By Ian Wilson
An important element in disputes between taxpayers and SARS is the burden of proof. This deals with identifying which of the parties must prove its case in order to succeed. In section 102(1) of the Tax Administration Act the burden of proof that an amount is exempt or is not otherwise taxable, or that an amount is deductible, rests on the taxpayer.
In the course of tax audits, a SARS auditor may call for evidence of a particular transaction reflected in the accounts of the taxpayer. It is possible that the evidence that the official is expecting to receive is not in existence. For instance, the accounting system may record transfers of assets between divisions in a company as a “sale”, whereas the transaction is no more than an internal adjustment. In such an event no invoice or tax invoice would have been necessary.
In such circumstances, the auditor may decide to raise an adjustment for income tax and VAT purposes, on the assertion that the taxpayer has not reported the “sale” in taxable income or taxable supplies. The reason for the adjustment is that no evidence has been provided to establish that the amount should not be included. In the event of protest the response is simply that the taxpayer has failed to discharge the burden of proof.
In Commissioner for the South African Revenue Services v Pretoria East Motors (Pty) Limited [2014] JOL 31933 (SCA), this approach was challenged by a taxpayer.
The Court recognised that the burden of proof rested on the taxpayer, but, importantly stated:
“That, however, is not to suggest that SARS was free to simply adopt a supine attitude. It was bound before the appeal to set out the grounds for the disputed assessments and the taxpayer was obliged to respond with the grounds of appeal and these delineate the disputes between the parties.”
The Court described the SARS auditor’s approach as being such that:
“. . . if she did not understand something she was free to raise an additional assessment and leave it to the taxpayer to prove in due course at the hearing before the Tax Court that she was wrong.”
The Court described this approach as “fallacious”.
When the matter proceeded to trial it appeared that the counsel acting for SARS did not specify which documents he expected the taxpayer to produce, yet in cross-examination of the taxpayer’s witnesses, questioned a lack of source documents.
The Court criticised this conduct as well:
“That approach was untenable, for, it left the taxpayer none the wiser as to what was truly in issue and what needed to be produced in order for it to discharge the burden of proof that rested upon it.”
It must be emphasised that the conduct of objections and appeals is governed by prescribed rules. These rules are designed to establish a process that will ensure the orderly procession of a matter from the stage of receiving an assessment to the hearing of the appeal in the Tax Court.
Every taxpayer has the right, in terms of Rule 3, to request reasons for the assessment or additional assessment from SARS. If this is done, many of the issues concerning the nature of the case may be resolved. In the event that no such request has been made, a taxpayer disputing an assessment will file an objection to the assessment based on an interpretation of the reason for which the assessment has been raised.
The Commissioner is obliged to notify the taxpayer of the decision on the objection in writing, but is not required to provide reasons for the decision. Thereafter, the taxpayer may appeal against the decision of the Commissioner, and specify which of the grounds of objection are relied upon.
In terms of Rule 10(1), on receipt of a notice of appeal, the Commissioner must prepare and deliver a statement of grounds of assessment to the taxpayer.
In the statement of grounds of assessment, the Commissioner must state the grounds upon which the taxpayer’s objection was disallowed and the material facts and legal grounds on which reliance is placed for the disallowance.
A potential risk for a taxpayer who has not sought a statement of reasons for assessment under Rule 3 is that the taxpayer, in objecting, may not have appreciated the reasons for the additional assessment, in which case the statement of grounds of assessment will be limited to the issues canvassed in the objection and not necessarily deal with the real reason for the assessment.
The Supreme Court of Appeal has struck a blow for taxpayers’ rights. It is evident from the judgment that SARS cannot act capriciously or hastily, but must satisfy itself as to the justifiability of its case before raising an additional assessment. The Court stated:
“The raising of an additional assessment must be based on proper grounds for believing that, in the case of VAT, there has been an under declaration of supplies and hence of output tax, or an unjustified deduction of input tax. In the case of income tax it must be based on proper grounds for believing that there is undeclared income or a claim for a deduction or allowance that is unjustified. It is only in this way that SARS can engage the taxpayer in an administratively fair manner, as it is obliged to do.”
Where disputes with SARS arise, taxpayers should be aware of their rights to administration that is fair and of the rules that may govern the dispute. It behoves a taxpayer who receives an assessment with which he is dissatisfied to request reasons for assessment at the earliest possible stage, as this will ensure that the decisions of SARS, in relation to the assessment, will have to be justified before the taxpayer notes an objection.
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About the Author
Ian Wilson is a contributing author on the Practical Guidance Income Tax practice area from LexisNexis South Africa. He is a former partner at PricewaterhouseCoopers. He specialised in tax consulting in 1981 after qualifying as a chartered accountant. As a partner in Johannesburg from 1983 to 1987 he provided advice and services to several major listed and unlisted clients. Ian moved to Durban in 1988 and served as a tax partner providing services and advice to a range of clients both individual and corporate. He returned to Johannesburg late in his career and retired as an international tax partner in the Johannesburg tax practice of PricewaterhouseCoopers. Ian has published articles in Tax Planning, has lectured to students in International Tax for the LLM course at the University of Kwazulu-Natal and is editor of the PricewaterhouseCoopers tax publication Synopsis.
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