Dis­agree­ments must stand up in court

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

ATAX­PAYER who dis­agrees with an as­sess­ment from the Com­mis­sioner: South African Rev­enue Ser­vice can lodge an ob­jec­tion against that as­sess­ment.

Un­der sec­tion 96(2) of the Tax Ad­min­is­tra­tion Act, the Com­mis­sioner must sup­ply the tax­payer with the grounds of the as­sess­ment. Un­for­tu­nately, far too many cases are seen where SARS sum­mar­ily dis­al­lows de­duc­tions claimed by tax­pay­ers with­out sup­ply­ing any in­for­ma­tion as to the legal ba­sis on which the de­duc­tion was de­nied. In th­ese cases the tax­payer is en­ti­tled to de­mand that the Com­mis­sioner com­plies with his statu­tory obli­ga­tion to sup­ply the grounds. The tax­payer is re­quired to sub­mit the re­quest for grounds within 30 busi­ness days of the date of the as­sess­ment.

Once the tax­payer has re­ceived the grounds of as­sess­ment, they are en­ti­tled to sub­mit an ob­jec­tion against that as­sess­ment within 30 days. Where the Com­mis­sioner has sup­plied the grounds of the as­sess­ment at the out­set, the tax­payer is re­quired to lodge the ob­jec­tion within 30 busi­ness days of the date of the as­sess­ment.

In the case of per­sonal in­come tax, a no­tice of ob­jec­tion or form NOO is re­quired to be sub­mit­ted via e-fil­ing. Cor­po­rate in­come tax­pay­ers are also re­quired to file the ob­jec­tion elec­tron­i­cally by us­ing the form NOO. Where a trust dis­putes an as­sess­ment is­sued by SARS, it is nec­es­sary to com­plete form ADR1 and sub­mit that ei­ther by hand or by e-mail. In the case of pay­roll re­lated taxes, VAT and other taxes, such as dona­tions tax, div­i­dends tax etc, a tax­payer can only file the ob­jec­tion us­ing form ADR1 and is un­able to lodge the ob­jec­tion elec­tron­i­cally. Un­for­tu­nately, it does not ap­pear that SARS of­fi­cials are familiar with the pro­ce­dure set out on the SARS web­site, and have of­ten re­jected ob­jec­tions on the ba­sis that they are in­valid on the grounds that the tax­payer has not used an NOO form. Once the legal po­si­tion and SARS guide­lines are pointed out, a let­ter of apol­ogy is is­sued and the ob­jec­tion is then ac­knowl­edged and con­firmed as be­ing prop­erly filed.

It is crit­i­cal that when the tax­payer ob­jects to the as­sess­ment, that they also con­sider whether to pay the tax in dis­pute or whether they wish to ap­ply for a sus­pen­sion of pay­ment of the tax in dis­pute in terms of sec­tion 164 of the act.

When the ob­jec­tion is pre­pared, it is im­por­tant that state­ments in the let­ter of ob­jec­tion can be sup­ported by doc­u­men­tary ev­i­dence should the case pro­ceed on ap­peal to the tax or an­other court.

On 8 De­cem­ber 2014 Judge Rogers de­liv­ered judg­ment in ABC (Pty) Ltd v Com­mis­sioner for SARS, as yet un­re­ported. In ABC’s case, the Com­mis­sioner sub­mit­ted an ap­pli­ca­tion to the Tax Court for con­sent to amend his grounds of as­sess­ment un­der rule 10 of the rules, which pre­vi­ously gov­erned the ob­jec­tion and ap­peal process. The case re­lated to the ap­pli­ca­tion or oth­er­wise of sec­tion 103(2) of the In­come Tax Act, 58 of 1962 and in his Rule 10 State­ment, the Com­mis­sioner in­di­cated that he was re­ly­ing not only on the first change in shareholding but also on the sub­se­quent change of shareholding which oc­curred dur­ing Novem­ber 2003. Th­ese fac­tors were im­por­tant in de­ter­min­ing whether or not sec­tion 103(2) of the In­come Tax Act could ap­ply to the trans­ac­tion in dis­pute. From a re­view of the de­ci­sion of Judge Rogers, it would ap­pear that the Com­mis­sioner in­formed the tax­payer of the grounds of as­sess­ment, with­out ref­er­ence to the sec­ond change of shareholding and now sought the court’s con­sent to sup­ple­ment his grounds of as­sess­ment.

The new rules gov­ern­ing ob­jec­tions and ap­peals took ef­fect on 11 July 2014 and the court in­di­cated that the Com­mis­sioner’s Rule 10 State­ment was filed at the time that the old rules ap­plied. Judge Rogers in­di­cated that he was re­quired to es­tab­lish what could law­fully be con­tained in a Rule 10 State­ment and he reached the con­clu­sion that the com­ing into force of the new Tax Court rules did not af­fect that eval­u­a­tion.

The court re­ferred to the fact that the ques­tion as to whether the Com­mis­sioner or the tax­payer could in­tro­duce new grounds into their Rule 10 and 11 State­ments not cov­ered by the ear­lier steps in the as­sess­ment process is not en­tirely set­tled in law. In ITC 1843 Judge Claasen held that the Com­mis­sioner and the tax­payer were en­ti­tled to de­part from their pre­vi­ously stated po­si­tions in let­ters of as­sess­ment and of dis­al­lowance of ob­jec­tion.

Sub­se­quently in HR Com­putek (Pty) Ltd v The Com­mis­sioner for the South African Rev­enue Ser­vice the Supreme Court of Ap­peal in­di­cated that the tax­payer does not have the free­dom of amend­ment which Judge Claasen ac­cepted.

Judge Rogers reached the con­clu­sion that a distinc­tion should be made be­tween a tax ap­peal which re­lates to ob­jec­tive ques­tions of fact and law and tax ap­peals which re­late to the ex­er­cise by the Com­mis­sioner of dis­cre­tionary pow­ers. The court ex­ten­sively an­a­lysed sec­tion 103(2) of the In­come Tax Act and re­viewed the grounds of as­sess­ment set out in the Rule 10 State­ment. The court in­di­cated that the Com­mis­sioner can­not sup­port the ex­ist­ing as­sess­ment made by him on the ba­sis of mat­ters on which he was not sat­is­fied when he first is­sued the as­sess­ment in dis­pute. The court con­cluded that the Com­mis­sioner’s ap­pli­ca­tion to amend his grounds of as­sess­ment set out in his Rule 10 State­ment should be re­fused and the tax­payer’s counter ap­pli­ca­tion to strike out those amend­ments should suc­ceed. The tax­payer in the case of ABC there­fore suc­ceeded in pre­vent­ing SARS from amend­ing its grounds of as­sess­ment and re­ceived an or­der of costs in its favour.

The les­son to be learnt is that tax­pay­ers must for­mu­late their grounds of ob­jec­tion prop­erly and SARS must for­mu­late its grounds of as­sess­ment ad­e­quately, and can­not sup­ple­ment that at will and thereby prej­u­dice the tax­payer.

As­sess­ments and ob­jec­tions must be prop­erly for­mu­lated

Dr Beric Croome is a tax ex­ec­u­tive at ENSafrica.

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