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Law of Taxation 411 notes
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Lecture notes for Law of Taxation 411 (first semester module). Both concise and detailed, these notes earned their author a distinction for the module.
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Law of Taxation 411Topic 1: Introduction
Overview:
1. Introduction and definition – what is “tax”?
2. Constitution
3. Classification of taxes
4. Objectives of taxation
5. Criteria for a good tax system
6. Interpretation
1 Intro and definition – what is “tax”?
Tax law module
• Tax at EMS (accounting and economics)
• Sources
o Legislation (including the constitution)
▪ Must be interpreted, applied by courts, just like in other law modules
o Case law
• Interaction with many other areas of the law
o Contract law (resolutive conditions in contracts etc), company law
Legislation
• Definition of “tax” in Income Tax Act 58 of 1962 (ITA): Means tax or a penalty imposed in terms of this
Act
o Closed definition
• Definition of “tax” in Tax Administration Act 28 of 2011 (TAA): For purposes of administration under
this Act, includes a tax, duty, levy, royalty, fee, contribution, penalty, interest and any other moneys
imposed under a tax Act
o Includes a number of things
• SARS is allowed to impose a penalty on taxpayers for non-compliance – all the powers that are
available to SARS to collect and enforce taxes are also applicable to penalties
Economics (Black, Calitz & Steenekamp)
• “Taxes are transfers of resources from persons or economic units to government and are compulsory
(or legally enforceable). There is not necessarily a direct connection between the resources
transferred to government and the goods and services that it supplies.”
• Not necessarily a direct connection but taxes you pay and what you get in return – just because you
pay doesn’t mean you will be guaranteed a hospital bed when you are sick and vice versa
Law (Legwaila)
• “…a monetary-based compulsory contribution payable by the public as a whole or a substantial sector
thereof to a government (at a national or sub-national level).”
Davis Tax Committee
• “Taxes … are general obligations for which: payments are compulsory and are enforced in terms of
legislation; no direct benefits accrue to taxpayers in exchange for payments made and benefits are
returned to groups of people, not identifiable individuals.”
• “Taxation is a critical part of the social contract between the state and citizens” = social contract –
relationship between government and citizens – responsibility of state to provide services,
responsibility of citizens to pay taxes
Courts
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, • Nyambirai v National Social Security Authority 1996 (1) SA 636 (ZS): “From these authorities the
following features which designate a tax may be said to emerge:
(i) it is a compulsory and not an optional contribution,
(ii) imposed by the Legislature or other competent public authority,
o Not imposed by SARS – collected by SARS (they execute the legislation, which was passed
by Parliament)
(iii) upon the public as a whole or a substantial sector thereof,
(iv) the revenue from which is to be utilised for the public benefit and to provide a service in the public
interest.”
• “A state cannot exist without taxes. Society receives benefits from them” (Pienaar Bros v C:SARS
2017 (6) SA 435 (GP))
• “They are indispensable in an open and democratic society to enable the State to discharge its
obligations towards its citizens” (PWC v C:SARS 2021 (3) SA 213 (GP))
• “Taxes are what we pay for a civilized society” (Compania Generalde Tabacos de Filipinas v Collector
of Internal Revenue – 1927 US Supreme Court case)
• Paying taxes is necessary if you want to achieve a democracy
2 Constitution
Power to levy tax
• Source which provides government with the power to levy taxes to raise revenue
• Section 55(1): In exercising its legislative power, the National Assembly may—
(a) consider, pass, amend or reject any legislation [including tax legislation] before the
Assembly; and
(b) initiate or prepare legislation, except money Bills. [different process must be followed]
• Section 213(1): There is a National Revenue Fund into which all money received by the national
government must be paid, except money reasonably excluded by an Act of Parliament.
o Government is going to receive revenue in the form of taxes and therefore, they must be
allowed to pass fiscal legislation.
• Section 228 empowers province to impose taxes, levies and duties:
o Limited power (type of taxes, act of parliament needed, way exercised)
• Section 229 empowers municipalities to impose:
o Rates on property
o Surcharges on fees for services provided by or on behalf of municipality
o Other taxes, levies and duties if authorised by national legislation
o Limitations
Enactment of fiscal legislation
Discussion papers Money Bill (section
(green paper, white 77 of the
paper) Constitution)
Draft bill, public
comments and
response document
Min of finance delivers annual budget speech, announces changes, draft documents and discussion papers
are drawn up, a draft bill is formulated, public comments are submitted and eventually a money bill is created.
A money bill is regulated by s 77 of the Constitution.
Money bill
• Section 77(1): A Bill is a money Bill if it
o (a) appropriates money;
o (b) imposes national taxes, levies, duties or surcharges;
o (c) abolishes or reduces, or grants exemptions from, any national taxes, levies, duties or
surcharges; or
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, o (d) authorises direct charges against the National Revenue Fund, except a Bill envisaged in
section 214 authorising direct charges.
• Why is it necessary to determine whether a bill is a money bill?
o Certain other provisions of the Constitution are applicable to money bills specifically
• Section 73(2): Only Minister of Finance may introduce a money Bill in the National Assembly
• Section 77(2): May not deal with any other matter (except e.g. subordinate or incidental)
• Section 77(3): Must follow section 75 procedure (passed by NA, referred to NCOP, assented to by
President)
SA Reserve Bank v Shuttleworth 2015 (5) SA 146 (CC) / 78 SATC 23 [not prescribed]
• Mark Shuttleworth wanted to emigrate from SA to the Isle of Man, and SA has a system called
exchange control. Ensure that everyone doesn’t take all their funds out of country – certain allowances
are made but need approval from reserve bank to take your money out of SA if you intend to emigrate.
MS wanted to take 2.5 billion out of SA. He needed RS approval, in addition to approval he had to
pay 10% exit charge, a fee levied ito the Exchange control regulations when they get approval to take
funds out of SA. 10% was levied, he duly paid, and he took his funds out of SA. If you don’t pay the
fees, your funds are “blocked”. Mr S was advised that the exit charge was a tax and that it was not
imposed in line with the money bills provisions in the Constitution. Legal question: whether the exit
charge fell within s 77(1)(b) of Con.
• Permission of SARB
• 10% exit charge (Exchange Control Regulations)
• Shuttleworth: Yes, a tax imposed for the purpose of raising revenue for the state
• SARB: No, a regulatory charge with main object to disincentivise export of capital
• Para 42: A blissful starting point would be to affirm that the power to tax residents is an incident
of, and subservient to, representative democracy. The manner and the extent to which national
taxes are raised and appropriated must yield to the democratic will as expressed in law. It is the
people, through their duly elected representatives, who decide on the taxes that residents must bear.
An executive government may not impose a tax burden or appropriate public money without due
and express consent of elected public representatives.
o It is the people who decide how and when taxes should be imposed – parliament decides but
parliament was elected by the people.
• Meaning “national taxes, levies, duties and surcharges” (section 77(1)(b))?
• Interpretation: Context and purpose (para 43)
o Court said words in s 77(1)(b) have wide meanings but labels will not determine whether
something is a money bill or not – the provision which imposes it must be interpreted it – in
what context is the term used and for what purpose is the charge imposed? Is the dominant
purpose of the statute to raise revenue or to regulate conduct
• Para 48: So, aside from mere labels, the seminal test is whether the primary or dominant purpose
of a statute is to raise revenue or to regulate conduct. If regulation is the primary purpose of the
revenue raised under the statute, it would be considered a fee or a charge rather than a tax. The
opposite is also true. If the dominant purpose is to raise revenue then the charge would ordinarily be
a tax. There are no bright lines between the two. Of course, all regulatory charges raise revenue.
Similarly, “every tax is in some measure regulatory”. That explains the need to consider carefully the
dominant purpose of a statute imposing a fee or a charge or a tax. In support of this basic
distinguishing device, judicial authorities have listed non-exhaustive factors that will tend to
illustrate what the primary purpose is.
• Court cases – Factors indicating primary or dominant purpose:
o Money paid into general revenue fund for general purposes (tax)
▪ Intention to raise revenue for state
o No specific service in return for payment (tax)
▪ No link between what you pay and what you get
o Purpose to punish (not tax)
o Subject to general machineries of assessment and collection (tax)
▪ SARS involved to collect the money
o Words used (e.g. “fee”) (not tax)
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, ▪ Terminology can be considered but not determinative
o Not imposed on public as a whole or on a substantial part (not tax)
▪ Small group of population affected
o Charge used to defray administrative costs (not for public benefit) (not tax)
o Purpose to ensure constant stream of revenue for state (tax)
• The purpose was thus to regulate the outflow of capital, to regulate conduct to protect SA economy
so not able to freely take funds out of SA without paying exit charge – not for gov to earn income but
to discourage people from transferring their money.
Bill of rights
• Section 9: Equality
o VAT rate on sanitary pads was changed from 15% to 0%, and it was argued that it was unequal
treatment of women as they would pay extra based on their biology.
• Section 14: Privacy
o Must disclose a lot of info to SARS to enable SARS to charge you with the correct amount to
SARS. This is justifiable under the limitations clause.
• Section 25: Property (see next bullet)
o It has been argued that the imposition of a tax is in breach of s 25 of the Constitution. It has
been held by our courts that the imposition of tax is not deprivation of property or expropriation.
However certain collection manners could possibly be, e.g. SARS owes A a tax refund and A
owes SARS income tax, would a setoff be allowed? Could SARS withhold the tax refund
because they are owed income tax? That is something to be considered here.
• Section 33: Just administrative action
o All administrative actions must be lawful, reasonable and procedurally fair and many of the
decisions made by SARS are administrative actions. SARS officials have certain discretions
and these must be exercised in a way which makes them a just administrative action.
• Section 34: Access to courts
o Tax Administration Act s 164: “pay now argue later” rule – if SARS issues an assessment
(document ito which you are liable to pay your taxes), you as a taxpayer have the right to
dispute an assessment. But this rule says you still have you pay your taxes, even though you
are going to dispute your liability, you cannot dispute in order to delay paying your taxes. If
you take it to court and are determined not to be liable, you will receive a refund with interest.
o This rule has been challenged on the basis of s 34, because a taxpayer must pay before it
has been found that he is liable. The CC has found that this is a balancing act, taxpayers have
right of access but at same time, SARS needs mechanisms to ensure taxes are collected
timeously and avid delaying tactics, and it is a justifiable limitation of the right of access to
courts. S 164 also allows a taxpayer to apply to SARS to suspend the payment if there are
grounds to justify that. When that application is brought to SARS then SARS has to make a
decision and that decision would be an administrative action (lawful, reasonable, procedurally
fair). Taxpayers do thus have remedies, as they can apply for a suspension and if SARS
rejects it, they can apply to a court to have the decision reviewed. As such, the “pay now argue
later” rule is not in breach of the right of access to courts.
• But also remember section 36 – limitation of rights
• The powers granted to SARS and commissioner must conform with rights in the constitution
• Taxpayer in an unequal relationship with SARS but SARS needs extensive powers to ensure
taxpayers do comply and to enforce legislation. The idea is that if SARS complies with the constitution,
if taxpayers are treated fairly, there will also be greater compliance from the side of taxpayers.
• Tax legislation must be constitutionally valid, and the conduct of SARS must also be in line with
constitutional rights.
Right to property (provincial high courts)
• First National Bank of SA t/a Wesbank v C:SARS 2001 (3) SA 310 (C): “Tax is not a depravation of
property, nor is it expropriation”
• Pienaar Bros v C:SARS 2017 (6) SA 435 (GP): “Taxes are not penalties. Neither can they be, without
any qualification, be regarded as unjust deprivation of property use.”
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