The interpretation of legislation in general, and the interpretation of tax legislation in particular, is complex. Legislation is generally interpreted based on the grammatical or ordinary meaning of the words of the statute, unless the literal interpretation leads to absurdity. In the past, if there has been uncertainty, ambiguity or absurdity in the language used in legislation, the courts have departed from the strict literal approach, and instead, have sought to establish the so-called ‘intention of the legislature’.
The proper approach to interpretation was reformulated by the Supreme Court of Appeal (the SCA) in Natal Joint Municipal Pension Fund1 v Endumeni Municipality1 as follows:
“The present state of the law can be expressed as follows: Interpretation is the process of attributing meaning to the words used in a document, be it legislation, some other statutory instrument, or contract, having regard to the context provided by reading the particular provision or provisions in the light of the document as a whole and the circumstances attendant upon its coming into existence. Whatever the nature of the document, consideration must be given to the language used in the light of the ordinary rules of grammar and syntax; the context in which the provision appears; the apparent purpose to which it is directed and the material known to those responsible for its production. Where more than one meaning is possible, each possibility must be weighed in the light of all these factors. The process is objective not subjective. A sensible meaning is to be preferred to one that leads to insensible or unbusinesslike results or undermines the apparent purpose of the document.”
The Natal Joint Municipal Pension Funds case confirms that the process of statutory interpretation is objective and unrelated to the subjective intention of those responsible for the words at the time they selected them.
In the case of tax legislation, the position is arguably complicated by the fact that SARS issues interpretation notes and guides on the interpretation of tax legislation. To what extent may a court consider these notes and guides and how does this accord with the approach set out in Natal Joint Municipal Pension Funds?
The extent to which a court may consider or defer to an administrative body’s interpretation of legislation (such as SARS interpretation notes and guides) was definitively decided upon by the Constitutional Court in Marshall and Others v Commissioner, South African Revenue Service2.
The South African Red Cross Air Mercy Service Trust (the Trust) applied to the Constitutional Court for leave to appeal against a decision of the Supreme Court of Appeal (SCA) on the proper interpretation of sections 8(5) and 11(2)(n) of the Value-Added Tax Act, 89 of 1991 (the VAT Act).
In the SCA, the Trust argued that the services it had provided to provincial health departments qualified as “deemed services” under section 8(5) of the VAT Act and that payments made to it by provincial health departments therefore qualified for zero rating under section 11(2)(n) of the VAT Act. The SCA ruled against the Trust and referred to a SARS interpretation note in reaching its conclusion.
In its application for leave to appeal, the Trust argued, amongst others, that the consideration of interpretation notes as legally relevant is a “relic” of an outdated approach to interpretation, namely that of ascertaining the subjective intention of the legislature, as opposed to the proper purposive interpretation, which is concerned with the objective purpose of the legislation. The Trust also argued that a court’s reliance on interpretation notes would violate the rule that ambiguous tax provisions should be interpreted in favour of the taxpayer under the contra fiscum rule.
The Constitutional Court confirmed that the correct approach to statutory interpretation is not to ascertain the intention of the legislature, which approach was developed in a system of legislative supremacy, but rather to undertake an objective, independent interpretation of the legislation to ascertain the purpose of the legislation, which is more suitable to a constitutional democracy. This is an independent analysis and SARS’ interpretation of the relevant legislation is in principle irrelevant.
The Constitutional Court held as follows at paragraph 10:
“Why should a unilateral practice of one part of the executive arm of government play a role in the determination of the reasonable meaning to be given to a statutory provision? It might conceivably be justified where the practice is evidence of an impartial application of a custom recognised by all concerned, but not where the practice is unilaterally established by one of the litigating parties. In those circumstances it is difficult to see what advantage evidence of the unilateral practice will have for the objective and independent interpretation by the courts of the meaning of legislation, in accordance with constitutionally compliant precepts. It is best avoided.”
The Constitutional Court therefore confirmed that, as a guiding principle, courts should not have regard to interpretation notes or guides when interpreting legislation. However, it did implicitly recognise that in any marginal question of statutory interpretation, a court may have regard to an interpretation as set out in an interpretation note if there is evidence that the interpretation has been recognised and followed by SARS and taxpayers alike for a number of years.
Taxpayers should therefore be careful when relying on interpretation notes and guides and should rather approach the interpretation of tax legislation as set out in Natal Joint Municipal Pension Fund. To the extent that such an objective, independent interpretation of the relevant legislation accords with the interpretation in the relevant interpretation note or guide, and such interpretation is recognised by SARS and the taxpayer, reference could be made to such interpretation note or guide to confirm the taxpayer’s or SARS’ interpretation of the relevant tax legislation.