Retrospective legislation involves Parliament passing Acts which affect the legal position or consequences of actions already completed by persons. In a criminal law context for example, retrospective legislative amendments would involve Parliament passing a law that actions already carried out by an individual may be illegal with historic effect, even though at the time that the act was carried out by the individual, the act was not considered criminal. In the income tax context, an example would be were an individual to receive a dividend (tax exempt based on prevailing legislation) on 1 June. However, on 1 July Parliament passes an amendment Act to the Income Tax Act, 58 of 1962, in terms of which dividends received from 1 January of that year is deemed to be non-exempt income.
How such retrospective legislation should be interpreted, and whether it is constitutional to even begin with, was the theme of a recent judgment in the North Gauteng Tax Court case of Pienaar Brothers (Pty) Ltd v CSARS.[1] The matter involved a taxpayer who planned to enter into an amalgamation transaction as contemplated in section 44 of the Income Tax Act. On 20 February 2007 though (at which stage the amalgamation transaction had not yet been entered into), the Minister of Finance announced in his Budget Speech that the Income Tax Act will be amended later that year, but which amendment will be effective from the date of that announcement, to address certain “shortcomings” in section 44. The “shortcomings” identified by the Minister however had no bearing on the tax treatment of the amalgamation transaction contemplated by the taxpayer, and it proceeded to enter into the proposed amalgamation transaction after the Budget Speech during March of that year.
Much to the surprise of the taxpayer, in June of that year, legislation was published which would amend section 44 in a manner more far-reaching than was announced by the Minister earlier. As forewarned though, the legislation was still to be introduced with retrospective effect (i.e. to the date of the Budget Speech earlier), and which now had the effect of altering the tax consequences of the amalgamation transaction which the taxpayer had already entered into with retrospective effect, now giving rise to a significant tax charge in the amount of R3.7 million. This tax liability did not arise based on the tax legislation as it read on the date of entering into the amalgamation transaction, but due to the retrospective enactment of legislation now, tax became due. The more drastic amendments were explained in the explanatory memorandum to the amendment bill as being necessitated to counter a new form of identified tax avoidance scheme.
The taxpayer appealed against the additional assessments raised to the North Gauteng Tax Court, on the basis that legislation may not in terms of our law be interpreted with retrospective effect, alternatively that the retrospective amendment to the Income Tax Act was unconstitutional in that it amounted to a deprivation of property.
The appeal was dismissed on both counts. What clearly played a significant role in the judgment was that the Minister had issued a warning of an impending, retrospective amendment to the Income Tax Act in his Budget Speech already earlier that year (even though the warning was issued in general terms only, and did not make mention of the specific amendment that would be introduced). According to the judgment by Judge Fabricius, taxpayers cannot be said to have a legitimate expectation to rely on the consistency of tax legislation, especially where National Treasury intervenes in order to close a loophole which would otherwise lead to continued raids on the fiscus.
The above matter presents a significant judgment, and it may not be the last say in the matter yet. There is a strong possibility that the matter will be taken to Bloemfontein on appeal, and on the outcome of which judgment we will report in due course.
[1] (87760/2014) [2017] ZAGPPHC 231 (29 May 2017)
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