Tax and the Constitutional Court – do they ever meet?

November 1st, 2020

Picture source: Gallo Images/Getty

The Constitutional Court (CC) has delivered over 800 judgments since its inception; only four of the judgments delivered involved the application of a tax Act.

In Metcash Trading Ltd v Commissioner, South African Revenue Service, and Another 2001 (1) SA 1109 (CC), the constitutional validity of the so-called pay-now-argue-later principle was confirmed, while the CC declared s 114 of the Customs and Excise Act 91 of 1964 unconstitutional in First National Bank of SA Ltd t/a Wesbank v Commissioner South African Revenue Service and Another 2002 (4) SA 768 (CC). In Marshall and Others v Commissioner for the South African Revenue Service 2019 (6) SA 246 (CC), the CC saw fit to pronounce on the binding nature of the South Africa Revenue Service’s (Sars’s) Interpretation Notes. It concluded that the unqualified use of such notes had failed to take into account the contextual change from ‘legislative supremacy to constitutional democracy’. Leave to appeal was otherwise refused.

These cases had involved constitutional questions and were accordingly appropriate for consideration by the CC. Naturally, the imposition of tax and its administration has the potential to infringe on a taxpayer’s fundamental constitutional rights. The imposition of tax is inherently in conflict with the right not to be deprived of one’s property as guaranteed by s 25 of the Constitution. So too are the provisions in the Tax Administration Act 28 of 2011 relating to tax audits, investigations and search and seizures fundamentally at odds with the right to privacy as provided for in s 14 of the Bill of Rights. Moreover, do the preferential tax regimes in the Income Tax Act 58 of 1962 (Income Tax Act) not run counter to the right to equality guaranteed to all taxpayers in s 9 of the Bill of Rights?

Even so, perhaps because the limitation of rights provision in s 36 of the Constitution has particularly long arms, there is a dearth of cases that involved weighty considerations relating to the constitutional validity (or otherwise) of a particular provision in a tax Act.

For the most part, litigation against the Commissioner of Sars turns on divergent interpretations and applications of a particular tax provision. Although the Supreme Court of Appeal (SCA) is commonly the last stop for such disputes, they may principally be adjudicated by the CC. The Constitution Seventeenth Amendment Act, 2012 amplified the jurisdiction conferred on the CC. Section 167(3)(b)(ii) (of the Constitution) provides that the CC may decide on not only constitutional matters, but also any other matter if the court ‘grants leave to appeal on the grounds that the matter raises an arguable point of law of general public importance which ought to be considered by that Court’.

The fourth tax case heard by the CC was in Big G Restaurants (Pty) Limited v Commissioner for the South African Revenue Service (CC) (unreported case no CCT 13/19, 21-7-2020) (Madlanga J (Froneman J, Jafta J, Khampepe J, Majiedt J, Mhlantla J, Theron J, Tshiqi J and Victor AJ concurring)). In this matter, the CC’s amplified jurisdiction was engaged. Although Big G Restaurants (Big G) had alleged deprivation of property as a potential constitutional issue, this was later expressly abandoned, making it the first tax matter decided by the CC solely on a non-constitutional issue: The proper interpretation and application of s 24C of the Income Tax Act.

Big G is a franchisee that operates a number of Spur franchises in terms of franchise agreements with the Spur Group. It had claimed an allowance in terms of s 24C(2) of the Income Tax Act for future costs of revamping its restaurant premises, an obligation imposed by the operative franchise agreements. Big G’s case was that the future expenditure fell within the purview of the allowance in s 24C(2) of the Income Tax Act. The Commissioner for Sars disagreed and so did the SCA. The CC granted Big G leave to appeal the SCA’s judgment.

In addressing the court’s jurisdiction to hear the matter, Madlanga J referred to the earlier decision of Paulsen and Another v Slip Knot Investments 777 (Pty) Ltd 2015 (3) SA 479 (CC). The Paulsen case was the first instance where the CC pronounced on its extended jurisdiction. It held that, reduced to its core, s 167(3)(b)(ii) allows for leave to be granted if the –

  • matter raises a point of law;
  • point is arguable;
  • point is of general public importance; and
  • point ought to be considered by the court.

The court articulated these criteria in striking detail confirming, inter alia, that for a matter to be of general public importance, it must implicate the interest of a ‘significant part of the general public’ – it must transcend the narrow interests of the litigants.

The majority in the Big G case agreed that the case was of general public importance because the franchise agreement in question was not unique, and more obviously, because there are several Spur restaurants dotted across the country. It was agreed, too, that the point raised by the taxpayer was arguable. The well-reasoned Tax Court judgment, which was in turn set aside by the SCA, supported this conclusion.

Madlanga J was at pains to ‘carefully and specifically’ link the relevance of interpreting s 24C(2) of the Income Tax Act with the ‘legal question of interpreting the contracts’. The latter was described as a ‘quintessential point of law’. The majority further noted that this linking exercise was necessary ‘so that this judgment should not be read to say it is now open season for appeals on the interpretation of any provision of the Income Tax Act to be brought to this Court’.

But this caveat is contrived. The majority was clearly inclined to accommodate Big G, while also being sure to deter future litigants in matters involving the interpretation of tax provisions. The correct construction of s 24C(2) of the Income Tax Act was in itself, principally, a legal point. In Diener NO v Minister of Justice and Correctional Services and Others 2019 (2) BCLR 214 (CC), the CC, in a unanimous judgment, accepted without ceremony that the interpretation of certain provision of the Companies Act 71 of 2008 was a legal point.

Majiedt J, writing on behalf of the duo of dissenting judges, found that the interpretation of the words ‘in terms of’ in s 24C(2) of the Income Tax Act could conceivably be a legal point. On further scrutiny, however, he concluded that the interpretation involved no law: Simply facts. This conclusion was based on Big G’s emphasis on the factual element of the inquiry. Majiedt J further lamented that the majority’s approach would result in a spate of litigants claiming that the CC has jurisdiction in matters which involve purely factual determinations. Because of the fact-specific nature of the Big G case, which was conceded by Big G, the minority was reluctant to find that the issue was one of general public importance, too. Remarkably, the minority argued that it was up to every taxpayer to persuade the Commissioner that, based on the facts at hand, they fall within the ambit of the s 24C allowance. Can this not be said of all preferential tax regimes, allowances, and deductions?

Following Telkom’s loss to the Commissioner of Sars in Telkom SA SOC Limited v Commissioner for the South African Revenue Service [2020] 2 All SA 763 (SCA), Telkom has asked the CC for leave to appeal the SCA’s judgment insofar as it relates to the interpretation and application of s 24I of the Income Tax Act. The Tax Court described the section as ‘notoriously complicated and poorly drafted’ (Appellant Company v Commissioner for the South African Revenue Service (unreported case no 24462, 19-11-2018) (Davis J)). It is as clear as mud. But, as the majority in the Big G case questionably remarked, this alone may not be enough to engage the court’s jurisdiction. In addition, Telkom’s case is not against the whole of s 24I. The crisp issue is specifically its novel interpretation of the term ‘ruling exchange rate’ and the application thereof in the context of a disastrous investment. While the SCA’s judgment undoubtedly holds devastating financial consequences for Telkom, the pertinent question is if the case transcends the narrow interests of the litigants. Effective after 1 January 2019, the National Treasury has introduced s 24I(4) to ameliorate the harsh consequences borne by taxpayers in the same position as Telkom, limiting the potential reach of the Telkom case.

Telkom may of course mount a constitutional challenge and engage the CC’s jurisdiction in this respect. Contrary to Telkom’s argument, the SCA controversially held that the contra fiscum rule, which requires fiscal legislation to be interpreted in favour of the taxpayer in cases of doubt, could only be activated where s 24I revealed an irresoluble ambiguity. That is to say, an ambiguity that could not be resolved through a purposive interpretation. Borrowing from a ragbag of incoherent commentary and case law on the application of the rule, the rule is frequently invoked in tax disputes. But its origins are in legislative supremacy and a text-based approach to interpretation. As it did in the Marshall case, the CC should seize the opportunity and say something about the contra fiscum rule and its place in a constitutional dispensation.

Can we expect a burgeoning practice of tax matters being heard by the CC 25 years after its advent? Unlikely. In most cases, tax litigation turns on divergent interpretations of a tax provision and its application to a particular factual matrix. Although the majority in the Big G case adopted an accommodating approach to the CC’s amplified jurisdiction, it noted an instructive caveat that was intended to serve as a hurdle to litigants. Likewise, if future considerations for leave to appeal are suffused by the high threshold of the minority, especially in the context of the requirement of ‘general public importance’, the scope for engaging the court’s extended jurisdiction in tax matters will be particularly narrow.

The result: We may be left with a rich landscape of tax judgments that is almost bereft of the CC’s scrutiny. But does it matter? The lower courts are generally well-equipped to adjudicate these disputes – the proper approach to statutory interpretation has been distilled and settled. Taxation is also not in dire need of the transformative flair that is often observed in CC judgments. That being said, authoritative pronouncement by the CC on the contra fiscum would be a welcome addition to its short list of tax-related judgments.

Simon Weber BCom (Law) (UP) (cum laude) LLB (UP) (cum laude) LLM (Wits) PG Dip Tax (UJ) is a legal practitioner at ENSafrica in Johannesburg.

This article was first published in De Rebus in 2020 (Nov) DR 30.