Pro­tec­tion against trial by am­bush

Tax­pay­ers must be wary of stat­ing ob­jec­tions to as­sess­ments in nar­row terms

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - EMIL BRINCKER

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.


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