South African Reserve Bank v Shuttleworth

CASE SUMMARY 

South African Reserve Bank v Shuttleworth 

Mhlakwana, PN, Miss [25970119@sun.ac.za] 

[COMPANY NAME]

South African Reserve Bank and Another v Shuttleworth and Another; Minister of Finance and  Another v Shuttleworth and Another (CCT194/14, CCT199/14) [2015] ZACC 17; 2015 (5) SA  146 (CC); 2015 (8) BCLR 959 (CC); 78 SATC 23 

• Court name: Constitutional Court of South Africa (CC) 
• Bench: A full bench of the Constitutional Court 
• Coram (Judges): Moseneke DCJ (writing for the majority), Cameron J, Froneman J  (separate concurring/dissenting judgment), Jafta J, Khampepe J, Madlanga J, Molemela  AJ, Nkabinde J, Skweyiya J, Zondo J. 
• Majority Judgment: Moseneke DCJ (Deputy Chief Justice) 

Date of Judgment 

• Date Heard: 3 March 2015 
• Date Delivered: 18 June 2015 

Parties Involved 

• First Appellant / First Respondent (High Court and SCA): The South African  Reserve Bank (“SARB”), body that has the ultimate authority for administering the  country’s exchange control system through its Exchange Control Department. 
• Second Appellant / Second Respondent (High Court and SCA): The Minister of  Finance, who carries the overall responsibility for the Exchange Control Regulations. • First Respondent (Main Appeal) / Applicant (High Court): Mark Richard  Shuttleworth (Mr. Shuttleworth), the South African-born entrepreneur and billionaire  who was relocating abroad and sought to export his capital. 

Facts of the Case 

Mr Mark Shuttleworth, who was a renowned businessperson made his fortune from the sale of  Thawte Consulting in 1999. He was emigrating from South Africa to the Isle of Man in 2001  and intended to transfer his assets. According to South African system of Exchange Control,  his assets remaining in South Africa were classified as “blocked assets” meaning that  expatriation (voluntary moving abroad to work or live) was restricted. The Exchange Control  Regulations created under Currency and Exchanges Act 9 of 1993, prohibits the exportation of  capital from the country without the permission of the Tressure.  

At the time of Mr Shuttleworth relocation, the value of his blocked assets which were held in loan accounts was substantial and to R4.2 billion. Over a considerable period of time, he was  permitted to transfer certain amounts. Alternatively, in June 2009 he also applied to South 

African Reserve Bank through an authorised dealer (Standard Bank) to be permitted to transfer  the remainder of his blocked assets out of South Africa, totalling R2.5 billion.  The South African Reserve Bank granted him this permission which included a condition. Mr  Shuttleworth had to pay 10% exit charge on the value of the capital to be exported, particularly  on the amounts that exceeds R750 000. However, this policy was not legislated or created by  Parliament but was instituted by a directive from the Minister of Finance which was a general  condition imposed on emigrants that wish move blocked asset. The 10% exit charge amounted  R250.5 million and he paid this amount under protest, and the balance of his capital was  successfully transferred abroad.  

Procedural History  

High Court: 

Mr Shuttleworth initially made an application in this Court challenging both the lawfulness of  the 10% exit charge and constitutional validity of the entire Exchange Control system. Legodi  J in the High Court held that the exit charge was not a tax to raise revenue and it had been  lawfully imposed as a condition of permission under Regulation 10(1)(c). However, the court  did some changes such as striking down various specific provisions of the Act and the  Regulations. These provisions included section 9(3) of the Act and Regulation 3(1)(c) dealing  with the infringement of privacy and freedom of movement and was declared as  unconstitutional, although it suspended these declarations of invalidity. Thus, the Court did not  order the repayment of 250.5 million.  

The Supreme Court of Appeal (SCA): 

Owing to being unhappy with the finding of the High Court, Mr Shuttleworth appealed the  refusal to order repayment, whereas the Minister/SARB cross-appealed against the declarations  of invalidity. The SCA ruled in favour of Mr Shuttleworth as it found that the 10% exit charge  in substance, was a tax (revenue-raising mechanism) used to raise revenue for government.  Their reasoning was that the money was paid into the National Revenue Fund and was intended  to generate revenue for the State. Due to this, the SCA held that the charge was invalid and  unlawful because it had not been enacted in accordance with the strict or rigid constitutional  procedure prescribed for Money Bills under sections 75 and 77 of the South African  Constitution, which reserves the power to raise national taxes to Parliament. Therefore, the  SCA mandated the SARB to repay the 250.5 million including interest. However, the SCA on cross-appeal reserved the High Court’s declarations of invalidity providing that the system as  a whole was constitutional.  

Constitutional Court (CC): 

The Minister of Finance and SARB appealed the SCA’s ruling to repay the 250.5 million,  whereas Mr Shuttleworth also cross-appealed the SCA’s refusal to declare the Exchange  Control legislative scheme unconstitutional.  

Issues Raised 

The Constitutional Court was initially required to resolve two principal issues. Firstly, had to  resolve the lawfulness of the exit charge. The issue relating this was whether if a tax would, it  would be unconstitutional and invalid merely because it was imposed by delegated legislation  without following the procedure set out for Money Bills as required by sections 75 and 77 of  the Constitution. Moreover, if the regulatory charge (a condition or fee imposed primarily to  regulate conduct), it would be validly imposed under the executive’s powers through the  Exchange Control Regulations, provided that the regulations themselves are constitutional. The  second issue, was whether if unlawful, should the SARB be ordered to repay the 250.5 million?  This matter was not moot considering that 2.9 billion in potential claims depended on the  outcome.  

Moreover, the cross-appeal issue was whether certain provisions of the Currency and  Exchanges Act particularly sections 9(1) and 9(3), the Henry VIII clause giving broad powers  to the President and the Exchange Control Regulations (Regulator property) is unconstitutional  because they grant overly wide discretionary powers that infringe on fundamental rights, the  right to freedom of movement (section 21) or property (section 25)? 

Arguments of the Parties 

Arguments of the Appellants: 

The main arguments of the appellants were that the exit charge was a regulatory charge and not  a tax. They used the dominant test, which asks whether the primary or dominant purpose of the  charge was to regulate conduct, particularly to discourage or disincentivise the export of the  capital by the emigrants. It also assesses economic regulation by asking whether the charge  was crucial tool within the broader Exchange Control system, intended to mitigate capital  flight, stabilise the local currency (the Rand) and protect the domestic economy during the  periods of economic uncertainty. Lastly, whether Regulation 10(1)(c) allows the Minister of  Finance (Treasury) to give permission for capital export in accordance with such conditions as the Treasury my impose. The 10% payment was merely a fixed, pre-determined condition for  obtaining that permission, an administrative step in a regulatory scheme which is not a true tax.  Moreover, they argued that the broad powers granted to the Executive (Minister/President) are  necessary or required considering the nature of exchange control and currency. Financial and  economic conditions change unpredictably and rapidly, requiring a speedy, flexible, and expert  response that Parliament cannot provide. This system, which includes Regulation 10(1)(c) is a  necessary, justifiable limitation on rights such as the freedom of movement and property under  section 36 of the Constitution to protect the national economy.  

Arguments of Respondent: 

He argued that the exit charge was clearly a tax and the 250.5 million was paid into the National  Revenue Fund, which is the repository for national taxes, levies, duties, or surcharges in terms  of section 213 of the Constitution. This destination confirmed its character as a tax. The  Minister of Finance, when announcing the levy demonstrated that the extraordinary proceeds  would be used to finance certain empowerment initiatives and support the budget, revealing a  clear intention to raise revenue. He also argued that as a tax, the charge was invalid because it  was implemented by the Minister’s executive decision and delegated legislation, bypassing the  constitutional requirement for a Money Bill to be passed by the National Assembly in line with  sections 75 and 77, which uphold the central principle of “no taxation without representation.” Moreover, the power granted by the Act and Regulations (especially the “Henry VIII clause”  in s 9(3) enabling the President to suspend other Acts of Parliament) is an unconstitutional  delegation of complete law-making authority to the Executive. The regulations allow the  Executive such wide, unconstrained, and vague discretionary power that they violate the  principles of legality, the rule of law, and administrative justice, amounting to an unlawful  infringement on fundamental rights. 

Judgment

The Constitutional Court, in a majority judgment written by Moseneke DCJ, ultimately upheld  the main appeal by the SARB and the Minister of Finance and dismissed the cross-appeal by respondent. The Court then ordered for the leave to appeal to be granted to the Minister of  Finance and SARB. Also, the SCA order requiring SARB to repay 250.5 million including  interest was set aside. The application brought by respondent in the High Court was dismissed  in its entirety. Leave to cross-appeal by respondent was granted only in relation to the challenge  to the constitutional validity of section 9(1) of the Act and Regulation 10(1)(c) of the Exchange 

Control Regulations. The cross-appeal was dismissed, meaning section 9(1) and Regulation  10(1)(c) were found to be constitutionally valid. No order was made as to costs.

Ratio Decidendi 

The majority judgment’s reasoning focused solely on the “dominant purpose” test and the need  for a pragmatic, flexible exchange control rule. They distinguished between a tax and a  regulatory charge or fee. If the primary objective of the charge is to raise revenue for the  government, it regarded as tax and must follow the Money Bill procedure. Whereas, if the core  purpose is to regulate behaviour, it is a regulatory charge even if it incidentally raised revenue. 

Consequently, the Court scrutinised the substance and purpose of the 10% charge. It accepted  the SARB’s argument that the dominant purpose was solely the regulation of capital outflow  in order to protect the domestic economy from the harmful effects if sudden, large-scale capital  flight. Therefore, the charge was regarded as condition imposed by the Minister to deter  conduct that threatened economic stability. Although it did raise a substantial amount of  revenue (2.9 billion in total over its lifespan), this was a necessary incident of the regulation,  and not its dominant goal. Due to the charge being deemed as a regulatory condition, it was  validly imposed under the enabling power granted to the Minister in terms of Regulation  10(1)(c) and did not need to follow the special procedure required for Money Bills under  sections 75 and 77 of the Constitution. 

Moreover, the Constitutional Court also considered the respondents wide attack on the  constitutionality of the Exchange Control legislative Framework which included section 9(1)  and Regulation 10(1)(c). The Court upheld the constitutional validity of both section 9(1)  which gives the power to make regulations and Regulation 10(1)(c) which prohibits capital  export without the necessary permission. The Court further emphasised that the Executive must  have flexible and broad powers to respond rapidly to changing international and domestic  financial conditions. The nature of exchange controls is that it requires immediate, expert  intervention that legislative processes cannot provide. Therefore, the limitation imposed on  rights to freedom of movement, property, and economic activity by the exchange control  system is necessary and justifiable under section 36 of Constitution provided that the State’s  critical responsibility to protect the national currency and economy.  

Conclusion

The ruling in this case is an essential precedent that elucidates the constitutional distinction between a tax and a regulatory charge in South African law, through supporting the concept of  the dominant purpose test. The majority judgment upheld the right of the Executive to implement strong and flexible exchange control measure, regardless of whether those measure  place significant financial conditions, provided that their primary objective is economic  regulation rather than revenue generation.