In our Tax Alert of 8 July 2011, in the article entitled Purposive interpretation of tax statutes: back to the future?, we reviewed the judgment handed down on 15 June 2011 in the case of XYZ v CSARS (Case No 12895), in which case the Court considered the approach to be adopted when interpreting statutes.
The taxpayer argued in favour of a purposive approach to interpretation whereas the Commissioner contended that the plain wording used by the legislature is central to the interpretation of all statutes and that it applies equally to tax legislation.
In summary, the Court held that the correct approach is to respect the language used:
"Interpretation concerns the meaning of words used by the legislature and is therefore useful to approach the task by referring to the words used, and to leave extraneous considerations for later."
Furthermore, it was held that the words chosen by Parliament cannot be subverted in favour of the spirit of the law, or undermined by referring to background policy considerations that are not reflected in the language of the particular statute.
The use of the purposive approach to statutory interpretation may only, according to the Court, be used in limited circumstances. Specifically, only where there is ambiguity may the purposive approach provide a "reliable pointer to the intention of the legislature".
Therefore, based on the decision in Case No 12895 a statute must be interpreted with reference to the words used and if the words are unambiguous, no reference may be made to any other aid to statutory interpretation.
As indicated in our Tax Alert of 8 July 2011, although there is a role for purposive interpretation, Case No 12895 strongly indicates that it can only come into play where the intention of the legislature is not readily discernable from the wording of the applicable provision.
The conclusion reached in Case No 12895 starkly contrasts with the approach to statutory interpretation adopted in the recent Court judgment in Case No 12856.
In its argument, the Commissioner made specific reference to the background material relating to the enactment of sections 36(7E) and (7F) of the Income Tax Act, 58 of 1962 (the Act), including the various explanatory memoranda, comments and opinions of the Margo Commission of Enquiry into the Tax Structure of the RSA 1986, press releases of the then Minister of Finance and commentary of academic writers in order to elucidate the mischief that the sections were intended to deal with and prevent.
The Court held at paragraph 13 that:
"Material that is not background material, such as the report of the Margo Commission and the views of commentators, are not admissible for the aforementioned purpose, but may be used in argument in an effort to persuade."
The Court thus adopted a lenient approach to making reference to background materials and relied on the background material to ascertain the mischief that the legislative provisions are meant to address. In other words, the Court did not confine itself solely to the words of the Act as prescribed in Case No 12895. Rather, a more expansive approach was adopted where the Court elevated the importance of understanding the mischief that the statute sought to address.
At paragraph 21, the Court's purposive approach to interpretation is highlighted:
"In my view s 36(7E), where it deals with the deduction of assessed losses carried over from preceding years of assessment, implies that such losses may only be deducted from the mine or mines that incurred them. I am fortified in this view that one of the main purposes of the subsection was to limit the amount of capex redeemed in any particular year. If the taxpayer was free to deduct the assessed loss from the preceding year from any other income it could undermine this purpose of the subsection. Subsection 36(7F) also provides that capex can only be redeemed against the taxable income of that mine after set-off of any assessed loss incurred by the taxpayer in relation to that mine in any previous year which has been carried forward from the preceding year of assessment."
Further at paragraph 28, the Court held that:
"In enacting ss 36(7E) and (7F) the Legislature did not regard the deduction of current operating losses as a mischief to be regulated by means of a ring-fencing provision in those subsections, in all probability because that was dealt with elsewhere in the Act."
From the above extracts it is apparent that:
- the Court did not make reference to the actual words of the Act as the point of departure in accordance with the judgment in Case No 12895;
- no reference or reliance was placed on the decision in Case No 12895;
- the focus of the Court was on the mischief surrounding the enactment of sections 36(7E) and (7F) of the Act without first determining what is the "ordinary" meaning of the words contained in those sections;
- the Court did not identify any ambiguity in sections 36(7E) and (7F) of the Act, thereby justifying the use of the purposive approach to statutory interpretation.
The contradictory approaches in the two cases highlighted above make the taxpayer's position all the more uncertain in that:
- there is no consistent approach that is applied when interpreting the provisions of the applicable tax statutes;
- it appears that either a strict literal approach may be adopted or an expansive purposive approach may be adopted;
- there is no indication of which interpretive approach may be used in any given circumstances, thereby compounding the uncertainty;
- the selection of the approach to statutory interpretation appears to be capricious and it seems that any one approach may be selected without sound reasons for doing so, thus prejudicing the taxpayer.
Natalie Napier, Director, Tax