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The lawfulness of retrospective amendments in tax law

Thursday, 20 July 2017   (0 Comments)
Posted by: Author: Beric Croome
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Author: Beric Croome (ENSafrica)

On 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, in a case dealing with the Taxation Laws Amendment Act, 2007 (the “Amending Act”) which inserted section 44(9A) into the Income Tax Act, 1962 (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 had 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 ZAR29.5-million out of the taxpayers’ share premium account. On the date of the resolution, the tax law excluded from the definition of “dividend” any amount distributed out of a company’s share premium account. 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 on companies (“STC”) was due and payable on the distribution on the basis that it was made out of the share premium account. The Commissioner, however, assessed the amount of ZAR29.5-million to STC 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.

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