Administrative action (being the exercise of public powers and the performance of public functions by organs of state) may be taken on review by members of the public that have been adversely affected by a decision that is taken by any public authority.
The first two applicants in this case were close corporations involved in the supply of commercial transport services to their clients. The third applicant was a member of each of the first two applicants.
In 2014, SARS selected the applicants for audit in accordance with section 40 of the Tax Administration Act 28 of 2011 (TAA). This decision was made following investigations into the customs, income tax and value added tax (VAT) compliance of the applicants, which investigations were undertaken after SARS Tax and Customs Enforcement Unit was made aware of suspicious activities that had come to light pursuant to the ongoing customs litigation between SARS and various companies that were affiliated with the applicants.
In the notice informing the applicants of the intended audit, they were advised that the audit was based on a risk assessment that had been done by SARS and they were requested to make available certain records to facilitate a proper audit. After the failure by the applicants to provide the necessary records, SARS conducted the audit on the basis of the documentation in its possession and subsequently informed the applicants of its intention to issue additional assessments in respect of income taxes that had been underpaid.
On 24 March 2015, the applicants informed SARS that they would be instituting review proceedings, contending that the decision to audit on a risk assessment basis was unlawful as no income tax risk pertaining to the applicants had been established by SARS. In support of this contention, the applicants argued that
- SARS failure to provide the written risk assessment served as proof that no risk assessment existed at the time that the decision was made; and
- the issuance in the past of tax clearance certificates demonstrated that they had always been fully compliant with all of their obligations under the tax Acts.
The applicants further advised SARS that the review proceedings would be instituted by no later than 14 April 2015 and requested that SARS refrain from proceeding with the audit or issuance of further assessments until such time as the review had been finalised. However, on 13 April 2015, SARS issued the additional income tax assessments and refused to suspend the obligation to make payment of the disputed tax raised by means of those assessments.
In the review proceedings that followed, the applicants sought to review SARS decision to audit on the basis that the decision was unlawful given that the decision was
- taken for an ulterior purpose;
- taken for a reason not authorised by the empowering legislation (being the TAA);
- irrational; and
- taken in bad faith.
In opposing the review application, SARS contended that the decision to audit did not constitute administrative action that was capable of being reviewed, alternatively that the decision was lawful and should therefore not be set aside.
Decisions by organs of state can be reviewed either on the basis of the provisions of the Promotion of Administrative Justice Act 3 of 2000 (PAJA), alternatively on the principle of legality to the extent that PAJA does not apply. In the present matter, PAJA did not find application and as such, the court had to consider whether the decision by SARS to audit was reviewable under the principle of legality. In order to make this determination, the court undertook a step by step analysis of the application of the facts of this case to the elements underlying the principle of legality.
The powers bestowed on SARS by the empowering provision (section 40 of the TAA)
The court highlighted that one of the purposes of the TAA is to ensure the effective and efficient collection of tax by prescribing the powers and duties of persons engaged in the administration of a tax Act, including SARS. This should be understood in conjunction with the SARS Act 34 of 1997, which states that SARS must secure the efficient and effective, and widest possible, enforcement of the tax Acts in order to effectively collect revenue (amongst other objectives). On this basis, it was held that SARS is not only empowered to use the available administrative mechanisms to collect all taxes, but is also legally obliged to do so in order to properly carry out its functions.
In terms of section 40 of the TAA, SARS has the power to select a person for audit on the basis of any consideration relevant for the proper administration of a tax Act. To this end, it is worth noting that administration of a tax Act includes obtaining full information in relation to anything that may affect the liability of a person for tax in respect of a previous, current or future tax period. It was the finding of the court that there would be no limitation to the considerations on which a decision to select a taxpayer for audit is to be founded to the extent that the intended audit is to be undertaken for the proper administration of a tax Act.
The purpose behind SARS exercise of the powers bestowed by section 40
When SARS informed the applicants of its intention to audit, it advised the applicants of the scope of the audits and the documents that were to be provided in order to facilitate the process. The court found that each of the requested documents were of the kind that would prove or disprove the correctness of the VAT and income tax returns filed by the applicants and that SARS would achieve no ulterior purpose by requesting the relevant documents. As such, it was apparent to the court that every enquiry directed by SARS was relevant for the administration of a tax Act.
The ripeness of the matter for litigation
The ripeness of a matter refers to the suitability of a matter to be adjudicated by a competent court. At issue here is generally the timing in respect of which proceedings are instituted and whether it is appropriate for the matter to be subject to litigation at that time.
In order for a decision to be reviewed, that decision must have had an adverse effect on the rights of a person in a manner that has a direct and external legal effect. To this end, the court noted that the request for documents by SARS could not have prejudiced the applicants as the applicants had a statutory obligation (in terms of section 29 of the TAA) to keep the relevant documents for a prescribed period of time.
The court also held that the selection of a person for audit results in an investigative process being set in motion and that this does not constitute a decision capable of review as the process has not yet come to completion such that the rights of that person will have been affected. In this regard, the court gave extensive consideration to the provisions of section 42 of the TAA which provides that
- during an audit, SARS must provide the taxpayer with a report indicating the stage of completion of the audit;
- upon the conclusion of the audit SARS must indicate the outcome of the audit, including the grounds for any proposed assessment or decision; and
- a taxpayer must respond in writing to the facts and conclusions drawn by SARS pursuant to the audit.
The court found that section 42 affords a taxpayer reasonable opportunity to make representations regarding the audit findings by SARS and that it performs a function similar to that of section 3 of PAJA (which requires that representations be made by the aggrieved party before review proceedings can be instituted). It was held that section 42 had been available to each of the applicants but that none of them had elected to make use thereof. Ultimately, the court decided that if the processes contained in section 42 had been exhausted, the decision by SARS may (at that time) have reached the required degree of ripeness such that the decision would be subject to review.
The application of the principle of subsidiarity
The principle of subsidiarity prescribes that where legislation has been enacted to give effect to a right, a litigant must rely on that legislation (rather than a constitutional provision) in order to give effect to that right, or alternatively the litigant must challenge that legislation as being inconsistent with the Constitution.
The court found that section 42 of the TAA, as well as the processes relevant to the tax court, give effect to the constitutional rights that the applicants sought to protect by instituting the review application. As such, it would have been more apt for the applicants to have pursued those processes in terms of the specific tax legislation rather than to institute the review proceedings. In addition, the applicants did not challenge the constitutional validity of the appeal processes contained in the TAA. For these reasons, the court held that the applicants had breached the subsidiarity principle and that it could not entertain the review application.
Conclusion on the reviewability of the decision to audit
The court concluded that the decision taken by SARS to audit the applicants did not constitute administrative action that stood to be reviewed and the review application was dismissed with costs.
Although the TAA bestows very broad powers on SARS in order to enable it to effectively collect revenue, it is worth noting that the TAA also contains provisions and processes aimed at giving effect to taxpayers rights. As such, it is important for taxpayers to understand the type, and extent, of the rights provided for, and how to ensure that those rights are protected and enforced to the fullest extent.
While SARS decision to audit in this case was not subject to review, it does not necessarily mean that all other decisions taken by SARS are not subject to review in terms of administrative law. For example, where SARS has rejected a taxpayers application to suspend payment of tax in terms of section 164 of the TAA, such a decision can be taken on review.