29 July 2011

Self-assessment: more weight on taxpayers' shoulders?

Under the Income Tax Act, No 58 of 1962 (the Act), the power to "assess" belongs exclusively to the Commissioner. The Tax Administration Bill (TAB), out for comment at the moment, will change this fundamentally by introducing the concept of "self-assessment".

Currently, under the Act "assessment" means "... the determination by the Commissioner, by way of a notice of assessment (including a notice of assessment in electronic form) ...". Hence, for a valid assessment there has to be a determination by SARS of some amount and notice to the assessed taxpayer of the determination by way of a notice of assessment (can be in electronic form).

According to case law, SARS "determination" refers to the mental decision-making process by which SARS ascertains the amount subject to tax. Irvin & Johnson (SA) v CIR 1946 AD 483 held "assessment" not to refer to the unexpressed thoughts of the assessing officer, but rather to the written representation of those thoughts. Once the assessing officer's determination has been captured in writing is there an assessment. Hence, the notice of assessment "publishes" the Commissioner's determination, enabling notice to the taxpayer (refer Irvin & Johnson; Stroud Riley & Co Ltd v Secretary for Inland Revenue [1974] 4 All SA 416 (E); First South African Holdings (Pty) Ltd v CSARS, Case No 372/10 SCA judgement delivered 11 May 2011).

For the Commissioner (actually the SARS official making the determination) to raise a valid assessment, he should be in "assessing mode". Where intent to make a "determination" lacks, the result will be a purported assessment. ITC 1740 65 SATC 98 held, since the SARS official only intended to produce a draft STC assessment, the resulting document could not be an "assessment" as defined.

ITC 1665 61 SATC 413 indicates that a taxpayer can normally assume that the Commissioner properly considered the information submitted and applied his mind in making an "assessment". A taxpayer can request reasons in respect of an assessment. Thus Parliament also seems to assume some rational decision-making process by the Commissioner when making his "determination."

One commentator has already opined that SARS's current e-Filing process has really become a "de facto self-assessment system": the problem being that a taxpayer actually "self-assesses" under e-filing without being able to explain to SARS the basis of, and reasoning behind, his self-assessment.

The Act and case law, at least until the TAB is promulgated, still contemplates an assessment process where the Commissioner applies his mind to taxpayer information in order to arrive at his "determination", followed by the notice of assessment.

Under the TAB, "self-assessment" will be formalised. The Memorandum accompanying the TAB gives the following background:

  • Throughout the TAB provision is made for a transition to a full self-assessment system;
  • The taxpayer will have to report the basis of assessment, submit a calculation of the tax due and, usually, make payment of the outstanding tax. The onus will be on the taxpayer to calculate the correct amount of tax payable;
  • SARS role shifts to the verification of the correctness of the taxpayer's assessment by means of a combination of risk-based and random audits;
  • Whereas currently the taxpayer primarily furnishes information to SARS, in future, the taxpayer himself will be obliged to accurately determine his tax liability.

The "self-assessment" modus operandi is found in s1 (Definitions) and Chapter 8 (Assessments) of the TAB.

"Assessment" is defined in sec 1 as "the determination of the amount of a tax liability or refund, by way of self-assessment by the taxpayer or assessment by SARS." Accordingly, the "date of assessment" definition also covers self-assessment by the taxpayer.

"Self-assessment" is defined as "the determination of the amount of tax payable under a tax Act by a taxpayer and (a) submitting a return which incorporates the determination of the tax; or (b) if no return is required, making a payment of the tax."

Where the taxpayer merely submits return information, the Commissioner's determination constitutes the "original assessment" (s91(1)). Should the return incorporate a determination by the taxpayer, the submission of the self-assessment return constitutes the original assessment (s91(2)). In relation to objection, s104(1) provides that "a taxpayer who is aggrieved by an assessment made in respect of the taxpayer may object to the assessment." It would therefore appear that the current wording in the TAB could hypothetically allow a taxpayer to self-assess (creating an original assessment), and then, subsequently, object to his own "determination". (Presumably where a taxpayer initially self-assesses conservatively only for subsequent advice, or a judgement, indicating a more advantageous tax position might have been tenable?)

Whereas the Act merely refers to the "notice of assessment" in the context of the definition of "assessment", the TAB actually prescribes the content of the notice of assessment (s96(1)). The TAB retains the well-known concepts of additional (s92), reduced (s93) and estimated assessments (s95). According to the Memorandum all three have been refined. The "jeopardy assessment" is new (s94). Such an assessment is made in advance of the date on which the return would normally be due and will be made where a senior SARS official (defined term) is satisfied that such an assessment is necessary to secure the collection of tax that would otherwise be at risk. This will typically happen where the taxpayer attempts to dissipate assets once SARS starts an investigation.

What should one make of all of this?

SARS Strategic Plan 2010/11 - 2012/13 showcases the benefits of its techno-savvy:

  • For 2009, more than 2 million individual income tax returns were submitted via e-filing (more than a 100% increase over 2008);
  • Approximately 97% of the above-mentioned returns for 2009 were assessed within 24 hours (up from 66% in 2008).

According to its strategic plan, SARS does not foresee any increase in staff numbers (currently 15 000) over the medium term. But it does anticipate the release of "...human resources to focus on value-adding activities, including exception handling, enforcement and other tax-base broadening actions." Thus expect a move of resources from manual back-room activities into service and enforcement spheres.

The TAB's introduction of self-assessment could enable SARS to accelerate the shift of resources into, for example, compliance and enforcement areas.

For taxpayers, a fully-blown self-assessment system could mean a greater compliance burden and increasing compliance costs. The onus to properly consider all tax provisions potentially applicable and to make an accurate tax liability "determination" will in future rest with the taxpayer.

Johan van der Walt

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