Retrospective changes to Tax Laws and the Rule of Law

Can Parliament amend tax laws (or any laws for that matter) so that they apply retrospectively, or are such changes contrary to the rule of law and Constitution?  For the first time, in Pienaar Brothers (Pty) Ltd v Commissioner of SARS, our Courts have squarely addressed this issue.

Graeme Palmer

Pienaar Brothers approached the Gauteng High Court for an order declaring an amendment to the amalgamation transaction provisions in section 44 of the Income Tax Act, 1962 unconstitutional and invalid because such amendment applied retrospectively.  The amendment was promulgated on 8 August 2007 but was deemed to come into operation on 21 February 2007.  The taxpayer had concluded an amalgamation transaction in March 2007, and in May 2007 made a distribution to shareholders out of its share premium account. When the distribution was made it did not constitute a dividend as defined in the Act and no secondary tax on companies (STC) was payable.  However, the retrospective amendment changed this, and following an audit by SARS in 2011, an assessment of R3.6 million for STC was raised.

The crux of the taxpayer’s complaint was that the retrospective change to the law offended against the principle of legality and the rule of law, one of the founding values of the Constitution.  The taxpayer further contended that it was given insufficient warning of the proposed amendment.  The Court, however, held that there is no authority or legislative provision that ‘a fairly precise warning’ needs to be given before Parliament can pass retrospective legislation.

After an exhaustive examination of both South African and international laws, the Court concluded that the rule of law does not preclude retrospective legislation.  But at the same time Parliament cannot legislate with retrospective effect as it pleases.  There must be a standard by which the constitutional validity of retrospective legislation is judged.  The court determined that there were two main standards, the ‘rationality test’ and that of ‘reasonableness’.  If the law limits a fundamental right the ‘reasonableness’ standard

applies, or ‘sufficient reason’ in the case of a deprivation of property.  If there is no infringement of the Bill of Rights the basic ‘rationality’ standard applies.

As there was no limitation of a fundamental right, the Court applied the ‘rationality test’, which is not a test of whether the legislation is fair or reasonable or appropriate.  The Court concluded it was rational for Parliament to be closing a tax ‘loop hole’ retrospectively and dismissed the taxpayer’s application.

This article has been written by Graeme Palmer, a Director in the Commercial Department of Garlicke & Bousfield Inc

NOTE: This information should not be regarded as legal advice and is merely provided for information purposes on various aspects of tax law.

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