Disagreements must stand up in court
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.