Shuttleworth’s exit charge was valid and did not constitute a tax

court image 1In an about-turn the Constitutional Court handed down judgment in the Shuttleworth matter on 18 June 2015. Not only was it found that Shuttleworth’s exit charge constituted a regulatory charge as opposed to a tax, but it was also found that the Exchange Control Regulations were not unconstitutional.

Should one consider the history of the matter, Shuttleworth made application to the South African Reserve Bank (Reserve Bank) to transfer approximately R2,5 billion out of South Africa. This approval was granted subject to an exit charge of 10% being imposed on the capital that was exported. The payment of this exit charge was challenged by Shuttleworth:

  • in the High Court it was indicated that the exit charge was not unlawful, even though a number of the Exchange Control Regulations were declared unconstitutional; and
  • in the Supreme Court of Appeal it was held that the exit charge was unlawful because it was calculated to raise revenue and that certain procedures prescribed to adopt a money Bill had not been followed.

As a starting point it was indicated that the matter was not moot given the fact that the government would be faced with about R2,9 billions’ worth of claims, to the extent that the payment of the exit charge is reversed. A number of other immigrants thus waited with baited breath on the judgment of the Constitutional Court as it was quite likely that a flood of claims would have ensued had Shuttleworth been successful in his argument.

The judgment written by Moseneke DCJ, divided the matter into two categories, being:

  • whether the exit charge was validly imposed; and
  • the constitutionality of the Exchange Control Regulations.

The question pertaining to the levying of the exit charge was in turn split into three questions, being:

  • was the imposition of the exit charge a decision of the Minister of Finance or the Reserve Bank?
  • was the exit charge a national tax, levy, duty or surcharge under s75 and s77(1)(b) of the Constitution?
  • was the exit charge calculated to raise revenue as envisaged in regulation 10(1)(c) and s9(4) of the Currency and Exchanges         Act, No 9 of 1993?

With reference to the question whether the exit charge was a decision of the Minister of Finance or the Reserve Bank, it was indicated that it was ultimately a decision of the Minister of Finance. The Reserve Bank had no discretion or mandate to refuse to impose or vary the exit charge. The Minister of Finance thus gave a general permission that was subject to fixed conditions. The Reserve Bank was only responsible for mechanically applying the policy decision of the Minister of Finance and did not have a discretion when implementing the decision.

The fact that the Minister of Finance made the decision and not the Reserve Bank, still does not put an end to the enquiry. The question is then whether the decision of the Minister of Finance was constitutionally valid.

Should the exit charge have been a charge, levy or tax that was of a kind that could only be imposed after having complied with the procedures of a money Bill, the decision of the Minister of Finance would also have been invalid. A Bill is a money Bill if it imposes national taxes, levies, duties or surcharges. A money Bill must be passed by the National Assembly in a specific manner. The reason for having to adopt this process is that the Executive of government is not entitled to impose a tax burden without due and express consent of elected public representatives. If a law that purports to impose a tax has not followed the due process, it is invalid. In the particular circumstances, however, it was indicated that a law may impose regulatory charges in order to pursue a legitimate government purpose even though it results in money being collected by the government. A money Bill is thus not any Bill that envisages a scenario where revenue is incidentally raised. Moseneke DCJ, indicated that the ‘seminal test’ is whether the primary or dominant purpose of a statute is to raise revenue or to regulate conduct. It was indicated:

“If regulation is the primary purpose of the revenue raised under the statute, it would be considered a fee or a charge rather than a tax. The opposite is also true. If the dominant purpose is to raise revenue then the charge would ordinarily be a tax. There are no bright lines between the two. Of course, all regulatory charges raise revenue.”

Turning to the facts, it was indicated that the purpose of the exchange control legislation was to curb or regulate the export of capital from South Africa. The exit charge was thus not directed at raising revenue. In addition, it was indicated that the exit charge was imposed on a discrete portion of the population and did not have general effect.

In addition, it was indicated that the exit charge was not calculated to raise revenue. Given the fact that the primary object of the exit charge was to regulate and discourage the export of capital, it was held that it was not calculated to raise revenue. Any income that may thus have been derived was incidental to the dominant objective of the legislation.

Following from the above principle, it was also indicated that every national revenue of whatever kind does not only need to be raised by original legislation. It was indicated that not every levy constitutes a national tax. Also, it was indicated that the legislation did not assign plenary legislative power to the President. In doing so, the President has not delegated legislative power as his power was (and still is) to regulate by imposing conditions for export of capital. In any event, it was indicated that one is dealing with exceptional circumstances and that one should consider legislative provisions against the background of what they intend to achieve. It was indicated that the Executive bears a responsibility to secure a stable currency within a good and prospering economy:

“This duty is sufficiently exceptional, and paramount, to warrant a broad power that allows the Executive to respond to the uniquely dynamic field of exchange control. The global financial crisis of 2007 is still fresh in many of our memories, a testament to the need for the ability to respond rapidly, and guard against the potential negative impact of drastic market or economic changes. This is particularly true for vulnerable economies such as ours. It is on this basis that we recognise the importance, indeed the public interest, in permitting the Executive to impose a limited charge on the export of capital.”

Turning to the constitutionality of the Exchange Control Regulations, it was indicated that the constitutional attack of Shuttleworth could only be limited to the circumstances and provisions that affect him and not all Exchange Control Regulations. Such an approach would be “academic, hypothetical and speculative”. In the context of his specific circumstances, it was indicated that the broad discretionary powers that were conferred by the legislation were not subject to attack given the fact that the exchange control system “requires a flexible, speedy and expert approach to ensure that proper financial governance prevails”. One is not able to lay down rules in advance and for this reason, one had to have broader provisions to cater for whatever circumstances could arise.

The Constitutional Court has now decisively indicated that neither the particular circumstances of Shuttleworth nor the general framework of the Exchange Control Regulations, in the context of the levying of the exit charge, could be successfully attacked. Not only was it found that the exit charge did not constitute a tax, but it was also indicated that wide and discretionary powers could be conferred in terms of the legislation given the unforeseen circumstances that can arise in the context of exchange control. Whereas the authorities are probably expressing a sigh of relief, a number of other individuals are probably expressing a sigh of disappointment. Two different sighs, but given in the context of the Exchange Control Regulations having to protect the South African economy in unforeseen and exceptional circumstances. If anything, the only form of scrutiny would now be the way in which the discretion is exercised given the circumstances of the matter as opposed to the framework within which it is exercised.

Tax Alert – 19 June 2015 (126KB)