South Africa: Constitutional validity of retrospective legislation
The recent High Court decision of Pienaar Brothers (Pty) Ltd v Commissioner for the South African Revenue, a highly important judgment dealing with the constitutionality of retrospective legislation, underscores the importance for taxpayers of participating in or at least being aware of the public consultation process around proposed tax amendments in order to be forewarned of pending changes.
The court in this case was faced with the fundamental issue of whether retrospective legislation that applies to completed transactions is a violation of the rule of law and the principle of legality, principles deeply entrenched in the South African Constitution.
The court noted that South African case law distinguishes between retrospectivity in a "strong" and a "weak" sense. A provision is retrospective in the "strong" sense if the provision applies from an earlier date than the date on which it is enacted. A provision is retrospective in a weak sense if it affects future consequences of existing transactions or matters. Two issues were considered, namely whether an amendment, which resulted in retrospectivity in a "strong" sense should be declared to be unconstitutional, and also whether the wording of the specific amendment that was relevant actually affected the transaction of the taxpayer, since it did not state explicitly that it applied to completed transactions.
On the interpretational issue, the court disagreed with the taxpayer's arguments that the amendment resulted in anomalous and unfair consequences. The purpose of the amendment was to close an unintended loophole, which allowed for a specific exemption in respect of secondary tax on companies on certain distributions, with a resultant loss to the fiscus. The court agreed with the tax authorities that a purely prospective amendment would have encouraged taxpayers to exploit the loophole in time remaining before the loophole closed.
The court held that the amendment was clear, its purpose was rational and that it applied to all transactions, including completed transactions.
On the constitutional issue, the court considered approaches to the issue followed in foreign jurisdictions as well as prior guidance given by the Constitutional Court. The court agreed with submissions made that retrospective laws are permissible and common place in countries based on the rule of law. However, this did not mean that Parliament could enact retrospective legislation as it pleased. The constitutional validity of retrospective legislation was still be judged by the standards of judicial review, i.e. whether the amendment was (i) rational; and (ii) reasonable or proportional relative to the infringement of fundamental rights of taxpayers.
The court, somewhat controversially, held that the rule of law did not require fair warning of the proposed retrospective amendment to be given to taxpayers before the enactment and that in any event the public consultation process carried out when the amendment was proposed would have provided any taxpayer seeking to exploit the STC exemption with more than adequate notice that the elimination of this particular tax planning opportunity was imminent.
This case is going on appeal and it will be interesting to monitor developments on the pertinent issues.
Joon Chong (email@example.com), Cape Town