7 September 2018 by Tax & Exchange Control Alert

More than one way to skin a cat? The High Court considers the power of SARS to issue reduced assessments

In terms of s93 of the Tax Administration Act, No 28 of 2011 (TAA), there are five circumstances under which SARS may issue a reduced assessment, so as to reduce a person’s tax liability. While s93, therefore, makes it possible to “skin a cat”, ie reduce a tax liability, in more ways than one, taxpayers should be mindful of the requirements that need to be met and the correct process to follow, in order to achieve the desired result.

In Rampersadh and Another v Commissioner of the South African Revenue Service and Others (5493/2017) [2018] ZAKZPHC 36 (27 August 2018), the KwaZulu-Natal Division of the High Court had to consider the provisions of s93 of the TAA, where the applicant taxpayers (Taxpayers) lodged a review application. Specifically, the Taxpayers requested the High Court to review SARS’s decision not to issue reduced assessments in terms of s93(1)(d) of the TAA. 

We will focus mainly on the High Court’s pronouncements regarding s93 and other provisions of the TAA but will also briefly discuss the High Court’s findings regarding the application of the Promotion of Administrative Justice Act, No 3 of 2000 (PAJA) to the facts of the case.

Facts

The Taxpayers are members of a close corporation, which was audited in respect of its 2011 to 2013 years of assessment. The Taxpayers had loan accounts in the close corporation and pursuant to these loan accounts, the audit was extended to the Taxpayers. The Taxpayers made representations to SARS and provided it with revised loan accounts. SARS issued revised assessments on 23 March 2015, to which the Taxpayers objected on 15 May 2015 and after SARS then requested further information arising from the loan accounts, the Taxpayers produced further revised loan accounts, followed by another objection on 20 July 2015. In all, the Taxpayers submitted three different versions of the loan accounts. After SARS disallowed some of the objections on 1 December 2015, the Taxpayers were told that they could appeal SARS’s decision within 30 (business) days. 

The Taxpayers failed to appeal SARS’s decision timeously and instead of lodging the appeal and requesting condonation for the late filing, the Taxpayers submitted three requests under s93(1)(d) of the TAA, that the revised assessments issued by SARS, be reduced. The requests were dated 13 July 2016, 19 October 2016 and 17 January 2017. After SARS refused all three requests, the Taxpayers brought this review application, to review some of SARS’s decisions, in terms of PAJA. Prior to the hearing, the Taxpayers had amended the relief sought and at the hearing, the Taxpayers indicated that the only relief sought was against SARS’s decision to refuse the third request, which decision SARS handed down on 10 March 2017.

Judgment

SARS opposed the relief sought by the Taxpayers and we will discuss the various matters dealt with by the High Court under separate subheadings.

Exhaustion of available internal remedies

Having regard to s7(2) of PAJA, SARS argued that the Taxpayers had not exhausted all the available internal remedies under the TAA before they brought the current review application. For this reason, SARS argued that the review application had to be dismissed.

In response to this argument, the High Court indicated that the crisp issue to consider was whether the Taxpayers could object or appeal to SARS’s decision to refuse the third request on 10 March 2017. The High Court held that to answer this question, one had to look at the provisions of the TAA. The High Court firstly explained that there are various types of assessments that SARS can raise in terms of the TAA and that only in the case of one type of assessment, a jeopardy assessment, does the TAA create an automatic right to take the decision on review.

The High Court then moved on to s93. In terms of s93 of the TAA, SARS may only issue a reduced assessment under the following five circumstances:

  • Where the taxpayer successfully disputed the assessment under Chapter 9 of the TAA (s93(1)(a)); 
  • Where it is necessary to give effect to a settlement under Part F of Chapter 9 of the TAA (s93(1)(b));
  • Where it is necessary to give effect to a judgment pursuant to an appeal under Part E of Chapter 9 of the TAA and there is no right of further appeal (s93(1)(c)); 
  • If SARS is satisfied that there is a readily apparent undisputed error in the assessment by SARS or the taxpayer in a return (s93(1)(d)); or
  • A senior SARS official is satisfied that an assessment was based on the failure to submit a return or submission of an incorrect return by a third party under s26 or by an employer under a tax Act; or the assessment was based on a processing error by SARS; or an assessment was based on a return fraudulently submitted by a person not authorised by the taxpayer (s93(1)(e)). 

Considering that the first three scenarios in s93 involve the issuing of reduced assessments pursuant to the dispute resolution mechanisms in Chapter 9 of the TAA being followed, it is clear that a request in terms of s93(1)(d) cannot be raised by way of objection or appeal. It appears that it is simply raised by way of a request.
The next question is whether the refusal of a request gives rise to the right of objection or appeal under the TAA. To answer this question, one must consider whether the refusal of the request falls within the ambit of s104(2)(c) of the TAA, where it states that a taxpayer may object to any decision that may be objected to or appealed against under a tax Act, other than the decisions not to extend the period for lodging an appeal or lodging an objection (see s104(2)(a) and s104(2)(b)). 

There are at least three refusals where the TAA states that the dispute resolution procedure in Chapter 9 applies:

  • where SARS is empowered, in terms of s220, to remit a penalty imposed under the TAA for administrative non-compliance, but decides not to remit the penalty, the taxpayer may object and appeal against such decision;
  • where s224 of the TAA states that a taxpayer may object and appeal against SARS’s decision to impose an understatement penalty in terms of s222 or its decision not to remit an understatement penalty in terms of s223; and
  • where a senior SARS official, in terms of s231, decides to withdraw relief granted under the voluntary disclosure programme to a taxpayer, the taxpayer may object and appeal against such decision.

As the TAA does not specifically state that the refusal to issue a reduced assessment under s93 is subject to objection and appeal and as the High Court’s jurisdiction is only ousted where a decision in s104 is being disputed, SARS’s decision to refuse the third request was not subject to objection and appeal in terms of Chapter 9 of the TAA. Therefore, the internal remedies in the TAA were not available to the Taxpayers and they can, therefore, bring the review application under PAJA.

High Court’s jurisdiction

The next argument raised by SARS was that the High Court did not have jurisdiction to hear the review application. 

Section 105 of the TAA, states that a taxpayer may only dispute an assessment or ‘decision’ as described in s104 in proceedings under Chapter 9, unless a High Court otherwise directs. Section 105 does not oust the High Court’s jurisdiction to hear the current review application as the decision to refuse the Taxpayer’s request is not a decision, within the ambit of s104 of the TAA. As SARS’s decision to refuse the request constitutes administrative action in terms of PAJA and as s6(1) of PAJA allows a person to institute proceedings for the review of administrative action, the High Court has jurisdiction to deal with this application.

Court’s finding on the outcome of the review application

As this section is mainly focused on the application of PAJA, we will only briefly mention the key findings made by the High Court. These are the following:

  • In terms of s93(1)(d) of the TAA, the Taxpayers had to show that the claimed errors were, in fact, apparent and undisputed.
  • The Taxpayers raised four points in arguing that SARS had made apparent and undisputed errors, but could not provide any documents to substantiate their claims. 
  • In light of the above, the High Court dismissed the Taxpayers’ review application under PAJA and awarded costs in favour of SARS.

Comment

The judgment should serve as a reminder to taxpayers that they must always have documentary proof when trying to argue that SARS had made an error in an assessment. In the matter discussed, such documentary evidence would have in any event been necessary for the Taxpayers to succeed with an objection or appeal. In the current case, it is clear that the basis for the value of the loan accounts could not be proven and that this is probably why the Taxpayers were unsuccessful. 

Furthermore, where faced with an audit or where SARS has raised an additional assessment, taxpayers should ensure that they obtain proper legal and professional advice, to avoid serious adverse consequences from ensuing.

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