Shut­tle­worth levy: charge stands, says court

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - Beric Croome

THE Con­sti­tu­tional Court handed down judg­ment on June 18 2015 in the case of the South African Re­serve Bank and Min­is­ter of Fi­nance v Mark Shut­tle­worth re­gard­ing the na­ture of the exit levy paid by Shut­tle­worth to ex­port cap­i­tal from SA.

That court also dealt with the broad dis­cre­tionary pow­ers con­ferred on the min­is­ter of fi­nance to reg­u­late the ex­change con­trol sys­tem of the coun­try.

Dur­ing 2001 Shut­tle­worth em­i­grated to the Isle of Man on the ba­sis that he wished to free up his funds for in­vest­ment out­side of SA. At that stage the ex­change con­trol reg­u­la­tions did not per­mit Shut­tle­worth to trans­fer his as­sets from this coun­try. He ap­plied to the South African Re­serve Bank to trans­fer an amount of about R2.5bn out of SA and the bank agreed thereto on the ba­sis that he was re­quired to pay a so-called exit charge of 10% of that amount.

Shut­tle­worth ac­cord­ingly paid the exit levy of about R250m and was later ad­vised that the exit charge was a tax and had been im­posed in a man­ner not per­mit­ted by the Con­sti­tu­tion.

Be­fore the mat­ter reached the Con­sti­tu­tional Court, the dis­pute was dealt with by the North Gaut­eng High Court and sub­se­quently the Supreme Court of Ap­peal. The High Court held that the exit charge was law­fully im­posed and also de­cided that a few ex­change con­trol leg­isla­tive pro­vi­sions were un­con­sti­tu­tional. Sub­se­quently, the Supreme Court of Ap­peal held that the levy paid con­sti­tuted a tax and was there­fore un­law­ful and should be re­funded.

As a re­sult of the fact that both par­ties to the case were dis­sat­is­fied with the de­ci­sion of the Supreme Court of Ap­peal, the case was heard by the Con­sti­tu­tional Court, which de­liv­ered its judg­ment on the mat­ter last month.

Af­ter the first demo­cratic elec­tion in SA in 1994, the process of re­lax­ing of the ex­change con­trol rules started. Dur­ing 2003 the min­is­ter of fi­nance reached the con­clu­sion that the econ­omy had be­come more re­silient and de­cided that it was ap­pro­pri­ate to com­mence with the re­lax­ation of ex­change con­trols pre­vi­ously in force. The min­is­ter con­firmed that hold­ers of blocked as­sets would be re­quired to ap­ply to the ex­change con­trol depart­ment of the Re­serve Bank to re­mit such funds and that ap­proval would be sub­ject to an ex­it­ing sched­ule and that an exit charge of 10% of the amount to be re­mit­ted would be payable.

The Con­sti­tu­tional Court reached the con­clu­sion that the de­ci­sion to im­pose the 10% exit charge on per­sons wish­ing to ex­port more than R750,000 was a de­ci­sion made by the min­is­ter of fi­nance and not the bank.

The court stated that the min­is­ter ex­er­cised the power to im­pose the levy in terms of reg­u­la­tion 10(1)(c) of the ex­change con­trol reg­u­la­tions and im­posed two con­di­tions on per­sons wish­ing to re­move funds from SA — namely, that they pay a 10% exit charge on the cap­i­tal ex­ceed­ing R750,000 and that the cap­i­tal ex­ported be sub­ject to an ex­ist­ing sched­ule.

Deputy Chief Jus­tice Dik­gang Moseneke reached the view that the Re­serve Bank was only re­spon­si­ble for im­ple­ment­ing the pol­icy de­ci­sion made by the min­is­ter of fi­nance and that it had no dis­cre­tion when giv­ing ef­fect to his de­ci­sion. The Supreme Court of Ap­peal had held that the exit levy con­sti­tuted a tax and in light of the fact that it had not been in­tro­duced by way of a Money Bill in ac­cor­dance with sec­tion 77 of the Con­sti­tu­tion the levy was un­law­ful.

The court made the point that the gov­ern­ment is not en­ti­tled to levy a tax or ap­pro­pri­ate public money with­out due process and the ex­press con­sent of public rep­re­sen­ta­tives and pro­ceeded to an­a­lyse the pro­vi­sions of sec­tion 77 of the con­sti­tu­tion and par­tic­u­larly the mean­ing of “na­tional taxes, levies, du­ties [and] sur­charges”. The court made the point that the fact that a charge or levy may be re­ferred to as a tax does not im­ply that it must be in­tro­duced in com­pli­ance with the re­quire­ments of sec­tion 77 of the Con­sti­tu­tion.

Judge Moseneke reached the view that the exit charge was not aimed at rais­ing rev­enue but that its pur­pose was to re­strict the scale of cap­i­tal ex­ported from SA. Fur­ther­more, the exit charge did not ap­ply to the gen­eral pop­u­la­tion of the coun­try but only to those per­sons who wished to ex­ter­nalise cap­i­tal in ex­cess of R750,000. The court recog­nised that the exit charge gen­er­ated rev­enue of some R2.9bn for the gov­ern­ment but reached the view that the gar­ner­ing of in­come by the Trea­sury was sec­ondary to the pri­mary pur­pose of reg­u­lat­ing and dis­cour­ag­ing the ex­port of cap­i­tal from SA.

Ul­ti­mately the court there­fore de­cided that the exit charge paid by Shut­tle­worth was not one which fell within the con­straints set out in the def­i­ni­tion of a Money Bill in the con­sti­tu­tion.

The court de­cided that it was not in the in­ter­ests of jus­tice to grant Shut­tle­worth leave to cross-ap­peal against the de­ci­sion of the Supreme Court of Ap­peal on the broad con­sti­tu­tional at­tack against the ex­change con­trol reg­u­la­tions. De­spite the court’s con­clu­sion, Judge Moseneke made the point that the spe­cific pro­vi­sions tar­geted by Shut­tle­worth “are well and truly ar­chaic and may very well be at odds with the tenets of our Con­sti­tu­tion. The state par­ties are nudged to take ap­pro­pri­ate steps to re­view the pro­vi­sions in is­sue.”

It is in­ter­est­ing to note that Judge Jo­han Frone­man did not agree with the con­clu­sion reached by Deputy Chief Jus­tice Moseneke and there­fore handed down his own dis­sent­ing judg­ment. Judge Frone­man reached the view that the exit charge raised rev­enue for the na­tional gov­ern­ment and reached the con­clu­sion that it could there­fore only be im­posed by way of orig­i­nal leg­is­la­tion passed by Par­lia­ment. He there­fore reached the con­clu­sion that the im­po­si­tion of the exit charge by an­nounce­ment in Par­lia­ment was con­sti­tu­tion­ally in­valid.

Fi­nance Min­is­ter Nh­lanhla Nene in­di­cated in his 2015 bud­get speech that the South African Re­serve Bank is in the process of sim­pli­fy­ing the ex­change con­trol man­ual and plans to fi­nalise that dur­ing the course of this year.

It is hoped that the Re­serve Bank will take heed of the court’s views on the pro­vi­sions con­tained in the ex­change con­trol reg­u­la­tions and that those pro­vi­sions will be re­viewed to take ac­count of the Con­sti­tu­tion.

De­spite its con­clu­sion, court does find rules ‘ar­chaic’ and ‘at odds with the tenets of our Con­sti­tu­tion’ The court made the point that the gov­ern­ment is not en­ti­tled to levy a tax or ap­pro­pri­ate public money with­out due process

Dr Beric Croome is a tax ex­ec­u­tive at ENSafrica.

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