Some things never change. Several of the newer additions to the current Income Tax Act were borrowed and adapted from Australian, Canadian and, especially in the case of VAT, New Zealand tax statutes. Well, our very first Income Tax Act, promulgated in 1914, was based entirely on the New South Wales Act.
Before 1914 the Treasury coffers were filled from customs duties, posts and telegraphs, mining, interest and especially the railways. However, Prime Minister General Jan Smuts, acting as Minister of Finance following the resignation, on a point of principle, two years previously of Mr Henry Hull, presented the first Income Tax Bill to the Union Parliament. Hull resumed the Finance portfolio a few years later, but it was left to General Smuts to lead the country into the brave new world of income tax. Legend has it that General Smuts delivered his Budget speech without notes, but I haven’t found firm evidence of this feat.
“We have now come to a definite point in our financial history”, began General Smuts; “We have exhausted all the various expedients and devices to which we have resorted since Union for making the revenues and expenditure balance…At first we resorted to the railways. The old system of taxation relied very much on the railways”. And so began our journey, beginning with an Act that was in some respects almost touching in its naivety and susceptibility to interpretation more favourable to the taxpayer than Parliament had intended.
The development of the legislation during its early years began a trend that we still see today. Firstly, taxpayers made it their business to plan their affairs to remain as far as possible outside the Act, requiring the legislature to react with amendments to plug loopholes. Secondly, outside events began to influence tax legislation: the first was the First World War, which placed an inevitable strain on the fiscus; a few years later, a post-war drought led to changes to the tax treatment of farmers which are still with us today. Third, we learn with the “bewilderment of hindsight” that the income of married women was taxed in the hands of their husbands. Imagine the reaction if the current Act included such a provision. And it stayed with us until 1991, believe it or not.
The first cases to be argued before the courts also reflected the novelty and naivety of the legislation and of taxpayers. For example, Mr Deary learnt an expensive lesson when he sold his business to his employees. Because they couldn’t afford to pay the purchase price in cash, he agreed that they could pay him a percentage of the profits for a number of years instead. The result: he had converted a capital amount, the proceeds of the sale of his business, into revenue taxable in his hands. The outcome of this unfortunate step by Mr Deary, driven by compassion for his employees, has ever since been at the forefront of the mind of every informed tax adviser when a client sells a business.
Then Mr Lunnon was probably the first taxpayer whose victory resulted in a change to the Act. He successfully argued that, because there had been no mention of a bonus in his employment contract, his bonus was not taxable. Needless to say, Parliament moved swiftly to ensure that this argument would never again prevail.
This has been the pattern of the development of our tax legislation ever since. Parliament passes the Act, taxpayers do their best to arrange their affairs to fall outside its provisions, the Revenue authorities contest the taxpayers’ efforts and the courts decide which party is correct. When the taxpayers succeed, Parliament has to decide whether the tax base is in sufficient danger from the result to justify an amendment to the legislation. In other words, we are playing a game where one competitor, the fiscus, sets the rules, the other competitor, the taxpayer, tries to minimise their effect, and the referee, the court, decides who has won. However, unlike most other games, if the fiscus loses, it can and often does change the rules to ensure that it won’t lose that particular game again.
So we have a robust and usually healthy tension between fiscus and taxpayer, and the result of this tension over the past century has been a piece of legislation which, despite inevitable complexity and shortcomings, is pretty effective.
