Supreme Court of Appeal tax cases often adopt a higher-than-normal threshold to support an exemption from, or a relaxation of, taxation. This is normally expressed as a rule that tax concessions are to be strictly construed. The strong presumption against the waiver or the relaxation of the state’s right to tax is particularly relevant for taxpayers:
- in the mining industry where miners are permitted to deduct certain categories of capital expenditure from income derived from mining operations;
- in the farming industry where farmers are permitted to deduct certain defined items of capital expenditure from income derived from farming operations;
- engaged in climate change activities which receive tax-exempt income from the disposal of certified emissions reductions arising from qualifying Clean Development Mechanism projects; and
- which, until recently, qualified for inclusion in the so-called ‘tax-free bubbles’ of the 2010 FIFA World Cup South Africa™ entitling them to receive tax-exempt income from certain qualifying activities.
Taxpayers in these industries often receive income in the form of interest from a variety of sources including, but not limited to:
- interest on money in foreign bank accounts;
- interest on so-called escrow accounts;
- interest earned on money lent on fixed deposit;
- interest earned on late payments;
- interest earned in terms of any incentive schemes;
- interest earned on SARS’ refunds; and
- interest earned on retention fees.
The question that falls to be resolved is whether the interest income is so directly connected to the qualifying activity (such as mining, farming or qualifying CDM activities) that the interest income falls within the tax concession applicable to the qualifying activity.
The applicable rule of statutory interpretation appears to be that when a provision in a statute such as the Income Tax Act imposes a categorical tax then another provision which asserts an exception or a relaxation of that tax must be interpreted ‘strictly’.
The tax cases which considered these issues all appear to reach the conclusion that any relaxations of a taxing right ought to be clearly expressed but cannot be clearly implied. Judges have said that a strict interpretation means that ‘it must be plain beyond doubt that the Legislature had that intention’ (Ernst v Commissioner for Inland Revenue 1954 (1) SA 318 (A)).
Whatever the origins of the rule that concessions from taxation are to be strictly construed taxpayers in affected industries are cautioned that they cannot ask courts to supply absent provisions to a statutory text to get it to what they think the legislature would have wanted.
In my experience, taxpayers in tax-favoured industries are inclined to disregard the space between what the statute provides and what they think the statute should provide. The reason why this occurs is because the courts often apply a conflicting principle to that of taxpayers. Courts will take the view that what a text does not provided is unprovided. Taxpayers will take the view that a statutory text includes not only what is expressed but also what is implicit in the words.
For example, taxpayers will contend that when a statute provides an exemption for income derived from a particular qualifying activity it implicitly authorises an exemption for interest associated with that income. The strict rule of interpretation, on the other hand, suggests that the statutory text should be extra-ordinarily clear before such an implication may be made.
Taxpayers operating in tax-favoured industries are therefore cautioned not to assume that all incremental revenue streams are necessarily covered by the tax concession applicable to the industry in which they operate but rather to test each revenue stream against the wording of the statutory text and to operate on the basis that unless the tax concession is clearly expressed that they will have a difficult time convincing a court that the tax concession is clearly implied.