Brief Summary

Interpretation of statutes — Value Added Tax Act — Judicial deference — Application for leave to appeal against Supreme Court of Appeal decision regarding VAT exemption for South African Red Cross Air Mercy Service Trust — Trust contended that courts must independently determine legislation meaning without regard to Interpretation Notes issued by South African Revenue Service — Supreme Court of Appeal held that Trust liable for VAT on services rendered — Application for leave to appeal dismissed, with condonation granted for late filing.

Comprehensive Summary

Summary of Judgment

1. Introduction

This matter concerned an application for leave to appeal to the Constitutional Court against a judgment of the Supreme Court of Appeal (SCA) on the proper interpretation of provisions of the Value Added Tax Act 89 of 1991 dealing with when amounts received by certain entities are subject to VAT and when they may be zero-rated.

The applicants were seven trustees acting nomine officii on behalf of the South African Red Cross Air Mercy Service Trust (the Trust). The respondent was the Commissioner for the South African Revenue Service (SARS). The underlying dispute was thus between a welfare-related trust providing services, on the one hand, and the tax authority responsible for administering VAT legislation, on the other.

The procedural history was that the SCA had held (in a unanimous judgment) that the Trust was not exempt from paying VAT on payments received for actual services rendered to provincial health departments. The applicants sought leave to appeal to the Constitutional Court. The application for leave was brought significantly out of time, requiring an application for condonation.

The general subject-matter of the dispute was VAT liability in respect of payments received by the Trust for services provided to provincial health departments, and the related interpretive question about the status and permissible use of SARS Interpretation Notes when courts interpret legislation in contested litigation.

2. Material Facts

The Constitutional Court treated the material facts largely as the contextual setting for a dispute that turned primarily on statutory interpretation, rather than on contested factual disputes.

It was accepted that the Trust rendered actual services to provincial health departments in terms of agreements concluded with those departments, and that it received payments in return for those services. The court approached the matter on the footing that these payments were consideration for services actually supplied, rather than merely gratuitous transfers.

The SCA’s reasoning (which formed the immediate backdrop to the application) had referred to SARS Interpretation Notes issued on 8 February 2013, describing the VAT treatment of public authorities before and after April 2005. The Constitutional Court recorded that the SCA regarded these Notes as not binding but persuasive, and that the Notes aligned with the SCA’s interpretation of the relevant VAT provisions.

The Constitutional Court did not resolve the matter on the basis of any evidentiary contest about the Trust’s operations. Instead, it proceeded on the basis that the Trust is a welfare organisation under the VAT Act, that it supplies actual services to provincial departments, and that it may also receive payments that could constitute government subsidies within the statutory scheme addressed by the deeming rule in section 8(5).

As to procedure, it was common cause that the leave application was brought approximately ten months late. The Trust attributed this delay to its financial situation and a change of legal representation. The Court noted that SARS did not suffer prejudice from the delay.

3. Legal Issues

The central legal questions before the Constitutional Court were, first, the interpretation and interaction of sections 8(5) and 11(2)(n) of the Value Added Tax Act, read with section 7(1), in determining whether the Trust was liable for VAT on amounts received for services rendered to provincial health departments.

Second, the Court was required to address a broader interpretive question raised by the parties and the Court itself: the extent to which a court may consider, rely upon, or defer to an administrative body’s interpretation of legislation, specifically SARS Interpretation Notes, in judicial interpretation.

The dispute therefore primarily concerned questions of law, namely statutory interpretation and constitutional propriety in interpretive methodology. To the extent that the Court considered the status of administrative practice, the question was one of how legal principles apply to a particular institutional context, rather than the resolution of primary factual disputes.

4. Court’s Reasoning

The Court dealt separately with (a) the permissible use of administrative interpretation (such as SARS Interpretation Notes) and (b) the proper interpretation of the VAT provisions themselves.

On the use of Interpretation Notes, the Court noted that the SCA had treated the Notes as persuasive explanations, while recognising they were not binding on courts or taxpayers. The Trust argued that any reliance on Interpretation Notes once a dispute has arisen would undermine constitutional guarantees, including equality (section 9) and the right of access to courts and a fair hearing (section 34), because the Notes would amount to unilateral guidance from one litigant (SARS) being used to influence the interpretation dispute. The Trust also contended that such reliance conflicted with the contra fiscum approach in cases of ambiguity, amounted to inadmissible opinion evidence, conflicted with interpretive principles relating to regulations, and reflected an outdated intentionalist interpretive approach.

SARS contended for a narrower position: that administrative interpretation could be relevant only where it shows a consistent interpretive practice over a substantial period, and then only in marginal interpretive cases to “tip the balance”. SARS relied on the approach articulated in Commissioner, South African Revenue Service v Bosch, where evidence of consistent revenue authority practice was said to be admissible and potentially relevant in marginal interpretive disputes.

The Court accepted that Bosch reflected a line of authority in which consistent administrative interpretation had sometimes been treated as relevant. It traced this to earlier authority, including Rex v Detody 1926 AD 198, where “custom” in administration could be invoked to assist in choosing between competing interpretations of ambiguous legislative language. The Court observed, however, that this approach originated within a framework of legislative supremacy, where statutory interpretation was directed at discerning legislative intention, and where administrative “custom” could sometimes assist in resolving ambiguity.

The Court emphasised a key contextual shift: South Africa’s move from legislative supremacy to constitutional democracy. In that changed context, the Court questioned why a unilateral practice of an executive organ—particularly where that organ is itself a litigating party—should play any role in the court’s task of objective and independent interpretation of legislation in accordance with constitutionally compliant precepts. The Court acknowledged that reliance on custom might be conceivable where it reflects an impartial and shared practice recognised by all concerned, but stated that where the practice is unilaterally established by one litigant (such as a revenue authority), it is difficult to see the advantage of treating that unilateral practice as a “pointer” to correct meaning. The Court concluded that this is best avoided.

Having addressed that methodological question, the Court then turned to the interpretation of the statutory provisions, noting SARS’s submission that the SCA had in any event first interpreted the provisions independently, and that the Interpretation Notes merely confirmed the result. The Court agreed that an objective, independent interpretation of the relevant VAT Act provisions led to the same conclusion reached by the SCA.

The Court’s statutory interpretation proceeded as follows. It relied on section 7(1) of the VAT Act as the general charging provision that attracts VAT on the supply of goods or services by vendors in the course or furtherance of an enterprise. It treated section 8(5) as a deeming provision that extends VAT to particular payments that are not an actual supply of services falling under section 7(1), specifically by deeming designated entities to supply services to a public authority or municipality to the extent of any payment made by that public authority or municipality in the course or furtherance of the designated entity’s enterprise. The Court characterised the entities covered as government-subsidised entities, and explained that a government subsidy is not itself an “actual supply” attracting VAT under section 7(1), but is deemed taxable under section 8(5).

The Court then explained the effect of section 11(2)(n), which provides a zero rate for a particular subset of supplies, namely where services comprise the carrying on by a welfare organisation of the activities specified in the definition of welfare organisation, and “to the extent” that any payment in respect of those services is made in terms of section 8(5). On the Court’s analysis, the zero rating in section 11(2)(n) assists only one of the types of designated entities covered by section 8(5), namely welfare organisations.

Applying these provisions, the Court concluded that because the Trust provides actual services to provincial departments under agreements, it is liable for VAT on those actual services under section 7(1). By contrast, any payment that constitutes a subsidy deemed to be a taxable supply of services under section 8(5) would be subject to zero rating by virtue of the Trust being a welfare organisation, through the operation of section 11(2)(n).

Finally, on condonation and costs, the Court held that despite the lateness of the leave application, the explanation given (financial position and change in legal representation), coupled with the lack of prejudice to SARS, justified granting condonation. However, leave to appeal still had to be refused because the Court considered the prospects of success not good and thus leave would not ordinarily be in the interests of justice. In relation to costs, the Court held that although leave was refused, the matter raised an interpretive issue worthy of the Court’s attention and was advanced in pursuit of the Trust’s public-benefit objectives; accordingly, the Biowatch principle applied and no costs order was made in the Constitutional Court.

5. Outcome and Relief

The Constitutional Court granted condonation for the late filing of the application for leave to appeal.

The Court dismissed the application for leave to appeal, leaving intact the SCA’s conclusion that the Trust was not exempt from VAT on payments received for actual services rendered to provincial health departments, while recognising that deemed supplies under section 8(5) could be zero-rated for welfare organisations under section 11(2)(n).

The Court made no order as to costs in the Constitutional Court.

Cases Cited

Commissioner, South African Revenue Service v Marshall NO [2016] ZASCA 158; 2017 (1) SA 114 (SCA)

Commissioner, South African Revenue Service v Bosch [2014] ZASCA 171; 2015 (2) SA 174 (SCA)

Rex v Detody 1926 AD 198

Ellert v Commissioner for Inland Revenue 1957 (1) SA 483 (A)

Nissan SA (Pty) Ltd v Commissioner for Inland Revenue [1998] ZASCA 59; 1998 (4) SA 860 (SCA)

Stopforth v Minister of Justice and Others; Veenendaal v Minister of Justice [1999] ZASCA 72; 2000 (1) SA 113 (SCA)

Natal Joint Municipal Pension Fund v Endumeni Municipality [2012] ZASCA 13; 2012 (4) SA 593 (SCA)

Master Currency (Pty) Ltd v Commissioner, South African Revenue Service [2013] ZASCA 17; 2014 (6) SA 66 (SCA)

Biowatch Trust v Registrar Genetic Resources [2009] ZACC 14; 2009 (6) SA 232 (CC); 2009 (10) BCLR 1014 (CC)

Legislation Cited

Constitution of the Republic of South Africa, 1996 (sections 9 and 34)

Value Added Tax Act 89 of 1991 (sections 7(1), 8(5), 11(2)(n), and the definition of “welfare organisation” in section 1)

Rules of Court Cited

No rules of court were cited in the judgment.

Held

The Court held that, in the context of constitutional democracy, it is generally inappropriate for courts to treat a unilateral administrative interpretive practice—particularly that of a litigating party such as SARS—as a factor that assists in determining the correct meaning of legislation, and that reliance on such unilateral practice is best avoided.

The Court further held that an objective and independent interpretation of the VAT Act led to the conclusion that the Trust was liable to pay VAT on payments for actual services rendered to provincial health departments under section 7(1). It also held that, to the extent that the Trust received payments that constituted subsidies falling within the deeming rule in section 8(5), those deemed supplies would be zero-rated under section 11(2)(n) because the Trust is a welfare organisation.

Condonation for late filing was granted, but leave to appeal was refused due to insufficient prospects of success, and no costs order was made in line with the Biowatch principle.

LEGAL PRINCIPLES

A court’s task in statutory interpretation remains one of objective and independent determination of meaning, undertaken in accordance with constitutionally compliant interpretive precepts, rather than being influenced by the unilateral interpretive views of one litigant party within the executive.

While prior authority has contemplated that consistent administrative interpretation might, in marginal cases, assist in resolving ambiguity, the judgment emphasised that this approach emerged from a different constitutional era and that, under constitutional democracy, unilateral executive practice has limited justificatory force as an aid to statutory construction and is generally best avoided.

In the VAT context addressed, the judgment applied the distinction between VAT liability for actual supplies under section 7(1) and the statutory deeming of certain payments (notably subsidies) as supplies under section 8(5), together with the availability of zero-rating for welfare organisations under section 11(2)(n) in relation to payments made in terms of section 8(5).

In costs, the judgment applied the principle from Biowatch Trust v Registrar Genetic Resources [2009] ZACC 14; 2009 (6) SA 232 (CC); 2009 (10) BCLR 1014 (CC) to make no costs order, notwithstanding the refusal of leave, given the public-interest character of the litigation and the interpretive issue warranting the Court’s attention.

Marshall and Others v Commission for the South Africa Revenue Service (CCT208/17) [2018] ZACC 11; 2018 (7) BCLR 830 (CC) ; 2019 (6) SA 246 (CC) (25 April 2018)