Unconstitutionality of retrospective or retroactive tax legislation
28 June 2012
Posted by: SAIT Technical
By Andrea Minnaar (MoneyWebTax)
Retrospective or retroactive legislation makes it impossible for a taxpayer to arrange their affairs and to comply with the relevant legislation.
More recently, amendments (or proposed amendments) to tax laws attempt to operate retrospectively or retroactively in certain instances. To name a few examples:
In the context of preference share funding, substantial changes to section 8E have been made by the Taxation Laws Amendment Act No. 24 of 2011 (TLAA), which changes came into operation on 1 April 2012. Following further discussions with stakeholders, National Treasury has released a draft Taxation Laws Amendment Bill (TLAB) on 13 March 2012, which provides that the changes to section 8E by the TLAA will be reversed. The relevant section in the draft TLAB proposes a date of operation of 1 April 2012, even though the draft TLAB is only expected to become law in the last quarter of 2012. This leaves taxpayers in the uncertain position that the amended section 8E is currently law, but draft legislation provides that if and when such draft legislation becomes law, it will (attempt to) retrospectively reverse the position. For taxpayers who have to complete provisional or final tax returns prior to such date, this creates a legal conundrum.
In the context of intra-group transactions, a new section 23K has been introduced by the TLAA to require taxpayers to obtain prior approval from the South African Revenue Service (Sars) in respect of certain types of funding in the context of such transactions, in order to be allowed an interest deduction in respect of such funding. In terms of the TLAA, section 23K came into operation on 3 June 2011, despite the fact that the TLAA was only promulgated in January 2012. Taxpayers entering into intra-group transactions between June 2011 and January 2012 accordingly applied for approval from Sars in terms of a section which was not law at the relevant time.
Retrospective or retroactive legislation such as the above makes it impossible for a taxpayer to arrange their affairs and to comply with the relevant legislation. The position may have been more tenable if the draft legislation released by National Treasury, often with immediate effective dates, could be relied upon to be the final version of the legislation. However, more often than not, these drafts undergo various changes before being promulgated with the effect that it is impossible for a taxpayer to predict what the rules are that it has to comply with.
The habit of bringing legislation into effect retrospectively or retroactively conflicts with two key South African constitutional principles, being the rule of law and the principle of separation of powers.
The rule of law is entrenched in section 1 of the Constitution of South Africa ("the Constitution") which states that:
"The Republic of South Africa is one, sovereign, democratic state founded on the following values:
(a) Human dignity, the achievement of equality and the advancement of human rights and freedoms.
(b) Non-racialism and non-sexism;
(c) Supremacy of the constitution and the rule of law.
(d) Universal adult suffrage, a national common voters roll, regular elections and a multi-party system of democratic government, to ensure accountability, responsiveness and openness."
One of the applications of the rule of law is that a person should be able to know the law in order to be able to arrange his actions accordingly. In this regard Mokgoro J, in her concurring judgment in the case of President of the Republic of South Africa v Hugo 1997 (4)(SA 1 (CC), held that:
"The need for accessibility, precision and general application flow from the concept of the rule of law. A person should be able to know of the law, and be able to conform his or her conduct to the law."
Where a taxpayer is expected to arrange its affairs in terms of draft legislation which may or may not come into effect in the same form, it is impossible for a taxpayer to a "know of the law" and "be able to conform his or her conduct to the law", indicating that the implementation of retrospective or retroactive legislation contravenes the rule of law and, therefore, the Constitution.
The separation of powers means that the functions of government must be classified as either legislative, executive or judicial and that these functions must be performed by different branches of government. The purpose of separating powers is to prevent the concentration of power. In South African Association of Personal Injury Lawyers v Heath 2000 BCLR 77 (CC) the court held that the doctrine of separation of powers is based on inferences drawn from the structure and provisions of the Constitution, rather than on an express entrenchment of the principle. The Constitution provides for the separation of powers between the executive, the legislature and the judiciary. The court held that "there can be no doubt that our Constitution provides for such a separation and that laws inconsistent with what the Constitution requires in that regard are invalid". The court continued to state that:
"The separation of the Judiciary from the other branches of government is an important aspect of the separation of powers required by the Constitution and is essential to the role of the courts under the Constitution. Parliament and the provincial legislatures make the laws but do not implement them. The national and provincial executives prepare and initiate laws to be placed before the legislatures, implement the laws thus made, but have no law-making power other than that vested in them by the legislatures. Although Parliament has a wide power to delegate legislative authority to the Executive, there are limits to that power. Under our Constitution it is the duty of the courts to ensure that the limits to the exercise of public power are not transgressed. Crucial to the discharge of this duty is that the courts be and be seen to be independent." (our underlining)
There are some limitations to the principle of separation of powers, including, inter alia, that Parliament may in certain instances delegate the power to make laws to the executive. No such delegation has, however, been implemented in respect of tax legislation. In fact, more stringent requirements appear to exist in relation to the passing of so-called "money Bills" which include the tax amendment Bills. More particularly, section 77 of the Constitution prescribes specific rules in relation to a money Bill. In terms of section 77(3) all money Bills must be considered in accordance with the procedure established by section 75 of the Constitution, and an Act of Parliament must provide for a procedure to amend money Bills before Parliament.
Section 75 of the Constitution provides, broadly speaking, that a Bill must be approved by the National Assembly, thereafter be referred to the National Council of Provinces and if approved by it, be submitted to the President for assent. The Money Bill Amendment Procedure and Related Matters Act No. 9 of 2009 (MBAP Act) has been passed to give effect to the requirement in section 77 of the Constitution which provides that an Act of Parliament must provide for a procedure to amend money Bills before Parliament. In terms of section 11 of the MBAP Act, tax Bills must be referred to the Committee on Finance of the National Assembly for consideration and report, and that after the National Assembly has passed a Revenue Bill, it must be referred to the National Council of Provinces.
In light of the above, the Constitution and the MBAP Act contain carefully designed procedures for the implementation of, amongst others, tax legislation. Although the relevant procedures are followed in the approval and passing of tax Bills, for all practical purposes tax Bills are treated as law before the process has been followed, which in substance contravenes the principle of separation of powers.
There may accordingly well be merit in an argument that retrospective or retroactive tax amendments are unconstitutional.