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Interpreting words used in a statute – a useful guide

Monday, 06 August 2012   (0 Comments)
Posted by: SAIT Technical
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By PWC Tax Synopsis

The interpretation of definitions that are found in statutes may be a difficult issue. Words are capable of wide or narrow interpretation and the degree of latitude applied in the process of interpretation may have a profound effect.

For this reason principles have been developed to assist in identifying the most apt interpretation that should be applied.

The golden rule, naturally, is that, wherever possible, the words should be given the meaning that they have in ordinary usage. It follows that the use to which a word is put derives from the context in which it is used.

Context would identify, for instance, whether a word is used as a noun or a verb (e.g. "work”). It would also assist in identifying the manner in which the noun or verb is intended to be understood (e.g. "work of nature” cf. "work of art”)

Our law relies on long established principles to assist it in interpretation, and the application of these principles is well demonstrated in a recent decision of the South Gauteng Tax Court in Case No. 12860 (judgment given on 22 June 2012).

A close corporation had claimed to be liable to income tax as a small business corporation subject to the provisions of section 12E of the Income Tax Act. SARS challenged the status of the CC as a small business corporation, alleging that it derived more than the permitted minimum proportion of 20% of its revenues from investments and the rendering of "personal service”.

The dispute centred around whether the income-earning activities of the CC fell within the definition of "personal service” as defined. Section 12E(4)(d) defines "personal service in the following terms:

"‘personal service’, in relation to a company, co-operative or close corporation, means any service in the field of accounting, actuarial science, architecture, auctioneering, auditing, broadcasting, consulting, draftsmanship, education, engineering, financial service broking, health, information technology, journalism, law, management, real estate broking, research, sport, surveying, translation, valuation or veterinary science, if ...”

The activities of the CC which were performed by the member, aided by a personal assistant, and by subcontractors in certain areas of the country. They involved the listing and sale of products - mainly imported by its principals - with major retail organisations in South Africa. In addition ancillary services in relation to its clients’ products were also performed from time to time. These included promotional activities both in-store and out of store, advice on trade details (pricing, incentives, etc), negotiating placement of products in store and the provision of advice to and training to the clients’ sales staff.

SARS seized on three of the words found in the definition of personal service, namely broking, consultancy and management. They took the position that the terms should be interpreted widely and that the nature of the activities of the CC fell within the scope of these wide interpretations. It relied on its own Interpretation Note No. 9, dated13 December 2002, paragraph 2.3(b):

"The definition of ‘personal service’ is very broad and does not define the meaning of each activity. It is, therefore, necessary to analyse each activity within its ordinary meaning.”

Tax Court not convinced

The Tax Court was not persuaded that SARS’ interpretation was appropriate. It sought rather to apply the well-established approach that has developed over centuries of jurisprudence. Thus, Mbha J stated at [21] of his judgment:

" If there is any doubt about the ordinary meaning of a word used in a particular context, certain rules must be applied. There are two rules relevant to this matter: A word included in the group of words must be regarded as being of the same type as the other words in that group (eiusdem generis); on the other hand, if a word is not included in the group, it must not be regarded as subject to the same prescriptions as that group (exclusio alteris).”

In order to establish the meaning of the word "consultancy”, the Court consulted the standard dictionaries and found that the word "consult” is used in three contexts, namely:

· having reference to a source of information (e.g. consult a dictionary);

· offering advice, typically in a professional capacity; and

· discussing a matter widely, as in consulting with interested parties.

The Court found that the context in which the term "consulting” was to be interpreted fell within the second category, and, at [24], was of the view that:

It is necessary to establish the intention of the legislature when passing the relevant provision. The legislature’s intention embodied in section 12E of theAct can clearly be seen from the contents of SARS’ Interpretation Note 9 (supra), which was issued at the time of the introduction of that section, and which states (at p 5) that:

‘Section 12E was enacted for the specific purpose of encouraging new ventures and employment creation, i.e. active small businesses. The provisions relating to SBC’s are therefore not intended to benefit any professional person such as, for example, an architect or a lawyer who renders his/her service by means of a company or close corporation.’ [emphasis added]

Accordingly, in interpreting the term "consulting”, as applicable to a personal service provided by a small business corporation for the purposes of section12E(4), the term "professional person” is crucial in defining that term.”

If any support for this approach was necessary, Mbha J considered thatthis was found in the application of the eiusdam generis principle. The Court thus held at [25]-[26]:

"The fields of activity listed as personal services in section 12E(4)(d) fall into two categories, the first of which is accounting, actuarial science, architecture, auctioneering, auditing, broking, draftsmanship, education, engineering, health, information technology, law, management, real estate, research, secretarial service, surveying, translation, valuation and veterinary service which are all professional or quasi-professional activities, requiring a particular qualification and, in many cases, a licence, certificate, or membership of a professional body before the person concerned can participate in that activity.

The second category comprises broadcasting, commercial arts, entertainment and sport, none of which are relevant to the activity carried out by the appellant.

[26] Since the term "consulting” is the least easily defined of all the terms, the rules of interpretation that I have referred to, must be strictly applied. The dictionary definition of the term must be applied and it must be regarded as the offering of advice by a professional or qualified person. I am fortified in adopting this approach, by the specific reference to a "professional person” in Interpretation Note 9 explaining the legislature’s basis of section 12E, as I have alluded to in para [24] above.”

Door finally shut

The door was finally shut on SARS in [28] of the judgment, where it was held:

"In any event, even if no definite conclusion as to the interpretation of the term ‘consulting’ can be arrived at by the application of any of the rules of statutory interpretation I have referred to, then the contra fiscum rule must be applied and the statute interpreted in favour of the appellant. In terms of this rule, where a taxing statute reveals an ambiguity and the ambiguous provision is capable of two constructions, the court will place a construction on the one that imposes a smaller burden on the taxpayer.”

The terms "broking” and "management” were also found not to be of application by reference to their dictionary definition and the context, and having regard to the nature of the activities performed by the member on behalf of the CC.

It was therefore found that the services rendered by the CC to its clients were not of the nature of "personal service” and that the CC was entitled to claim the benefit ofclassification as a small business corporation.

This decision highlights yet again that interpretation notes issued by SARS do not have force of law, and may be open to question. These are the statement to the public of the manner in which SARS will apply the legislation, and taxpayers are at risk of adverse assessment if they file returns that conflict with the interpretations as published.

"Personal service” unchanged

Interpretation Note No. 9 is currently in its fifth iteration. However, the interpretation of the term "personal service” has not changed, as evidenced by the following extract from 4.5 on page 8:

"In general terms, a personal service refers to a service rendered and for which the income derived is mainly a reward for the personal efforts or skills of an individual. However, the term is capable of expansion or limitation depending on the scope of the specific law in which it used. Section 12E(4)(d) (as quoted below) defines "personal service” which merely lists a class of activities that would be regarded as a personal service. For the sake of clarity, the ordinary, grammatical meaning is to be ascribed to each word. Accordingly, each of these entries is to be construed in their widest possible sense.” (Emphasis added)

Tax Court decisions are not binding legal authority. However, the approach of Mbha J in this matter is a pragmatic demonstration that interpretation is a process that requires careful and detailed analysis of a word or words found in a statute, having regard not only to the very word itself but also to those with which it may be associated.



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