South Africa: Western Cape High Court, Cape Town

Commissioner for the South African Revenue Service v Van Kets (13446/2011) [2011] ZAWCHC 435; 2012 (3) SA 399 (WCC); [2012] 2 All SA 413 (WCC) (22 November 2011)

4. If information is requested by a Contracting State in accordance with this Article, the other Contracting State shall use its information gathering measures to obtain the requested information, even though that other State may not need such information for its own tax purposes. The obligation contained in the preceding sentence is subject to the limitations of paragraph (3), but in no case shall such limitations be construed to permit a Contracting State to decline to supply information solely because it has no domestic interest in such information.

5. In no case shall the provisions of paragraph (3) be construed to permit a Contracting State to decline to supply information solely because the information is held by a bank, other financial institution, nominee or person acting in an agency or a fiduciary capacity or because it relates to ownership interest in a person."

[18] The key question for determination thus turns on the legal status that must be given to this amended clause of the DTA; that is what is the reach of these obligations and how do they fit with domestic law, in particular the relevant provisions of the Act. On the basis of the provisions of s 231 and, as is apparent from the analysis provided by the Constitutional Court in Glenister, supra, the Act has chosen one of the three principal methods to transform treaties into municipal law; in this case an enabling Act of Parliament which gives the executive the power to bring a treaty into effect in municipal law by means of a proclamation or notice in the Government Gazette. See also CJR Duqard International Law: A South African perspective (3ed) at 61.

[19] The question therefore for decision can be refined to the following, whether the provisions of Article 25, which provides that 'the competent authorities of the Contractual States shall exchange such information as is foreseeably relevant for carrying out the provisions of the Agreement or to the administration and enforcement to the domestic law' can be enforced in terms of South African law. In other words, as the applicant submits, absent the provisions of s 74A and 74B there would be no legal basis by which applicant would have the legal means to acquire the information which is 'foreseeably relevant' for the administration or enforcement of Australian domestic tax law.

[20] Mr Emslie, who appeared on behalf of the respondent, submitted that ss 74A and 74B can only relate to a taxpayer who is charged with any tax which is leviable under the Act. Thus, the arrangement referred to in Article 25 expressly makes itself subject to the Commissioner's power under the Act which would include s 74A and s 74B read together with the definition of taxpayer in s 1. In Mr Emslie view, s 108(2) of the Act does not import the wording of the DTA into the Act but merely 'arrangements' which would be subject to the express wording of the Act.

[21] In other words, the respondent's argument is that this court must decide what is permitted in terms of s 74A and s 74B, absent any provision of the DTA. As the DTA expressly makes itself subject to what is permitted in terms of s 74A and s 74B, applicant can only supply information which it may obtain under these sections, the scope of which is set in the express language chosen by the legislature.

[22] Accordingly, the information which the ATO requested from applicant cannot be procured, notwithstanding a request in terms of the DTA, as it is impermissible for the applicant to employ s 74A and s 74B, which are the source of the only powers available to respondent, to obtain this information and pass it on to the ATO.

[23] The essential dispute therefore hones down further to whether the provisions of the DTA in general and Article 25 thereof in particular broaden the scope of s 74A and s 74B beyond the strict meaning of the definition of taxpayer in s 1.

[24] Olivier and Honiball International Tax, A South African Perspective (2011) at 305 make the following pertinent observations regarding DTA's:

"It must be argued that, as the main object of a treaty in general is to avoid the same income being taxed twice (see discussion below and in Chapter 9), any domestic legislation (including legislation promulgated after the treaty took effect) which has the effect that the same income is taxed twice, will be subordinate to the treaty provisions. As a result specific legislation to this effect is unnecessary. The first support for this view is found in the following phrase within s 108:

'... with a view to the prevention, mitigation or discontinuance of the levying, under the laws of the Republic and of such other country, of tax in respect of the same income, profits or gains'

The wording of the section makes it clear that the aim of tax treaties is to prevent economic and juridical double taxation, although tax treaties generally only eliminate juridical double taxation.

In terms of this view, even if tax is payable in respect of particular income, profits or gains under South African domestic law, if in terms of the provisions of a treaty the relevant tax is not payable in South Africa, or only part of that tax is payable, then the treaty automatically takes precedence and overrides the relevant domestic law in terms of which the tax is payable. This view holds that s 108(1) presupposes a liability for tax under the laws of South African and provides for the conclusion of a treaty to prevent, mitigate or discontinue that liability. Under this view it would be absurd to interpret s 108 as meaning that a treaty cannot or does not apply where the Income Tax Act, as such an interpretation would have the result that provision in a treaty providing for the prevention, mitigation or discontinuance of a liability for tax would be meaningless and would serve no purpose. This view is substantially based on the Australian court case of Lamesa Holdings BV 1997 35 ATR 239, 97 ATC 4229 in which it was held that tax treaties by their nature are unlikely other international agreements because they also confer rights and obligations on parties other than those to the double tax agreement (ie the taxpayers). When enacted as part of domestic law they therefore automatically override domestic law."

[25] It would thus appear as if the DTA provisions become part of domestic income laws. Given the manner in which the DTA stands to be treated in terms of s231 of the Constitution, its provisions must rank at least, equally with domestic law, including the Act. For this reason, the provisions of the DTA and the Act, should, if at all possible, be reconciled and read as one coherent whole.

[26] It follows that, if ss 74A and 74B stand to be interpreted on the basis of respondent's argument, there would be an inconsistency, to the extent that applicant would not be able to comply with the request from its contracting partner, in this case the ATO. The definition of taxpayer in s 1 would represent an insurmountable obstacle to compliance. However, if the DTA is interpreted as part of domestic tax legislation, then it behoves this court to interpret ss 74A and s 74B so as to render them compatible with this very provisions of the DTA and, in particular, Article 25 thereof.

[27] The express purpose of the DTA is set out in the header to the Australian/South African DTA, namely an agreement between the government of the Republic of South Africa and the government of Australia for the avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income. Article 25 clearly provides that the competent authority of either Contracting State may request information from the other Contracting State in order that it may impose any of the taxes 'to which the agreement applies insofar as the taxation under that law is not contrary to the agreement'. In other words, Article 2 covers the taxes to which the agreement shall apply, including, in the case of Australia, income tax, the resource rent tax in respect of offshore projects relating to exploration for or exploitation of petroleum resources, imposed under the federal law of Australia.

[28] The purpose of the exchange of information clause is to ensure, for example, that a resident of Australia does not escape Australian tax which may be imposed in circumstances where income, profits or gains have accrue to that resident but are from a South African source. Absent an exchange of information, the ATO would be unable or find it extremely difficult to impose the legitimate amount of tax on such income, profits or gain. Within this context, the question arises as to whether the exchange of information provision caters for a third party who may have information with regard to income profits or gains of a resident of Australia in circumstances where the income, profit or gain could be sourced anywhere in the world. In this case, the investigation concerns the income tax affairs of Mr Duncan Saville and in particular the accretion of his offshore wealth.

[29] It would appear that Mr Saville is a taxpayer of Australia. In these circumstances, the question arises as to whether respondent, who on his own version has information regarding the tax affairs of a Australian resident, can be compelled to provide such information pursuant to the exercise by appellant of its powers in terms of sections 74A and 74B of the Act. In my view, once the DTA is read together with the Act, this reading would imply that the word 'taxpayer' should include those taxpayers who do fall within the scope of the Act but fall within the scope of the DTA, which would thus include an Australian resident. Once the

Australian resident, in this case Mr Saville, is considered to be a taxpayer, manifestly the respondent would fall within this section because he would be classified as any other person' who would be able to furnish information regarding a taxpayer, in this case Mr Saville.

[30] It was precisely on this basis that the request from the ATO has been generated. In my view, when the DTA is read together with the Act so as to render the one congruent with the other, applicant is entitled to act in terms of sections 74A and 74B. Article 4 of the DTA defines a resident of a Contracting State as a resident of that State for the purpose of its tax when read together with sections 74A and 74B, respondent possesses information which is relevant to an Australian taxpayer. Thus applicant is entitled to require another person, in this case respondent, to furnish such relevant information in relation to this particular Australian taxpayer. In this manner, the relevant provisions of the DTA and the Act are then reconciled.

[30] Accordingly, the application must succeed and an order is made in the following terms:

1. Declaring that s 74(A) and 74(B) may be invoked by the applicant for purposes of obtaining information from the respondent and any person in the Republic of South Africa for purposes of complying with its obligations under any double taxation agreement, alternatively, treaty concluded for the exchange of information.

2. Declaring the 'taxpayer' as contained in s 74(A) and 74(B) must be interpreted to be consistent with South Africa's obligations under any double tax agreements for the provision of information, alternatively, treaty concluded for the exchange information.

3. Declaring that South African residents are bound by the provisions of the agreement concluded between South Africa and Australia for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income between South Africa and Australia, as amended by the protocol and in terms of which South African residents are bound to furnish information pursuant to any request in terms thereof.

Ordering the respondent to disclose the following information to the applicant for onward transmission to the Australian tax authorities:

5.1. The name of the any Trust of which he is aware that holds any direct or indirect interest and/or any beneficial ownership in a Labuan, Malaysia entity known as Republic Life Common Fund (L) Limited (RLCF);

5.2. The name of the trustee of the said Trust;

5.3. The name of the beneficiaries of the said Trust; and

5.4. The address (residency) of the said Trust for tax purposes.

6. Respondent is ordered to pay the costs of this application.

DAVIS J