On 2 October 2024, the Constitutional Court issued a judgement in the case of The Thistle Trust v Commissioner for the South African Revenue Service [2024] ZACC 19 that was both highly anticipated and somewhat contentious. The Thistle case has elicited a significant amount of discussion among tax professionals, with some sympathising with the majority judgement and others supporting the dissenting judgement. In one respect, this case raises significant points regarding the interpretation of fiscal legislation during the constitutional era (apart from the understatement penalty issue which we discuss in another article here).
In the case, the applicability of the “conduit principle” to capital gains when dispersed through various trusts in a multi-tiered trust structure had to be determined. Considering the complexity of the case, it is not surprising that the Court rendered two judgements: a minority and a majority judgement.
The minority judgement
On our reading, the main reason for the underlying difference in the conclusions of the majority and minority comes down to the fact that the minority reasoned that paragraph 80(2), as it read in the relevant years in question, is susceptible to two reasonable interpretations, to wit:
- one that leads to the conclusion that vesting capital gains through multiple trust structures is possible so that the “ultimate beneficiary” is liable for the tax on the capital gain (“the minority conclusion”); and
- another that leads to the conclusion that vesting of capital gains is only possible at the first level of a multi-tiered trust structure or in other words the beneficiaries of the trust disposing of the asset (“the majority conclusion”).
The right interpretation must then be determined with reference to the rules that govern interpretation of statutes:
- Purpose:
The purpose of paragraph 80(2) is to give effect to the conduit principle.
The conduit principle acknowledges that a trust merely administers property for the benefit of beneficiaries where those beneficiaries have a vested interest in that property (regardless of whether that vested interest is acquired by the exercise of a trustees’ discretion or by the nature of the trust itself).
The minority conclusion gives effect to this purpose as the ultimate beneficiaries (following the exercise of Thistle’s trustees’ discretion to “on-vest” the capital gain it received from another trust as beneficiary), are the beneficiaries of the Thistle trust, not the Thistle trust itself.
- Text
Because paragraph 80(2) (as it read prior to certain amendments in 2020) refers to “a capital gain determined” by “a trust” and to “a trustbeneficiary” “… the disposal does not have to be done by the same trust as the trust in which the gain is determined”[1] for vesting to be competent under paragraph 80(2).[2] So then, on this interpretation of the text, the disposal can be made by another trust and the gain can properly be vested in the beneficiary of Thistle. The text then, supports the minority conclusion.
- Context:
Amendments made to paragraph 80(2) in 2020 made it clear in the text of paragraph 80(2) itself that vesting can only take place out of the trust who made the disposal. Paragraph 80(2) now referred to the disposal of an asset by a trust and the vesting of the gain in the beneficiary of “that trust” (as opposed to the previous wording “a trust”). By making these amendments, the legislature could only have attempted to make paragraph 80(2) read in a way that clarifies its intentions. This supports the minority conclusion.
The fact that a 2008 explanatory memorandum stated that multiple tier trust vesting is not possible is not that important because the legislature cannot seek to cure ambiguity in the text of the legislation with explanations in an explanatory memorandum, especially where that “explanatory” memorandum does not actually explain the rationale for the stated purpose but simply states the legal position.
- Contra Fiscum
The two possible interpretations of paragraph 80(2) (as it read at the time) creates ambiguity. In the result, the interpretation that favours the taxpayer must prevail in line with the contra fiscum rule. [3]
The majority judgement
Unlike the minority, the majority determines that there is only one possible interpretation of paragraph 80(2) and that is simply that it is only the trust which disposed of the asset that can vest a gain in a beneficiary in terms of paragraph 80(2). This is so because paragraph 80(2) clearly refers to a gain determined “in respect of the disposal of an asset” and Thistle did not determine a gain in respect of a disposal of an asset. Rather, the asset was disposed of by a trust higher up in the structure. In fact, the words “in respect of the disposal of an asset” is exactly what was added by the legislature to paragraph 80(2) in 2008 with the explanation in the corresponding “explanatory” memorandum explaining the intention as being that multiple tier vesting is not permitted under paragraph 80(2).
The takeaway:
Really, the issue of interpretation of paragraph 80(2) that formed the subject matter of this dispute is somewhat isolated to historic tax years given the amendments made to paragraph 80(2) in 2020. What is important to take away from this judgment, on our reading at least, is two main points (apart from the understatement penalty issue which we discuss in another article here).
The first being a point highlighted in both the majority and minority judgment: The question regarding the amount of weight to be placed on explanatory memoranda when interpreting tax legislation.
The majority, for example, points out that: “if the meaning of law depends entirely on historical research into what was and what was not said in an explanatory memorandum issued decades earlier and not easily capable of identification and location, that undermines accessibility of the law and will potentially undermine the rule of law.”[4]
The minority, also, states: “it seems to me that limited weight should be placed on such a memorandum: the Legislature is duty-bound due by the requirements of the rule of law to ensure that the legislation it passes is as clear as possible and enables individuals to know how to order their affairs. The legislature must, in the legislative instrument itself, say what it means and cannot cure ambiguity by relying on an explanatory memorandum.”[5]
It is not uncommon, in our experience, for the legislature to try to explain away ambiguity and uncertainty in explanatory memoranda or other explanatory documents as opposed to making its intentions clear in the legislative instrument itself. An example will be an explanatory note issued a couple of years ago to explain that where, for VAT purposes, “electronic services” are rendered with some human intervention, it is not intended to fall within the scope of the electronic services VAT regulations at the time. The legislative instrument itself, on the other hand, was phrased wide enough to encompass electronic services rendered with human intervention. Whilst we appreciate that it is sometimes impossible to be exactly clear in the legislative instrument itself, its all too easy to revert to: let’s just explain it in the explanatory memorandum.
The second take away is a reminder in the minority judgment of a 1995 judgment,[6]where the Constitutional Court held:
“We have moved from a past characterised by much which was arbitrary and unequal in the operation of the law to a present and a future in a constitutional State where State action must be such that it is capable of being analysed and justified rationally. The idea of the constitutional State presupposes a system whose operation can be rationally tested against or in terms of the law. Arbitrariness, by its very nature, is dissonant with these core concepts of our new constitutional order.” (our emphasis).
Perhaps the legislature would do well to bear in mind that when it does attempt to explain itself in explanatory memoranda, that there is a difference between an explanation and making a statement of a position. The former is what is required in a Constitutional State and the latter something reminiscent of a terrible past.
[1] At paragraph 125 of the judgment.
[2] It appears the minority seems to accept that the words “disposal of an asset” could in fact be the very thing that links the vesting to the trust which disposed of the asset (which in essence is what the majority judgment comes down to) as opposed to some other trust but deals with it by explaining the words “disposal of an asset” are there to explain how the gain arose and to distinguish paragraph 80(1) from 80(2).
[3] The majority judgment is highly critical of the minority judgment’s reliance on the contra fiscum rule as the majority reads the minority judgment’s reliance thereon as a rule of statutory interpretation when it is not (see for example at paragraph 73). It is respectfully submitted that the minority does not, on our reading, rely on the rule as means of interpretation but reverts to the rule exactly because there are, according to the minority, two equally plausible interpretations of paragraph 80(2).
[4] At paragraph 67 of the judgment.
[5] At paragraph 137 of the judgment.
[6] S v Makwanyane [1995] ZACC 3; 1995 (3) SA 391 (CC).