Welcome to your. STEP Cape Town Branch Membership Newsletter. Welcome. Highlights in this Edition. Events. Disclaimer

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1 Welcome to your STEP Cape Town Branch Membership Newsletter Welcome to your July 2012 STEP Membership Newsletter (Cape Town Branch) 1) Exchange Control and Intellectual Property By Lavina Daya, ENS South Africa's exchange controls are governed by the regulations issued under the Currency and Exchanges Act (Act 9 of 1933). Regulation 10(1)(c) deals with restrictions placed on South African residents with regard to the export of capital and stated (prior to the recent amendments thereto, discussed later in this article) that: "No person shall, except with permission granted by the Treasury and in accordance with such conditions as the Treasury may impose, enter into any transaction whereby capital or any right to capital is direct or indirectly exported from the Republic". Though the term "capital" was not defined in the Regulations, prior to the judgement of the Supreme Court of Appeal in Oilwell (Pty) Limited v Protect International Ltd & others 2001 (4) SA 394 (SCA) given during 2011, the prevailing view was that the prior approval of the Financial Surveillance Department of the South African Reserve Bank (SARB) was required for the transfer of intellectual property from a South African resident/entity abroad. The impression was that failure to obtain approval would result in the transaction being null and void since it contravenes Regulation 10(1)(c). In the Oilwell case, the Supreme Court of Appeal, found that the terms "capital" and "right to capital" must be interpreted restrictively to mean cash and money and should not be interpreted to include a trade mark or any other form of intellectual property. Consequently on this basis the court found that an assignment of a trade mark offshore does not require prior SARB approval in terms of Regulation 10(1)(c). As a result of the Oilwell case it appeared that, in principle, South African residents now had the ability to assign intellectual property to related parties offshore without exchange control approval. While National Treasury has, since the 1990s, embarked on a process of gradually relaxing South Africa's exchange controls, on June 8 the President amended Regulation 10(1)(c) restrictively by inserting a new regulation to deal with the transfer of intellectual property. Highlights in this Edition 1. Exchange Control and Intellectual Property 2. Is the Extension of Exchange Controls Regulations to IP Unlawful? 3. Australian Tax: New Trust Regime Postponed - Further Reform Signalled 4. Letters of Wishes 5. Did you know? Events 1. STEP Cape Town Branch Seminar - 31 July 2012 at Maitland: Presentation by Mel Roberts (Maitland Malta) 2. STEP Bermuda Seminar - 9 August STEP Johannesburg Seminar - 20 August 2012: FATCA Update 4. STEP Annual UK Tax Update - 12 September STEP South Australia Seminar - 3 September 2012 Adelaide Australia: Demystifying Implied Trusts 6. Step Private Client Awards - 19 September 2012 London Hilton Disclaimer STEP Cape Town Branch makes no representation nor gives any warranty (either expressly or implied) as to the completeness or accuracy of this publication. STEP Cape Town Branch is not liable for the information in this publication nor of the consequences of the use of this publication. STEP Cape Town Branch will not be liable for any direct or consequential damages arising from the use of the information contained in this publication. Page 1 of 5

2 Regulation 10(4) reads as follows: "(4) For the purpose of sub-regulation (1)(c) - (a) 'capital' shall include, without derogating from the generality of that term, any intellectual property right, whether registered or unregistered; and (b) 'exported from the Republic' shall include, without derogating from the generality of that term, the cession of, the creation of a hypothetic or other form of security over, the assignment or transfer of any intellectual property right, to or in favour of a person who is not resident in the Republic." The application of Regulation 10(1)(c) is now expanded to include as "capital" "any intellectual property right", whether "registered or unregistered" (emphasis added). The purpose of this amendment is to restrict the director or indirect export of all intellectual property from South Africa, unless prior express permission is obtained from the SARB. It would appear that the amendment is an attempt to close the gap created by the Oilwell case, which as stated, supported the contention that the prior approval from SARB was not required when a South African resident transfers ownership of intellectual property to a non-resident. Therefore, as a result of the amendment of Regulation 10(1)(c), and assume the amendment is valid(see article below), the transfer of intellectual property by a South African resident offshore would, absent prior SARB approval, constitute a contravention of Regulation 10(1)(c). 2) Is the Extension of Exchange Controls Regulations to IP Unlawful? By Benjamin Cronin, Webber Wentzel On 8 June 2012, the President of South Africa gazetted a brief amendment to the Exchange Control Regulations to extend their application to "any intellectual property right", whether "registered and unregistered". Unfortunately, this far-reaching amendment is potentially both unlawful and unconstitutional. This amendment to the Exchange Control Regulations is clearly an attempt to close the gap created by the Supreme Court of Appeal ("SCA") judgment in Oilwell (Pty) Ltd v Protech International Ltd (295/10) [2011] ZASCA 29 ("Oilwell Judgment"), which held that exchange control approval is not required when a South African resident transfers ownership of intellectual property to a non-resident. To close this gap the meaning of the otherwise undefined term "capital" in the Exchange Control Regulations was extended to include "any intellectual property right" (see discussion in the other article, above). The effect of this purported lawful extension of exchange control restrictions is a freeze on the direct or indirect export of all intellectual property from South Africa, without the prior express permission from the South African Reserve Bank. While on the face of it, this amendment is a positive step in that it attempts to create certainty by establishing a partial definition of the term "capital" and of the phrase "exported from the Republic", there are continuing problems with its practical implementation, including the following: neither the term "capital" nor the phrase "exported from the Republic" is in fact fully defined, and the new phrase "any intellectual property right" is itself not defined. Page 2 of 5

3 Consequently, this amendment not only perpetuates the on-going uncertainty with regard to the application of the term "capital", but also adds to the uncertainty due to the inclusion of further broad, undefined terms and phrases. In addition to these practical challenges, there are further uncertainties as to the lawfulness of this extension in light of the inherent limits of the empowering provision to make the Regulations themselves, contained in section 9(1)(a) of the Currency and Exchanges Act 9 of 1933 ("CE Act"). Potentially unlawful use of empowering provision Section 9(1) of the CE Act refers to the ability of the President to "make regulations in regard to any matter directly or indirectly relating to or affecting or having any bearing upon currency, banking or exchanges. While the terms "currency" and "banking" on an ordinary interpretation would not include a reference to intellectual property, the use of the term "exchanges" could arguably be broad enough to encompass an intangible asset such as intellectual property. This very issue was, however, considered in the Oilwell Judgment and the court, in considering its meaning, looked to the Afrikaans version of the CE Act which used the term "wisselkoerse", a reference to "exchange rates". The SCA in the Oilwell Judgment, therefore, held in light of this that exchange controls can only apply to cash and currency transfers. The empowering provision in the CE Act, therefore, arguably does not cover intellectual property, making any regulation dealing with intellectual property, in the absence of a legislative amendment, potentially unlawful. The empowering provision in the CE Act is potentially unconstitutional Even if one were to accept the proposition that intellectual property could be the subject of Regulations under the CE Act, then the section 9 power to create this restriction may itself be unconstitutional. This is because the power to legislate is given by the Constitution exclusively to Parliament, which in turn may prescribe circumstances in which secondary or delegated legislation (such as Regulations) may be issued. The CE Act in sub-sections 9(3) and 9(2)(e) gives the President the power to effectively amend a piece of legislation (including the CE Act) and allows for the retrospective criminalisation of certain actions by means of issuing Regulations. Neither of these powers is consistent with the Constitution and their potential use is questionable. Further, the authority to issue Regulations does not in any event mean that the President can usurp from Parliament the power to legislate. Regulations that attempt to broaden the scope of a piece of legislation are potentially ultra vires, as the delegated power to legislate is circumscribed by the ambit of the empowering statute. This Constitutional protection is particularly relevant in respect of amendments that criminalise everyday activities, as alluded to in the Oilwell Judgment. Indeed the Constitutional Court held in Executive Council, Western Cape Legislature v President of the Republic of South Africa 1995 (4) SA 877 (CC) that the extension of the power to amend an act to the President would be unconstitutional. The result is arguably that the current Exchange Control Regulations unlawfully and unconstitutionally restrict the export of intellectual property. Government may through an appropriate statute legitimately regulate transactions involving intellectual property across international borders, however, the lawful power to issue such regulations must first be put in place by Parliament. If the Government wishes to avoid further court action like the Oilwell Judgment, Parliament needs to urgently intervene to rectify this legislative shortcoming. Page 3 of 5

4 3) Australian Tax: New Trust Regime Postponed - Further Reform Signalled By Dan Foster, KPMG The fundamental reforms to the taxation of trusts in Australia due to come into force from 1 July 2013 have been deferred until 1 July The announcement was made on 30 July 2012 by Assistant Treasurer Hon. David Bradbury MP, during an event hosted by CPA Australia, and has been welcomed by that professional accounting body as a more sensible timeframe for such major reform. A policy design paper will be released in September 2012, which is expected to provide further development and clarification of the potential models of trust taxation in Australia. The original consultation paper on trust taxation reform, released 21 November 2011, can be found here: The proposed reforms to management investment trusts will also be postponed to 1 July 2014 to coincide with the proposed new trust taxation regime. In a related development, the government has also released a discussion paper proposing options to bring greater certainty to the taxation of fixed trusts (i.e. vesting trusts), the status of which is currently subject to the discretion of the Commissioner. The discussion paper can be found here: Full details of current and proposed legislation and compliance matters relating to Australian trusts, as well as the history of planned reforms and discussion papers, can be found on the ATO website at: 4) Letters of Wishes By Michael Honiball, Webber Wentzel In England and Wales, a letter of wishes is not only used as a side letter addressed to the trustees by a settlor but is also commonly used by a testator or testatrix to express wishes about the disposal of his or her body after death, or to express wishes about the specific disposal of low-value personal chattels after death which are too numerous or too insignificant to mention in a will. The use of a letter of wishes for the latter reason is common in order to avoid the imposition of a binding obligation upon the executors of the deceased estate, which could create a trust with negative tax consequences. While this kind of letter of wishes could form part of a will under the doctrine of incorporation by reference, it is not normally part of the will. It follows that such a letter of wishes does not need to comply with the legal formalities for the creation of a valid will. Nevertheless, the original of this kind of letter of wishes is normally kept together with the original will at the offices of the testator's solicitors. 5) Did you know? By Michael Honiball, Webber Wentzel The concepts "vested" and "contingent" originated in English law in the context of residuary or nonresiduary gifts in wills. A gift by a testator in a will is vested if, by the terms of the gift, the beneficiary's entitlement depends solely upon him or her being alive at the testator's death. A contingent gift, in contrast, only vests when some future condition is satisfied. Page 4 of 5

5 Most commonly, a gift will be made contingent on the beneficiary attaining a certain age. If the beneficiary dies before attaining the specified age (and therefore before attaining the vested interest), the gift fails. This is referred to as a "lapse". What will then happen to the gift will be determined by the provisions of the testator's will or by the rules of intestacy. In this regard, the general rule is that if a non-residuary gift lapses, it falls into residue while if a gift of residue lapses, then the property passes under the intestacy rules, and this general rule applies (with some statutory exceptions) to both vested and contingent gifts. These English law concepts have become part of South African common law and South African trust law through their use in early case law about trust issues, and have retained the same meaning which they currently have in English property and testamentary law. Newsletter Editor: Michael Honiball This is a monthly newsletter. All contributions for publication are welcome. Please submit articles to the Editor on or before the 10 th of the relevant month to ensure publication. In order to be placed on the mailing list for a free subscription, please contact the Editor. STEP The Society of Trust and Estate Practitioners is a company limited by guarantee and incorporated in England and Wales under the Companies Act Registered No Registered Office: Artillery House (South), Artillery Row, London, SW1P 1RT. Page 5 of 5