amendment (Capital Gains) Act 1986 which included a new Part IIIA (ss160A-160ZZU) in the Income Tax Assessment Act 1936 (the `ITAA'). As a consequence of the use of these two terms, the Australian legislation became subject to considerable judicial criticism.
This criticism was aimed particularly at two `disposal' provisions, ss160M (6) and (7), known as the `terrible twins' and their interplay with the definition of asset in s 160A, which was also tied to the notion of property.In FCT v Cooling 2 Hill J stated that while both ss160M (6) and (7)`present difficulties of construction, the former is drafted with such obscurity that even those used to interpreting the utterances of the Delphic oracle might falter in seeking to elicit a sensible meaning from its terms'.164 The author wishes to thank Professor Susan Scott of the University of South Africa for her kind assistance in answering queries regarding South African property law, in particular the law of cession.** LLB (Hones) (Adelaide), PhD (Bond). Barrister and Solicitor, Associate Professor, School of Law, Dakin University, Waurn Ponds Campus, Australia.All references to the ITA 1962 are to sections in the Eighth Schedule unless otherwise indicated.
(1990) 90 ATC 4472 at 4488. In Helples v FCT3 Mason CJ added that ss160M(6) and (7)`must be obscure, if not be wildering, both to the taxpayer who seeks to determine his or her liability by reference to them and to the lawyer called upon to interpret them'.As a consequence of this criticism, Part IIIA was subsequently amended and ultimately rewritten in a manner that changed the very foundations of the legislation.It will be shown below that as part of the Tax Law Improvement Project (the `TLIP'), Part IIIA was replaced by Chapter 3 of the Income Tax Assessment Act 1997 (the `ITAA 1997').
In this new version of the CGT legislation, the drafters moved away from the two notions of `asset' and `disposal' to a single key requirement, the notion of a `CGT event'. Moreover, the definition of `asset' in s 108-5ITAA 1997 was no longer confined to proprietary assets.Given the history of CGT in Australia, it was some what strange to find that the South African legislature adopted the same prerequisites and definitions that had proven to be so troublesome in Australia.It may be surmised that the Legislators were mindful of the differences in Australian (based on common law) and South African (based on Roman-Dutch law) property law, and believed that defining `asset' in terms of property would not be as problematic in South African law.
Given the breadth of the notion of `property' in South African law, perhaps the Australian experience was considered irrelevant. While it will be seen that Australian and South African property law have different legal foundations, under both legal systems there are some rights that are not capable of transmission. Moreover, the types of right that are not transferable under South African law echo those personal rights that are not transferable under Australian law and thus are not considered property. It will be seen that this, in turn, raises the same difficult issues that troubled the courts in Australia as to the meaning of an `asset' and the ability to `dispose' of certain rights under the CGT legislation.
While there are some variations between the troublesome, original version of Part III A of the ITAA 1936 and the Eighth Schedule of the ITA 1962 which may lead the South African judiciary to approach the latter legislation in a different manner, the South African drafters could nevertheless have learnt from the Australian experience and avoided the notions of asset (proprietary) and disposal. Under one view, using a singular notion, a `CGT event', as the trigger for the operation of the CGT legislation is much simpler.Most importantly, at the very least the South African drafters could have ascertained from the Australian experience that applying a CGT to personal rights is problematic and, inturn, carefully drafted the legislation so that it might accommodate such CAPITAL GAINS TAX IN SOUTH AFRICA: LESSONS FROM AUSTRALIA? 1653 (1991-1992) 173 CLR 492 (HC of A) at 497; (1991) 91 ATC 4808 at 4810.4 The amended versions of ss 160A and 160M(6) and (7) were effective from 26 Jun 1992.5 See s 102-20 of the ITAA 1997.These events are summarized in s 104-5 of the ITAA 1997.6 That is, a `disposal' of an `asset': ss 3 and 4 of the ITA 1962.
In particular, defining an asset in terms of property: s 1 of the ITA 1962.Rights. In this regard it will be seen that the South African legislation is in herently incompatible with the treatment of all personal rights as assets for CGT purposes.The South African legislation is also confusing in what it does not say.There are many conceptual `gaps'. Perhaps most significantly the `acquisition' of an asset is really not addressed in the legislation.Largely, that an asset has been acquired seems to be presumed.
Often one provision assumes the existence of another complimentary provision that simply does not exist.This is important because as the operation of the legislation is premised upon establishing certain prerequisites, a capital gain per se does not give rise to tax liability.The gain has to be coupled with an `asset' (that had presumably been `acquired') and then `disposed'.When considering the South African legislation, care is therefore required not to simply assume the existence of one prerequisite just because another has been satisfied.This is particularly so where the language used in a particular section seems to presume the existence of the other prerequisite(s). In this regard it is submitted that the South African CGT legislation is even more poorly drafted, and has more conceptual `gaps', than Part IIIA. Ultimately, it is potentially as confusing as the original version of the Australian CGT and will undoubtedly be met with similar criticism. What follows is a consideration of the key components of the South African CGT legislation.As a detailed consideration of all aspects of this legislation is beyond the scope of this article, this discussion will be confined to the interplay between the definition of `asset' and the notion of `disposal' and the concept of an `acquisition' under the Act.
Source: By Julie Cassidy, Deakin University, Australia (SA Merc LJ)
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