Court boosts the taxpayer’s rights

NOTICE: SARS MUST FOLLOW DUE PROCESS

Ruling on R1.7m farming expenditure and R7m retrenchment payment taxed as normal reversed.

In a recent case on the validity of a tax audit process, the tax court reversed an entire assessment because Sars didn’t meet Tax Administration Act (TAA) requirements.

Sars disallowed a taxpayer’s R1.7 million farming expenditure and his R7 million retrenchment payment was taxed as normal tax, not at the special rate for retrenchment lump sums.

The taxpayer objected and when the objections were disallowed he went to court.

He only realised he was audited when he received Sars’ statement of grounds for assessment. The court found Sars’ reliance on a procedurally flawed audit, conducted without the taxpayer’s knowledge, “impermissible”.

This was further compounded by Sars’s failure to comply with the TAA, which requires Sars to provide taxpayers with a report on the status of audit completion. The taxpayer hadn’t received a letter of findings after the audit’s completion.

The court ordered Sars to pay the cost of his appeal.

Adequate notice

Bowmans Patricia Williams says Sars appears to believe a letter of findings is only required when a formal audit is conducted, not with verifications.

The Promotion of Administrative Justice Act (Paja) requires any administrator (including Sars) to give a person adequate notice of the nature and purpose of proposed administrative action and reasonable opportunity to make representations.

A letter of audit findings should give taxpayers advance warning of a potential tax assessment and the opportunity to respond to findings.

Williams says there are common audit/verification violations.

These include repeated requests for verification, without Sars applying its mind to documents taxpayers submit; extended/repeated audits, which deny taxpayers the right to finality; overly broad requests for information or documentation; issuing assessments based on extremely tenuous legal arguments, seemingly to postpone a taxpayer’s entitlement to a refund; and providing inadequate assessment reasons.

Another taxpayer frustration is Sars not asking for the right documents, then arguing the taxpayer didn’t meet the burden of proof.

In an earlier submission to Treasury, the South African Institute of Tax Professionals (Sait) said many taxpayers receive inquiries from Sars without understanding why. They are often confused as to what Sars is looking for.

Sait recommended a TAA amendment, making it compulsory for Sars to comply with the requirement to provide taxpayers with audit findings.

It said the section should be applicable to “audits” – and to verifications or any other process of which the result is a potential assessment.

“The taxpayer should be entitled to receive a letter of findings setting out the potential adjustments of a material nature, and 21 business days within to respond, before any additional assessment is issued by Sars.”

ENS’ Beric Croome says if Sars fails to adhere to statutory obligations the court will set aside any additional assessments. It’s more likely than not to award costs against Sars for not complying with the law.