Protection against trial by ambush
Taxpayers must be wary of stating objections to assessments in narrow terms
QUESTIONS have been raised in the past few months about the process to be adopted when a taxpayer objects to an assessment by the South African Revenue Service (SARS).
Rules have been promulgated to deal with the way in which the dispute must be dealt with and the process that needs to be adopted.
Time periods are prescribed within which both parties must respond to the papers of the other. To the extent that a taxpayer is out of time he would usually be faced by an argument from SARS that he is precluded from, say, raising an objection or an appeal unless there are good grounds for not submitting same within a period of 30 business days.
However, to the extent that SARS does not comply with its time limits the remedies that a taxpayer can rely upon are limited. Usually, the effect of the enforcement of any remedy would be that SARS would file the next document, albeit belatedly.
In a number of unreported cases a further question has arisen, namely whether SARS is entitled to amend the grounds upon which a taxpayer has been assessed subsequently and pursuant to the issue of what is generally referred to as a rule 10 statement containing grounds of assessment.
A taxpayer then has to respond by filing a rule 11 statement of grounds of appeal.
In one instance, a rule 10 statement was filed about five years after the disallowance of objections and appeals. The rule 10 statement filed by SARS changed the basis upon which the Receiver previously assessed the taxpayer and the taxpayer objected to this change on the basis that it is contrary to the relevant rules and that it would also constitute an unfair administrative decision by SARS that falls foul of the constitution.
The taxpayer argued that any change to the grounds previously advanced by SARS would place it at a disadvantage. For instance, SARS could have disallowed an amount initially on the basis of it not being incurred in the production of income. Under a rule 10 statement the argument can then be amended by indicating that the amount has not been incurred for purposes of trade.
In indicating that SARS was in fact entitled to amend the grounds upon which it originally issued the assessment, it was indicated that the issues before the Tax Court are those as defined in the pleadings, that is the rule 10 and the rule 11 statements. This is notwithstanding that it was argued on behalf of the taxpayer that a taxpayer is prejudiced given the fact that it would not be entitled to object and appeal against the new grounds. A taxpayer would therefore only become aware of the “true reasons” for the first time when receiving the rule 10 statement.
The court indicated that the approach cuts both ways. Both SARS and the taxpayer are therefore entitled to add additional grounds or further defences in their statements. It was held that no disadvantage flows from such interpretation as each party will have an opportunity by adding new or different arguments and therefore be in a position to state his case better or more fully than the case set out during the objection and appeal stage.
Ultimately, it was indicated that a taxpayer is not prejudiced to the extent that a new ground is added by SARS in the rule 10 statement as the taxpayer will have the opportunity when filing his own rule 11 statement to counter and/or to deal with any such new ground.
SARS is obliged to set out a clear and concise statement of the grounds why the objection was disallowed and also the material facts and the legal grounds for SARS’s conduct that must be set out.
It was therefore held that SARS is not bound by any previous grounds referred to in any preceding correspondence. It was indicated that a taxpayer is therefore protected to avoid any trial by ambush, surprise or any prejudice which might result from any new or different ground that has been raised by SARS. According to the judgment there are many built-in structures in the rules that protect a taxpayer from any potential mischief.
In another tax case the matter was taken further in circumstances where both the taxpayer and SARS filed their rule 10 and rule 11 statements. A few days before the hearing of the matter an application was brought by SARS on different grounds than as set out in the rule 10 statement. Even in these circumstances it was found that the conduct of SARS was proper.
Effectively the risk that a taxpayer runs is that it may word its rule 11 statement on the basis and relying on the issues raised by SARS in the rule 10 statement. If SARS then subsequently changes its tack the taxpayer is left without a remedy on the basis of being led down the garden path.
Taxpayers are therefore cautioned to be careful in drafting the legal pleadings that accompany objections and appeals. Documentation should be worded as widely as possible to cover any potential change in argument that may be adopted by SARS.
Also, it implies that substantial time may be spent unproductively in dealing with objections and appeals in circumstances where the real grounds are ultimately reconsidered when drafting the rule 10 and rule 11 statements.