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Introduction
Definition – what is tax?
o Definition of “tax” in Income Tax Act 58 of 1962 (ITA): Means a tax or
penalty imposed in terms of this Act.
Closed definition
o 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.
Note: any other money SARS collects as taxes can be imposed as
penalties.
The above definitions are not helpful. Definition from Economics (Black, Calitz &
Steenkamp):
o “Taxes are the 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 it provides.”
Davis Tax Committee
o Committee appointed by Min of Finance (Pravin Gordin at the time) in
2013 they make recommendations (a few have been implemented and
led to changes in the law).
o “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.”
Nyambirai v National Social Security Authority 1996
o “From these authorities the following features which designate a tax may
be said to emerge:
i. It is compulsory and not an optional contribution
ii. Imposed by the legislature or other competent authority
iii. Upon the public as a whole or substantial sector thereof
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iv. The revenue from which is to be used for the public benefit and to
provide a service in the public interest.
Courts:
o “taxes are what we pay for a civilised society” (Compania Generalde
Tabacos)
o General idea: paying taxes is necessary in order to achieve a democracy.
The Constitution as a source of tax law
Is the source that provides the power to the government to collect taxes, as well as
the source of rights for taxpayers.
S55(1): in exercising its legislative power, the National Assembly may:
o Consider, pass, amend or reject any legislation before the Assembly; and
o Initiate or prepare legislation, except money bills
S213(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.
S77(1): A bill is a money bill if it:
o Appropriates money;
o Imposes national taxes, levies, duties, or surcharges
o Abolishes or reduces, or grants exemptions from, any national taxes, levies,
duties or surcharges; or
o Authorises direct charges against the National Revenue Fund, except a Bill
envisaged in Section 214 authorising direct charges.
Annual budget meeting and Money Bills:
o Public comments are received as drafts, responses are given to the public
comments, final version: money bill which is regulated inter alia by s77 of
the Constitution.
o S77(b): a bill is a money bill if it imposes national taxes, levies, duties, or
surcharges
o Importance of determining whether a bill is a money bill: if it is a money
bill, certain other parts of the Constitution are applicable:
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Only the minister of finance is allowed to introduce a money bill
to the NA. (this is unique: any other minister may introduce any
kind of other bill to the NA)
S77(2): A money bill may not deal with any other matter (except for
any aspects which are subordinate or incidental thereto)
E.g. income tax act deals with penalties that can be imposed,
interests that can be levied against the late payment of taxes
SA Reserve Bank v Shuttleworth 2015 (CC)
When is a piece of legislation a money bill to which constitutional processes apply? Court
formulated a test which says that you need to a) look at the purpose of the statute (to earn
revenue or regulate conduct of people being disincentivised not be moved out of South
Africa) b) list of factors to determine the purpose.
Not prescribed, but the class discussion below is important
Facts:
o Mark Shuttleworth wanted to Emigrate to the Isle of Man, but in SA we
have exchange control: you can only take a certain amount of money out of
South Africa (there are certain allowances); when you emigrate you are no
longer a resident of South Africa so you will not be taxed as a resident but
you will still be taxed on certain income that is earned here.
o Aim of exchange control: to protect the South African economy (to ensure
everyone does not take their funds out of the country and invest it abroad)
certain allowances are made to make foreign investments, but in a
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certain number of instances you need permission from the Reserve Bank to
take money out of SA.
o Shuttleworth wanted to take R2.5bil out of SA and needed permission from
the Reserve Bank and had to pay a 10% exit charge (a fee levied in terms
of Exchange Control Regulations upon approval by reserve bank to take
funds out of SA).
o The fee was levied, Shuttleworth paid the fee, took his funds out of SA. If
you do not do this, your funds are ‘blocked funds’.
o Mr Shuttleworth was then advised that this exit charge was a tax and that it
was not imposed in line with the Money Bill provisions of the Constitution
LQ: did the exit charge fall within s77(1)(b) of the Constitution?
o If the answer is yes (as Shuttleworth argues)
o RB says it is not a tax, rather it is a regulatory charge with the main object
to disincentivise the export of capital
o What it boils down to: meaning “national taxes, levies, duties, and
surcharges” (77(1)(b)) – do the exchange control regulations qualify as tax?
Para 42:
o The power to tax residents is an incident of, and subservient to,
representative democracy. The manner and 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 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 the elected representatives.
o Interpretation: context and purpose (para 43)
The fact that the 10% was called an exit charge does not exclude it
from falling under a “national tax, levy, duty or surcharge” you
need to interpret the provision which imposes the payment, in what
context the term is used, and what was the purpose for which the
charge was imposed the label assigned to the charge is not
decisive.
o Para 48: “aside from mere labels, the seminal test is whether the
primary purpose of a statute is to raise revenue or to regulate conduct.
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If regulation is the primary purpose of 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.”
Factors to take into account to determine what the dominant purpose of the
legislation is: green leads to conclusion that it is a tax; red indicates the conclusion
is that it is not a tax
1) Money paid into general revenue fund for general purposes
2) No specific service in return for payment
3) Purpose to punish
4) Subject to general machineries of assessment and collection
5) Words used (e.g. fee)
i. (Terminology can be taken into account, but the court says this is not
determinative).
6) Not imposed on public as a whole or on a substantial part
7) Charge used to defray administrative costs (not for public benefit)
8) Purpose is to ensure constant stream of revenue for the state
Conclusion:
o The 10% exit charge is not imposed on the public as a whole or a
substantial part, it is not used to defray administrative costs.
o The primary purpose: exchange control system in SA is designed to
regulate the outflow of capital – the purpose was to regulate conduct to
protect the economy not for the government to earn income. Therefore, it is
not a tax.
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Constitutional rights:
SARS and the imposition of taxes must conform with the rights of the
Constitution. The taxpayer is in an unequal relationship towards SARS. The idea is
that treating the taxpayer fairly will encourage compliance
Section 9: Equality
Section 14: Privacy
o Have to disclose a lot of information to SARS in order for them to charge
you the correct amount of tax – this is a justifiable infringement to the right
to privacy. In Tax Administration Act SARS has the power to call
information
o Concept of confidentiality in tax: information disclosed to SARS can only
be shared in very limited circumstances
Section 25: Property
o Has been challenged in courts that the imposition of tax can be challenged
ito S25. The courts have in numerous instances confirmed that imposing a
tax is not deprivation of property or expropriation.
o Although the imposition of tax does not infringe s25, certain collection
manners may be, e.g., if SARS owes a taxpayer a VAT refund and the
taxpayer owes SARS income tax – would a set-off be allowed? (Can SARS
withhold a VAT refund if you owe them income tax?) this could be a
possible s25 infringement.
Section 33: Just administrative action
o The Constitution says that all administrative action must be lawful,
reasonable, and procedurally fair; many of the decisions made by SARS are
administrative actions since SARS is an organ of state, which makes
decisions that meet the requirements of an administrative action. This is
relevant where SARS officials are given a discretion to make decisions –
these decisions must be fair.
Section 34: access to courts
o Provision in Tax Administration Act: known as the “pay now, argue
later” rule s164. S164 says that if SARS orders an assessment, the
taxpayer submits a tax return, determines tax liability, and issues the
taxpayer with an assessment. The taxpayer has a right to dispute the
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assessment. The rule says that the taxpayer still has to pay their taxes even
though they intend to dispute their liability (you cannot delay payment).
You follow a dispute resolution procedure and if successful get a refund +
interest.
o This rule has been challenged ito s34. The court found that this is a
balancing act, taxpayers have the right of access to courts, but SARS needs
powers and mechanisms to ensure that taxes are collected timeously, and to
avoid delaying tactics of taxpayers. Court held that this is a justifiable
limitation to s34 the taxpayer can apply for a suspension and, if denied,
can challenge it as unjust administrative action.
o The taxpayer can apply to SARS for a concession if there are grounds to
justify this – when bringing the application for suspension of payment
whilst disputing liability, SARS must make a decision on that request,
which can again be disputed as unjust or unfair administrative action.
But also Section 36 limitations clause
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Classification of taxes
* one type of tax, e.g. income tax, can be classified in terms of its tax base
Tax base
o What is the underlying thing that is being taxed? E.g. if it is income
(rental income, interest income, dividend income), it is income tax.
Income tax is the most important source of revenue for the state.
PIT = personal income tax (tax levied on natural persons)
CIT = corporate income tax (tax levied on juristic persons)
o Consumption (the taxation of goods and services), e.g VAT, customs and
excise, and diamond export levy.
Excise levies: levied on certain luxury goods, and sintax (excise
duties are sintaxes
o Wealth (the taxation of property or capital) e.g. CGT (capital gains tax),
donations tax, estate duty, transfer duty, and STT.
Rate structure
o Can either be proportional or progressive rate
o Proportional:
Flat rate:1 e.g. the corporate income tax rate at the moment is 28%
Regressive: a flat rate is regressive, it has a greater impact on a
lower income individual or company, e.g. the 15% VAT rate has a
larger impact on a poorer household.
o Progressive:
The tax rate increases as your income increases
Direct/ indirect
o Direct taxes are levied on a person (that person pays tax, it is not passed
on)
E.g. personal income tax
o Indirect taxes imposed on transactions (passed on to consumers by
incorporating it into the prices of goods and services)
E.g. VAT
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Flat rate – it affects everyone irrespective of what their income is (whether a company earns R10 000 or R10
000 000, will be taxed 28%).
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What is the role of tax?
Revenue earned by the state to cover expenses
Taxes can be used as a redistribution of wealth in society – the taxes that are
levied on one person can be used to fund the social grant of another person
Taxes are often used to stimulate and promote economic growth, e.g. reducing
corporate income tax rate might result in more international investment in SA
o The government also has certain other tax incentives in place if, e.g.
inexperienced young job-seekers are employed, tax incentives are available
to the employer. Certain tax incentives are available to small businesses.
Reprising: the government is able to encourage certain behaviour and discourage
certain behaviour through taxes
o E.g. donations to certain public benefit organisations will be to the
taxpayer’s benefit (that person will get a deduction).
o E.g. sin tax discourages smoking and drinking
Criteria for a good tax system
Economist Adam Smith developed the following measures which classify a system
as a good tax system:
o Equity (horizontal and vertical)
Horizontal equity = people in the same economic positions should
be treated in the same way, e.g. people with same abilities and
economic positions should be treated the same way.
Vertical equity = if you are in a greater capacity, you should pay
more.
o Certainty (retrospective tax legislation not certain)
Taxes cannot be arbitrary – need to know what to pay, when and
how.
Retrospective tax legislation has been found to be valid by the
courts in certain instances, but it does create uncertainty.
o Convenience
You should be given a tax bill when you have the funds to pay, e.g.
income tax is automatically deducted by the employer. You can do
your administration with SARS on e-filing.
o Cost-effective and economically efficient
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Both from the taxpayer’s point of view as well as SARS’ point of
view. As a taxpayer you have compliance costs. If you are a large
company you will have to obtain tax advice, which is costly. SARS
has collection costs.
There is no point in imposing a tax that raises so little revenue that
the costs of raising that revenue render any income gained
redundant.
Not from Adam Smith:
o (flexibility)
Tax system must be able to change when circumstances change.
E.g. definition of an electronic service was recently changed to a
more broad definition since technology has changed.
o (simplicity)
The legislation should be easy to understand (but this is not the
case). If the legislation were simple tax avoidance would be too
easy.
Legislation as a source of tax law
Interpretation
The same words and phrases in a statute bear the same meaning
o Unless the context indicates otherwise
Contra fiscum rule
o Applies if a provision in the legislation is open to more than one
meaning. If the provision is ambiguous, this rule says that you need to
interpret the provision in favour of the taxpayer/ against the fiscus (fiscus
= fund in latin).
Double taxation
o Presumption against double taxation: you should not interpret legislation
in such a way that the same amount is taxed twice
SARS interpretation notes
o SARS is not allowed to make laws, they are the executive, but they provide
guidance to the interpretation of tax legislation.
o To which extent is a court allowed to take SARS interpretation notes into
account in interpreting provisions in tax legislation?
