16 October 2011

Legitimate expectations

In the Tax Court judgment handed down on 14 September 2011 (Cases no 12760, 1282 and 12756) the issue arose as to whether SARS was precluded from issuing additional assessments for the 2001 and 2003 years of assessment against the First Appellant by reason of her having a legitimate expectation about how the deferred delivery share scheme would be taxed.

There is no longer any controversy that a taxpayer may be protected from procedural treatment by SARS where the taxpayer has such a legitimate expectation about the way in which SARS will exercise its taxing powers. Section 3 (1) of the Promotion of Administrative Justice Act No 3 of 2000 stipulates that fairness needs to be observed in relation to "administrative action which materially and adversely affects the rights or legitimate expectations of any person".

What is of particular interest in this case is that the First Appellant did not allege that she held any expectation about how SARS would tax the gains. You have to have the expectation, in order for the court to have something to protect under the umbrella of "fairness". The judge particularly noted that if she had wished to rely on the doctrine of legitimate expectation she ought to have submitted some evidence as to the conduct or representation of the Commissioner giving rise to her expectation. The judge quoted two English cases on this point, and in particular in R v Secretary of State for the Home Department, Ex Parte Kahn [1985] 1 All ER 40 (CA) the Government had given undertakings about the conditions under which entry to the United Kingdom would be allowed. The point is very neatly summarised in Administrative Law in South Africa by Cora Hoexter, at page 382, where the learned author says "On one hand it seems unjust ("unfair" in the looser sense) not to give effect to promises and practices on which people have relied; on the other the Courts are understandably reluctant to enforce promises or practices where this would undermine the basic requirement of legality or where it would have the effect of fettering the future exercise of an agency's discretion".

In South Africa, the courts have been very careful in recognising the doctrine of legitimate expectations but only in respect of procedural fairness (SA Veterinary Council v Szymanski 2003 (4) SA 42 (SCA) at paragraph 20 and more recently, Duncan v Minister of Environmental Affairs 2010 (6) SA 374 (SCA) at paragraphs 13 and 14). Our courts recognise the need to hold a regulatory agency to a legitimate expectation which the taxpayer may have in the context of the duties or procedures that would be followed before a decision (or an unfavourable decision) is made. The South African courts have not shown themselves willing to recognise a legitimate expectation as to the interpretation of the substantive provisions of the law. The First Appellant may have been seeking effective substantive relief through her expectation.

Judge Allie summed up on this point that although First Appellant had shown a practice generally prevailing, because evidence had not been led about any representation by the Commissioner, he did not believe she had shown a legal right to expect the practice to continue in regard to the tax treatment of deferred delivery schemes. In Duncan's case at paragraph 15, the Court set out what you need to prove to have such an expectation:

  • The representation inducing the expectation must be clear, unambiguous and devoid of any relevant qualifications;
  • The expectation must have been induced by the decision maker;
  • The expectation must be reasonable; and
  • The representation must be one which is competent and lawful for the decision maker to make.

Based on Judge Allie's concluding sentence in paragraph 84, which reads "What must be shown is the legitimacy of that expectation which led the person whose expectation was so raised to believe that it would receive a procedural benefit", the First Appellant might have had her expectation of a procedural benefit recognised had she led sufficient evidence. But to the extent that she was asking for the Court to use that expectation to interpret the tax law itself, the matter would have needed to go to a higher court.

Alastair Morphet

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