In terms of Rule 31(2) of the Tax Court Rules, the Rule 31 Statement must set out a clear and concise statement of -
- The consolidated grounds of the disputed assessment;
- Which of the facts or the legal grounds in the notice of appeal under rule 10 are admitted and which of those facts or legal grounds are opposed; and
- The material facts and legal grounds upon which SARS relies in opposing the appeal.
In A v the Commissioner for the South African Revenue Service (Case No 24643) (as yet unreported) heard by the Tax Court sitting in Johannesburg, the applicant (Taxpayer) took exception to SARS’ Rule 31 Statement.
In summary, the facts were as follows:
- The Taxpayer’s exception is framed in the alternative in that it firstly states that SARS’ Rule 31 Statement lacked averments necessary to sustain a finding of gross negligence and the imposition of an understatement penalty at the rate of 100%. In the alternative, the exception complains that the Rule 31 Statement is vague and embarrassing as it failed to explain the basis upon which SARS opposes the Taxpayer’s appeal against the imposition of the understatement penalty (USP) at the rate of 100%;
- In the further alternative, the Taxpayer argued that the Rule 31 Statement fails to set out a clear and concise statement of material facts upon which SARS relies in opposing the appellant’s appeal against the USP at the rate of 100%;
- The relevant passage in the Rule 31 Statement in respect of which the Taxpayer took exception appeared in paragraph 22 and stated the following:
“22.1 The appellant neglected to provide complete and accurate information together with the submission of his annual income tax returns for the tax year in dispute;
22.2 The facts uncovered during the audit fell in the sole knowledge of the appellant, these facts the appellant failed to disclose to SARS;
22.3 It is SARS’ contention that there was no bona fide inadvertent error on the part of the appellant when he completed and submitted his tax returns;
22.4 SARS deems the conduct of the appellant as stipulated above to fall under the category of gross negligence in completing a return as listed in the understatement penalty percentage table of section 22(3)(1) of the Tax Administration Act.”
Firstly, the Tax Court stated that it was common cause between the parties that the onus rests upon SARS in respect of the imposition of a USP. This is clear from section 102(2) of the TAA which states that “the burden of proving whether an estimate under section 95 is reasonable or the facts on which SARS based the imposition of an understatement penalty under Chapter 16, is upon SARS.”
The Tax Court then proceeded to state that the real question it needs to answer in considering the exception, is whether the averments contained in paragraph 22 of the Rule 31 Statement suffice for the purposes of Rule 31 of the Tax Court Rules. With reference to Rule 31(1)(c) and Rule 32(2)(c) of the Tax Court Rules, the latter of which deals with what must be set out in the Taxpayer’s statement of grounds of appeal (Rule 32 Statement), the Tax Court noted that the Rule 31 Statement and Rule 32 Statement must state ”… facts and legal grounds that are sufficiently clearly and concisely specified so as to know what issues proceed to an appeal.”
The question is then whether the matters that are raised in paragraph 22 of the Rule 31 Statement, suffice to meet the requirement that the facts are set out in compliance with Rule 31, in a manner sufficient to define the issues that are to proceed on appeal.
The Tax Court considered the USP percentage table in the TAA, which distinguishes between different kinds of behaviour and the penalty percentages that flow from the different behaviours. The penalty percentages increase with the differentiation in the behaviour, with “gross negligence” in a standard case resulting in a penalty percentage of 100%, which is the percentage that SARS alleges in the Rule 31 Statement should apply.
The Tax Court considered the contents of paragraph 22 of the Rule 31 Statement and held that it does not go far enough to meet the requirements of Rule 31 and in particular the facts that are relied upon and needed to be pleaded, as stipulated for in Rule 31(2)(b) and 31(2)(c). The Tax Court’s reasons for this finding can be summarised as follows:
- In paragraph 22.2 of the Rule 31 Statement, it was pleaded that facts were uncovered in the course of the audit, but paragraph 22.2 does not state what these facts are and why the failure to disclose them to SARS gave rise to gross negligence. At the very least, this should be explained in a summary and concise fashion.
- This explanation is necessary because without some averments as to why failure on the part of the Taxpayer was grossly negligent, there is no basis on which the Taxpayer can know why SARS considers his conduct to be grossly negligent, rather than merely negligent or whether it constitutes a “substantial understatement”, as contemplated in section 223 of the TAA.
- The behaviours tabulated in section 223 point towards differentiated forms of culpability. In order to differentiate the behaviour, it is necessary to understand by reference to some facts SARS has uncovered why the deviation from the standard of reasonable care is so great, that it amounts to gross negligence, rather than ordinary negligence or simply a substantial understatement.
- The determination of the relevant behaviour is not purely a matter of evidence, but is something where certain facts would have to be proved to show that gross negligence is present and that gross negligence must have something to do with what facts were not disclosed and why SARS believes that the failure to disclose those facts constitute gross negligence, as opposed to mere negligence or innocent understatement.
- Something more is required in order to place the Taxpayer in a position to know the case that it must meet and then to meaningfully plead in its Rule 32 Statement as to which facts it admits and which facts it denies for the purposes of determining those matters that will proceed as the issues on appeal.
- Absent the essential facts that SARS relies upon as to why there is gross negligence, the pleadings will simply be a bare denial of gross negligence and that will not be helpful for the purposes of explaining the true dispute that must be resolved on appeal.
Pursuant to finding in favour of the Taxpayer and that the Rule 31 Statement lacks averments necessary to sustain a finding of gross negligence and the imposition of a USP at the rate of 100%, it further granted SARS 15 days in order to remedy the defect in the Rule 31 Statement.
In recent times, a number of tax disputes heard by the Tax Court and the Supreme Court of Appeal (SCA) have dealt with the issue of USPs, such as the SCA judgment in Purlish Holdings v The Commissioner for the South African Revenue Service (76/2018)  ZASCA 4 (26 February 2019), which we wrote on in our Tax & Exchange Control Alert of 8 March 2019.
The key principle derived from this judgment is that once a taxpayer has received SARS’ Rule 31 Statement in a particular matter, it can consider taking an exception if the taxpayer believes that the Rule 31 Statement lacks averments necessary to sustain a particular finding, including a finding regarding the USP to be imposed. It is important to note that if the exception is allowed, the Tax Court would likely give SARS an opportunity to remedy the defect. The taxpayer would then have to file a Rule 32 Statement in response to the amended Rule 31 Statement.
Therefore, where an exception is allowed, such as in the case discussed in this article, it simply compels SARS to state the facts on which it relies at an earlier stage, following which the taxpayer would likely be better placed to respond to SARS’ allegations in its Rule 32 Statement.