SARS has a duty of care, level of standards
Constitution also provides taxpayer with certain rights
UNDER the provisions of the Tax Administration Act, the Commissioner: South African Revenue Service (SARS) is entitled to request that a taxpayer submits relevant material that SARS requires in terms of section 46.
Section 1 of the act in turn defines “relevant material” as meaning “any information, document or thing that is foreseeably relevant for the administration of a Tax Act as referred to in section 3”.
Section 3 in turn contains an extensive definition of what constitutes the administration of a tax act and in essence encompasses information required for purposes of assessing taxpayers for tax purposes.
Under the general provisions of the Tax Administration Act a taxpayer bears the onus that an amount is not subject to tax or that a deduction claimed is deductible for tax purposes. Section 102 of the act, which replaced the erstwhile onus provision contained in section 82 of the Income Tax Act, provides that a taxpayer bears the burden of proving:
That an amount, transaction, event or item is exempt or otherwise not taxable;
That an amount or item is deductible or may be set-off;
The rate of tax applicable to a transaction, event, item or class of taxpayer;
That an amount qualifies as a reduction of tax payable; That a valuation is correct; or Whether a “decision” that is subject to objection under appeal in the tax act, is incorrect.
However, the burden of proving whether an estimate envisaged in section 95 of the Tax Administration Act deals with estimation of assessments, shifts to SARS, which is required to show that the estimate is reasonable. Where SARS imposes an understatement penalty SARS must prove the facts on which it based the understatement penalty levied under chapter 16 of the Tax Administration Act.
When SARS conducts an audit and requires information to satisfy itself that deductions have been properly claimed, the question arises as to the extent of documentary evidence that is required to be submitted by a taxpayer to discharge the onus placed upon the taxpayer under the Tax Administration Act.
In the Supreme Court of Appeal case of The Commissioner for the South African Revenue Service v Pretoria East Motors (Pty) Ltd, in which judgment was delivered by Judge Ponnan on 12 June 2014, clear guidelines were set out as to what constitutes sufficient proof which should be acceptable to SARS in a taxpayer discharging the onus borne by a taxpayer.
In the Pretoria East Motors case the taxpayer carried on business as a car dealership in Pretoria selling new and used vehicles. During June and July 2003 SARS officials conducted a detailed audit of the taxpayer’s affairs covering the period 2000 to 2004. In concluding the audit SARS issued additional income tax and valueadded tax assessments. The taxpayer lodged objections against the various assessments and, that having been disallowed by SARS, it then appealed to the Tax Court in Pretoria. Both the taxpayer and SARS were dissatisfied with the decision of the Tax Court and the case proceeded to the Supreme Court of Appeal.
The court pointed out that much of the evidence presented at the Tax Court took the form of documentary exhibits, including documents obtained or prepared by SARS during the course of the audit.
The court pointed out that the taxpayer’s ipse dixit (an unsupported statement that rests solely on the authority of the individual who makes it) would not lightly be regarded as decisive. It is necessary that the taxpayer’s ipse dixit is considered together with all of the other evidence. The court made the point that the interests of justice require that the taxpayer’s evidence and questions of its credibility be considered with great care.
SARS issued additional assessments on the basis of information obtained from the taxpayer’s records and the court indicated that the SARS official, namely Ms Victor, was to examine the taxpayer’s accounts and, where she identified a discrepancy that she did not understand, be raised in assessment to additional tax either for income tax or VAT or, in some cases, both. The court pointed out that Ms Victor did not seek to familiarise herself with the workings of the taxpayer’s accounting system even though the information was available to her. Certain transactions concluded by the taxpayer were purely internal to its operations and being reflected as sales on that internal system did not comprise sales in the true sense for fiscal purposes. The court noted Ms Victor ignored the internal character of the transactions and levied VAT thereon. At paragraph 11 the court stated:
“Her approach was fallacious. The raising of an additional assessment must be based on proper grounds for believing that, in the case of VAT, there has been an under-declaration of supplies and hence of output tax, or an unjustified deduction of input tax. In the case of income tax it must be based on proper grounds for believing that there is undeclared income or a claim for a deduction or allowance that is unjustified. It is only in this way that SARS can engage the taxpayer in an administratively fair manner, as it is obliged to do. It is also the only basis on which it can, as it must, provide grounds for raising the assessment to which the taxpayer must then respond by demonstrating that the assessment is wrong. This erroneous approach led to an inability on Ms Victor’s part to explain the basis for some of the additional assessments and an inability in some instances to produce the source of some of the figures she had used in making the assessments. In addition, as a matter of routine, all the additional assessments raised by her were subject to penalties at the maximum rate of 200%, absent any explanation as to why the taxpayer’s conduct was said to be dishonest or directed at the evasion of tax.”
It is clear that the Supreme Court of Appeal has held that in auditing a taxpayer the Commissioner is required to properly consider and understand the documentation provided. It is not sufficient for SARS to merely request information and then disregard it and to issue an assessment as it sees fit.
While it is clear from the judgment that the taxpayer did not succeed in all of its challenges to the VAT and tax assessments issued by the Commissioner, the taxpayer did succeed in satisfying the court that SARS had gone too far in reaching the conclusions it did by disregarding information provided to it.
It is clear under the right to administrative justice in section 33 of the constitution that taxpayers are entitled to fair administrative action and this includes the conduct of SARS officials in concluding an audit into the affairs of the taxpayer. It is clear that in the case the SARS auditors had been given access to the documents substantiating the taxpayer’s accounts but chose not to examine them.
Thus, taxpayers who are subject to audit by SARS need to be aware of the rights that they have flowing from the constitution and also the level and standard by which SARS is required to operate.
Dr Beric Croome is a tax executive at ENSafrica.