Author: PwC South Africa
In this issue we have focused on the SARS tactic of challenging the forum to which a taxpayer brings a dispute with SARS. These challenges illustrate that the selection of the procedure to be followed in a dispute with SARS may be critical to success.
In the matter of Ackermans Ltd v Commissioner for the South African Revenue Service Case No 16408/2013 in the North Gauteng High Court, the taxpayer had elected to bring an application for a review of the actions of SARS as unconstitutional in terms of section 6 of PAJA. It should be mentioned that the taxpayer had also, on the merits of the dispute, noted an objection and appealed to the Tax Court against the disallowance of that objection.
The matter at issue was the conduct of SARS in an inquiry into a transaction entered into by Ackermans Ltd (‘the applicant’) in 1997. In this regard:
- SARS instituted the inquiry in October 2003, by requesting relevant information;
- Information was supplied and correspondence flowed between the parties in regard to the request and the supply of information;
- In February 2005, SARS gave notice of its intention to raise additional assessments relating to the transaction;
- In July 2006, a further notice to the same effect was issued by SARS;
- There was no further communication between the applicant and SARS until 9 November 2011, when SARS issued a letter of findings arising out of its 2003 inquiry, indicating an intention to raise additional assessments for the years 1998 to 2003 and inviting comment; and
- A response was made on 12 March 2012 and additional assessments were issued on 19 September 2012.
In raising the additional assessments outside the three-year period within which an assessment usually prescribes, SARS alleged that the returns of income contained incorrect statements and misrepresentations and that its failure to assess the amounts for tax timeously was a result of such statements and misrepresentations.
The applicant’s arguments
Three arguments were advanced.
The first was that the assessments had prescribed and additional assessments could not be raised after the expiration of three years from their date of issue.
Secondly, the raising of additional assessments after a very lengthy period of delay was unreasonable and procedurally unfair and constituted unreasonable administrative action in terms of PAJA.
Finally, SARS’ decision to issue the assessments, in the circumstances, was so unreasonable that no reasonable person would have done so, and accordingly was unreasonable administrative action.
SARS’ arguments
The arguments of SARS were directed firstly to the forum for deciding the dispute. SARS argued that the Tax Court had jurisdiction to deal with the issues in dispute.
Secondly, it argued, in terms of section 7 of PAJA, an applicant must first have exhausted all available remedies. This, it averred, the applicant had not done.
The Court’s findings
Mothle J, at para [14], identified that the parties had raised points that could dispose of the matter, in the High Court at least. The applicant’s contention was that the delay in the decision was so unreasonable that it was ground for the setting aside of the decision. SARS’ contention was that the High Court did not have jurisdiction to deal with the matter, which, on account of the disputes as to fact, should be adjudicated in the Tax Court.
Jurisdiction
Dealing first with the issue of jurisdiction, after a review of the authorities, Mothle J concluded at para [20] that:
The objection by SARS that this court does not have jurisdiction to hear this application has no merit and must be rejected.
Delay
On the question of delay, the applicant had contended that the period of silence between 2006 and 2011 was unreasonable. It asserted that, since early 2005, SARS had all the information and documents at its disposal to enable it to make the decision in good time and it had failed to do so.
SARS’ defence and explanation for the delay was that it had to wait for a judgment of a case before the Supreme Court of Appeal (C:SARS v NWK Ltd [2010] ZASCA 168) which had a bearing on the legal issues in this dispute. (Editor’s note: The case referred to was finally determined in the Income Tax Court in July 2008 and in the SCA in November/December 2010: the matter could therefore only have been referred to the SCA in or about August 2008.)
In para [27] of the judgment, Mothle J recognised the application of PAJA in the matter:
It is indeed imperative that all Constitutional obligations executed by organs of State in the exercise of public power, must be performed diligently and without delay. An unreasonable delay will result in a procedurally unfair administrative action, which is a reviewable conduct in terms of section 6 of PAJA. The decision to raise Additional Assessments is an administrative action which is an exercise of public power and it falls within section 237 of the Constitution …
The Court noted that the Constitution does not prescribe what constitutes an unreasonable delay, and that this was left to the courts to determine in the circumstances of each case. Mothle J therefore turned to the Income Tax Act, section 79, which, at the relevant time, provided that SARS could not raise an additional assessment after the expiration of three years from the date of the assessment unless the failure to assess an amount for tax was the result of fraud, misrepresentation or misstatement of material fact.
In para [34] the Court stated that there was a dispute between the parties about whether or not SARS had the right to issue the additional assessments after the expiration of the three-year period, the applicant asserting that there had been no fraud, misrepresentation or misstatement of material fact, and SARS contending that there had indeed been such conduct.
Then, in para [35], Mothle J delivered the reason for his decision:
There is clearly a dispute of fact on this part of the evidence, which is relevant in deciding whether, apart from other explanations, the delay in raising Additional Assessments falls or does not fall within the proviso in subsection (1)(c)(i) of section 79. If it is concluded on the resolution of the disputed facts, that there was misrepresentation or non-disclosure of material facts on the part of Ackermans, the delay by SA (sic) will be covered by the proviso in paragraph (aa) and will thus be reasonable. If, however, it is found that there was no misrepresentation and that there was a disclosure of the material facts, the delay from 2006 to 2012 when additional assessments were raised, would constitute an unreasonable delay in contravention of i (sic) section 79(1)(c)(i) …
Mothle J, it is submitted, appears to have confused or, at least, conflated the issues. What he appears to be saying is that a delay is always reasonable if there has been fraud, misrepresentation or misstatement of material fact. It is true that these factors permit the issue of an additional assessment more than three years after the issue of the original assessment. However, it is questionable whether a lengthy delay may be considered reasonable once SARS is in possession of all the material facts (i.e. is no longer deceived or misinformed). In the context of the dispute, the reasonableness of the delay should have been considered by reference to the time when SARS was placed in possession of all the material facts.
It is submitted that the Court erred in finding that the issue of reasonableness fell to be determined by reference to the right to raise additional assessments. The inquiry of the Court should have been into the reasons why SARS, having received all information by early 2005, delayed until 2012 before raising additional assessments. If, as it contended, it was satisfied that there had been misrepresentation or misstatement of material facts, this would have been known to it in 2005 – after all, it notified an intention to issue additional assessments in February of that year, yet failed to follow through until 2011, at the very earliest.
Consider the following hypothetical situations:
- SARS issues an assessment in 2003. In 2011 it becomes aware of material facts that indicate that additional amounts should have been subjected to tax, which were not disclosed to it in the return of income. It issues additional assessments in 2012. In this case, the Income Tax Act gives SARS the right to issue the additional assessment more than three years after the issue of the original assessment. The taxpayer’s constitutional right to the performance of administrative action diligently and without delay is not infringed, as SARS has acted without undue delay to issue the additional assessment.
- SARS issues an assessment in 2003. In 2005 it becomes aware of material facts that indicate that additional amounts should have been subjected to tax, which were not disclosed to it in the return of income. It issues additional assessments in 2012. Here, the Income Tax Act also gives SARS the right to issue the additional assessment more than three years after the issue of the original assessment. However, it is submitted that the failure to take administrative action within the period from 2005 to 2012 infringes the taxpayer’s constitutional right to the performance of administrative action diligently and without delay.
In both situations, the right to issue the additional assessments is unquestioned. However, there is a profound difference in the time delays between obtaining the information and performing the administrative action of issuing the additional assessment. Surely, both situations cannot be regarded as indicative of reasonable administrative action solely because SARS has a right to issue an additional assessment?
The takeaway
No-one can dispute that SARS has a right to collect tax and that it should have powers to enable it to assess amounts for tax long after the original assessments were issued if it has been prevented by the actions of the taxpayer from identifying the amounts that should be taxed. The provisions that enable it to do so are necessary and desirable.
However, the power to collect tax should not be seen to give SARS carte blanche to ignore the rights of citizens to fair and reasonable administration. SARS, as an organ of state, must act with diligence and without delay once it has become apprised of the facts which justify its right to act.
By referring the matter to the Tax Court in the case of the applicant, the High Court, effectively, deprived the applicant of the right to argue the merits of its constitutional right to reasonable administrative action. It will be interesting to see if Ackermans will take the judgment of the High Court on appeal to the Supreme Court of Appeal.
This article first appeared on pwc.co.za