Finance

Clarity for South African taxpayers

A recent Constitutional Court judgement in favour of the South African Revenue Service (SARS) has added much-needed clarity to the interpretation of tax laws, which is good news for South African taxpayers.

This is according to Tax Consulting South Africa partner and head of tax legal, Darren Britz, who referred to the case of SARS vs the Thistle Trust.

In short, this case centred around the Thistle Trust receiving capital gains distributions from another trust, Zenprop. 

The Thistle Trust distributed these amounts to its beneficiaries, treating them as taxable in their hands.   

However, SARS argued that the capital gains were taxable in the hands of the Thistle Trust and raised additional assessments, which the trust objected to.

The Tax Court initially ruled in favour of the Thistle Trust, finding that the capital gains were taxable in the hands of its beneficiaries.

However, the Supreme Court of Appeal (SCA) overturned the Tax Court’s decision, maintaining that the capital gains were taxable in the hands of the Thistle Trust. 

The SCA reasoned that the Thistle Trust had not disposed of any capital asset and had only distributed amounts received from Zenprop.  

When the Thistle Trust appealed to the Constitutional Court, it upheld the SCA’s decision. 

In its ruling, the Constitutional Court emphasised the importance of interpreting tax laws in accordance with their plain meaning and avoiding unintended consequences.

In a recent media release, SARS acknowledged the ruling as a step forward for the clarity of tax legislation.

However, Britz said the judgment itself is also a win for taxpayers, especially on the issue of legal interpretation. 

“This decision has important implications for how tax laws will be applied moving forward, particularly when it comes to balancing legislative intent with the clear wording of the law,” he said.

SARS Commissioner Edward Kieswetter

In its judgment, the Constitutional Court emphasised the significance of legislative intent when interpreting tax laws, particularly in cases where there is ambiguity about how those laws should be applied. 

This was central to the Thistle Trust case, where the application of the conduit principle to capital gains within trust structures was contested.

However, the court made it clear that while exploratory memoranda can help clarify what lawmakers intended, they cannot override the statute’s clear language. 

Brtiz explained that their role is limited to providing context when the statutory language is ambiguous. 

In this case, the court referred to legislative changes made in 2008, particularly paragraph 80(2) of the Income Tax Act, and relied on the associated memoranda to understand Parliament’s intent.

“The judgment underscores that the letter of the law remains paramount, with exploratory memoranda serving as a secondary tool only when needed,” Britz said. 

“This ensures that tax law is not open to wide interpretations and remains predictable and transparent, reflecting the intent behind legislative amendments while maintaining consistency with the statute’s clear wording.”

He explained that the rule of law dictates that the law should be certain and predictable, as this enables individuals to organise their affairs around it. 

Taxation legislation represents a special category of laws in which people proactively organise their affairs to conform to the law’s predictable consequences.

“This principle reinforces that for law to be predictable, it must first be accessible. Thus, the court’s focus on clarity and accessibility is essential for ensuring that taxpayers can understand and comply with tax laws,” he said.

While SARS welcomed the ruling because it clarified complex tax matters, the court ruled against the taxman’s attempt to impose understatement penalties on the Thistle Trust. 

Britz explained that the trust had relied on professional legal advice, and although that interpretation was eventually found to be incorrect, the court determined that the trustees were neither reckless nor trying to evade tax.

“This decision serves as a reminder that tax laws should be applied reasonably, particularly for those acting in good faith,” he said. 

“By dismissing the penalties against the Thistle Trust, the court signalled that while taxpayers must comply with tax laws, they should not be punished excessively for honest mistakes or misinterpretations, especially when they rely on expert advice.” 

“SARS’s endorsement of the ruling in its press release suggests that the tax authority is committed to ensuring clarity in how tax laws are enforced while also emphasizing the need for clear and understandable legislation.”

Newsletter

Top JSE indices

1D
1M
6M
1Y
5Y
MAX
 
 
 
 
 
 
 
 
 
 
 
 

Comments