SARS has a duty of care, level of stan­dards

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - Beric Croome

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.

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