Round-tripping between the draft version and the enacted version – part 1
In November 2006, section 103(1) of the Income Tax Act was abolished and replaced by a new Part IIA, containing sections 80A to 80L, which target impermissible tax avoidance arrangements. Section 80A(c)(ii) was introduced in the Revised Proposals on Tax Avoidance and Section 103 of the Income Tax Act, 1962 (Revised Proposals). It contained the phrase: ‘frustrate the purpose of any provision’. The wording of the enacted version of section 80A(c)(ii), however, was altered from that of its draft version: in essence, the phrase ‘frustrate the purpose of any provision’ was replaced with the phrase ‘a misuse or abuse of the provisions’. The Explanatory Memorandum on the Revenue Laws Amendment Bill, 2006 (Explanatory Memorandum) is cryptic, giving no indication as to the meaning of the phrase ‘a misuse or abuse of the provisions’ or why it replaced the phrase ‘frustrate the purpose of any provision’ employed in the draft version.1
The purpose of this two-part article is to examine the meaning of the phrase ‘a misuse or abuse of the provisions’ contained in the enacted version of section 80A(c)(ii) of the Income Tax Act 58 of 1962, as amended (the Act). In the first part it will be established whether there is a difference in meaning between this phrase and that of its predecessor in the draft version, ‘frustrate the purpose of any provision’. If no difference is found this could entail a ‘round-tripping’ by the legislature with regard to section 80A(c)(ii): words are ‘transferred’ between the draft version and the enacted version without a change in meaning.2 The second part will examine the ‘round-tripping’ contention and the presumed reaction by the South African Courts.
2. The draft version of section 80A(c)(ii) of the Act
The draft version of section 80A(c)(ii) reads as follows:
‘An avoidance arrangement is an impermissible avoidance arrangement if its sole or main purpose was to obtain a tax benefit and …; or (c) in any context-…; or (ii) it would frustrate the purpose of any provision of this Act (including the provisions of this Part).’ (Emphasis added.)
The rationale behind the draft version of section 80A(c)(ii) was apparently to discourage ‘impermissible avoidance arrangements that rely upon excessively literal or technical readings of the tax laws to defeat their purpose’.3 This implies, it is submitted, establishing the purpose of a provision (an issue relating to the interpretation of statutes) and then ascertaining whether the arrangement ‘frustrates’4 or ‘defeats’5 the identified purpose of the provision.
3. The enacted version of section 80A(c)(ii) of the Act
Section 80A(c)(ii), as finally enacted, concludes in a different form to that of the draft version:
‘An avoidance arrangement is an impermissible avoidance arrangement if its sole or main purpose was to obtain a tax benefit and …; or (c) in any context-…; or (ii) it would result directly or indirectly in the misuse or abuse of the provisions of this Act (including the provisions of this Part).’ (Emphasis added.)
3.1 The change from the draft version and its presumed implications
Essentially, the concept of the ‘frustration’ of the ‘purpose’ of a provision of the Act was replaced by the concept of the ‘misuse or abuse’ of such a provision.6 Reference to a misuse or abuse of a provision ‘presupposes that there is some identifiable non-abusive use of each provision of the Act (and the Act as a whole), which can in some way be used as a yardstick against which to measure misuse or abuse.’7
Whereas the purpose of a provision is ascertainable and the ambit of such an inquiry, within reasonable bounds, determining a yardstick against which to measure a misuse or abuse is a seemingly vague and incomprehensive inquiry8, that is, abuse is in the eye of the beholder.9 The substitution, it is submitted, could therefore result in a significant expansion of Part IIA. This contention will be evaluated in part 2 of this article. The starting point of such an evaluation, it is submitted, lies in construing the meaning of the words ‘misuse or abuse’.
3.2 The meaning of ‘a misuse or abuse’: referencing South African sources
The ordinary meaning of the words ‘misuse’ and ‘abuse’ are as follows:
‘misuse •v. 1 use wrongly. 2 treat badly or unfairly.’10
‘abuse •v. 1 use to bad effect or for a bad purpose.’11
From the above, it is observed that the meaning of the word ‘abuse’ has a strong resemblance to the language in which the draft version of section 80A(c)(ii) was couched: using a provision for a ‘bad purpose’, it is submitted, implies that its purpose has been ‘frustrated’. It seems therefore that, ascertaining the purpose of a provision and whether such purpose has been frustrated, might be inherently imbedded in the linguistic nature of the word ‘abuse’. This could imply that substituting the phrase ‘frustrate the purpose of any provision’ (in the draft version) with the phrase ‘misuse or abuse of the provisions’ (in the enacted version) in fact does not result in a broader inquiry under section 80A(c)(ii) and hence no expansion of Part IIA.
In addition, it is doubtful whether the words ‘misuse’ and ‘abuse’ have substantially different meanings. Both imply a misconduct or transgression. According to Cilliers, the legislature, in using both the words ‘misuse’ and ‘abuse’, merely acted ex abundant cautela and did not wish to denote two distinct concepts.12 The words ‘misuse’ and ‘abuse’, he argues, could be regarded as synonyms.
A ‘misuse or abuse’, it is submitted, imply using a provision ‘wrongly’ or for a ‘bad purpose’. It seems therefore that the ‘misuse or abuse’ inquiry involves establishing the purpose of a provision in order to ascertain whether such purpose has been contravened. This is similar to that (presumably) prescribed by the draft version of section 80A(c)(ii) of the Act.
According to the Explanatory Memorandum, the legislature has
relied on, amongst other things, Canadian precedent in introducing the concept of a misuse or abuse.13 Determining how the Canadian court establishes a misuse or abuse, it is submitted, will allow inferences to be drawn as to the meaning of the phrase a ‘misuse or abuse of the provisions’ and whether that deviates from ‘frustrate the purpose of any provision’.
3.3 The meaning of ‘a misuse or abuse’: referencing Canadian sources
It seems that section 80A(c)(ii) of the Act has its roots in the Canadian general anti-avoidance rule (GAAR), contained in section 245 of the Canadian Federal Income Tax Act (Canadian Act).14 The misuse or abuse concept appears in section 245(4) thereof, which provides a basis for distinguishing between legitimate tax planning and abusive tax avoidance.15 From SARS’ Discussion Paper on Tax Avoidance and Section 103 of the Income Tax Act (Discussion Paper) it is clear that the interpretation of the words ‘misuse or abuse’ in Canada Trustco Mortgage Company v Canada16 is exactly what was intended by the South African legislature with the phrase ‘a misuse or abuse of the provisions’. In this case, the Supreme Court of Canada prescribed the following approach in assessing for a ‘misuse or abuse’:
‘… s. 245(4) imposes a two part inquiry. The first step is to determine the object, spirit or purpose of the provisions of the Income Tax Act that are relied on for the tax benefit, having regard to the scheme of the Act, the relevant provisions and permissible extrinsic aids. The second step is to examine the factual context of a case in order to determine whether the avoidance transaction defeated or frustrated the object, spirit or purpose of the provisions in issue.’17
This approach is similar to that (presumably) prescribed by the draft version of section 80A(c)(ii) of the Act. Reference to the ‘spirit’ of a provision, however, seems to nullify this contention as the draft version of section 80A(c)(ii) only referred to the ‘purpose’ of a provision. Cilliers, however, indicates that the reference to a so-called ‘spirit’ behind the legislation is not what was intended. He states that the word ‘spirit’ has no sinister meaning; it must simply be read eiusdem generis with ‘object’ and ‘purpose’.18 Authority for this view is also found in the judgment of OSFC Holdings Ltd v The Queen19, where the Federal Court of Appeal in Canada stated the following:
‘The approach to determine misuse or abuse has been variously described as purposive, object and spirit, scheme or policy. I will refer to these terms collectively as policy of the provisions in question…’20
The terms ‘purposive’, ‘scheme’, ‘policy’, ‘object’ and ‘spirit’, in the Canadian jurisprudence, seem to be synonymous. If Cilliers is correct, in holding that the words ‘object’, ‘spirit’ and ‘purpose’ have the same meaning, this implies that the terms ‘purposive’, ‘scheme’, ‘policy’, ‘object’, ‘spirit’ and ‘purpose’ are all, in the Canadian jurisprudence, synonymous. See Figure 1.
In Canada Trustco Mortgage Company v Canada21 the court further indicated that the terms ‘misuse’, ‘exploit’ and ‘frustrate’ are synonymous:
‘While the Explanatory Notes use the phrase ‘exploit, misuse or frustrate’, we understand these three terms to be synonymous, with their sense most adequately captured by the word ‘frustrate’.’22
If the words ‘misuse’ and ‘abuse’ are regarded as synonymous (as contended by Cilliers), there exists, it is submitted, a strong presumption that the words ‘misuse’, ‘abuse’, ‘exploit’ and ‘frustrate’ could all be regarded as synonymous. See Figure 2.
In essence, it is submitted, the Supreme Court of Canada has indicated that the words ‘misuse or abuse’ imply ‘frustrating’ or ‘exploiting’ the purpose of the provisions relied on by the taxpayer. If this interpretation is what was intended by the South African legislature, this could imply that the phrase ‘a misuse or abuse of the provisions’ (in the enacted version), presumably, being synonymous with the phrase ‘frustrate the purpose of any provision’ (in the draft version).
In part 2 of this article, the effect of the synonymous nature of the two phrases, the ‘round-tripping’ contention and the presumed reaction of the South African courts will be examined.
Footnotes
1 Cilliers 2008a:86
2 The ordinary meaning of the word ‘round-tripping’ is ‘a journey to a place and back again’ (South African Concise Oxford Dictionary 2002:1018). This implies an unchanged status quo. If it is discovered that there has been no change in meaning between the draft version of section 80A(c)(ii) and the enacted version, this entails an unchanged status quo, that is, a ‘journey’ from the draft version and then back to it again.
3 South African Revenue Services 2006:16
4 As used in the draft version of section 80A(c)(ii).
5 As used in the rationale (contained in the Revised Proposals) to the draft version of section 80A(c)(ii)
6 Cilliers 2008a:86
7 Clegg 2007:37
8 An inquiry as to the misuse or abuse of a provision has been referred to by Cilliers (2008b:110) as an ‘invisible yardstick, a stealthful nocturnal assassin’.
9 Clegg 2007:36
10 South African Concise Oxford Dictionary 2002:745
11 South African Concise Oxford Dictionary 2002:5
12 Cilliers 2008a:87
13 Broomberg 2008:31
14 Davis et al 2007:80A-11 and Clegg & Stretch 2007:26.3.5 and De Koker 2007:19.7
15 De Koker 2007:19.7
16 Canada Trustco Mortgage Company v Canada 2005 SCC 54
17 Canada Trustco Mortgage Company v Canada 2005 SCC 54 at paragraph 55
18 Cilliers 2008b:108
19 OSFC Holdings Ltd v The Queen 2001 FCA 260
20 OSFC Holdings Ltd v The Queen 2001 FCA 260 at paragraph 66
21 Canada Trustco Mortgage Company v Canada 2005 SCC 54
22 Canada Trustco Mortgage Company v Canada 2005 SCC 54 at paragraph 49
Linda van Schalkwyk CA(SA), MCom (Taxation), LLB is an Associate Professor at the University of Stellenbosch. Bernard Geldenhuys, BAcc (Hons) is a trainee at Investec Bank Limited.
