Author: Hylton Cameron, associate director Grant Thornton Johannesburg
In the recent case of Ackermans Ltd v CSARS the issue of prescribed tax returns was re-visted in the Pretoria High Court.
In terms of the Income Tax Act, SARS is entitled to raise additional assessments for three years from the date of final assessment. However if there is a misrepresentation of a material fact in the original return, the three prescription period does not apply.
In this case however, SARS only raised additional assessments some seven to thirteen years after the original assessments, sparking concern about SARS’ almost infinite reach to reassess tax returns.
SARS argued that Ackermans misrepresented and failed to disclose material facts regarding the true nature and substance of a series of agreements, which were simulated loans in SARS’ view. Ackermans on the other hand, argued that the additional assessments should be set aside in terms of the Promotion of Administrative Justice Act (PAJA), or declared unconstitutional, unlawful and invalid.
Between October 2003 and February 2005 SARS and Ackermans exchanged a slew of correspondence about these ‘simulated loans’. Ackermans maintained that all documents were provided, while SARS alleged that some documents were actually not handed over.
On 5 February 2005, SARS notified Ackermans that it would raise additional assessments for 1998 to 2003. However, SARS did not take any action and 6 July 2006 another notice of the same intent was issued and then communication ceased between the parties until more than five years later. SARS finally issued the additional assessments in 2012.
SARS contended that Ackermans misrepresented facts when answering “no” on their tax return to the questions of whether they had been party to interest rate swap transactions and whether the company was party to a structured finance transaction. Because these were misrepresentations in SARS’ view, it entitled them to raise the additional assessments.
Ackermans argued that there was an unreasonable delay in issuing the additional assessments, especially taking into consideration the period of utter silence on the topic between July 2006 and November 2011.
As defence, SARS argued that it was waiting for another case (CSARS v NWK) to be concluded. Additionally, in terms of prescription it has 30 years in which they are entitled to raise such additional assessments.
As explained above, SARS is indeed entitled to raise additional assessments after three years provided there was a misrepresentation of a material fact. While the legislation is reasonable, one would expect that if SARS became aware of an issue, and enter into correspondence with the taxpayer regarding it, SARS should act within reasonable time.
Due to the dispute of facts, i.e. whether all information was provided or not and whether there was a misrepresentation the court held that further evidence was required. As a result, the matter was referred to the tax court.
In essence, even if we assume the tax return misrepresented the facts, SARS became aware of it and corresponded with Ackermans until July 2006. SARS should then arguably be under a legal duty to issue the additional assessments either in terms of the Constitution or PAJA. What constitutes a reasonable timeframe is debatable, but five years does seem excessive, which should mean such additional assessments should be rejected.
How does this case affect you and other taxpayers?
The main issue is that all questions in your tax return must always be answered honestly and correctly. If you fail to do this, there is a risk that SARS will raise additional assessments even if it becomes aware of the misrepresentation years from now. Well, at least within 30 years according to SARS.
As we’re approaching Tax Season, contact us to assist you in compiling a tax return that will withstand SARS’ scrutiny now, and in the future.