The erosion of tax rights

A recent ruling opened the door for SARS to enforce amendments to the Income Tax Act retrospectively.

Peter o’Halloran - Tax advice

A number of important issues relating to retrospective and retroactive tax statutes recently came before Judge Hans Farbicius in Pienaar Bros (Pty) Ltd v CSARS (case number 87760/ 2014).

The main thrust of the dispute related to whether a taxation statute can be made retrospectively applicable to a transaction already completed.

In broad terms, the transaction involved transferring assets to a new BEE company, in terms of Section 44 of the Income Tax Act. This offers certain tax concessions when such deals are put together.

As the law stood at the time of the completion of the deal, the profits of the ‘old’ company could be transferred to the ‘new’ company’s share premium account, from which a tax-free disbursements could be made. No secondary tax on companies would have been payable.

Unfortunately, some months later, the law was changed. In terms of the amended Section, secondary tax on companies was payable on deals concluded after a certain date, which was prior to the amendment.

In South African law, there is a strong presumption against statutes that come into effect retrospectively. This was one of the pillars of the argument raised by the applicant. The taxpayer asked for the assessment that SARS made as a result of the application of the amended section to be declared invalid and set aside.

However, in his ruling released in May this year, the judge found that such a statute can be made retroactively applicable. Therefore, the tax raised by SARS was lawful, even though the amount was tax-free in terms of the statutory provisions that existed at the time of the transaction.

The ruling will no doubt be the subject of much discussion in academic and tax circles, and I will be discussing it in more detail in future columns.

For now, suffice it to say that the ramifications are ominous, for SARS will surely seek to exploit the judgement to the maximum. And tax advantages won in the past might now be open to retrospective attack.

Worse, thanks to the ruling, taxpayers will find it next to impossible to defend themselves.

Currently, about the only recourse they have is to move the business to a jurisdiction where they are not open to such attacks.

Will the ruling be challenged? Time will tell.