A fundamental reason for the existence of the rules of prescription in our tax law is to provide a taxpayer with certainty as regards its tax position. It is therefore important that such rules are clear and not subject to unfettered discretions. In disputes with the Commissioner for South African Revenue Service (the Commissioner or SARS), prescription is a powerful defence available to compliant taxpayers, allowing them to bring finality to their tax assessments.
For some time, amendments to the prescription provisions have been on the cards. SARS has motivated for such amendments due to the fact that it has been involved in protracted information entitlement disputes which it alleges are being used as a delaying tactic to force audits closer to the end of a prescription period. SARS also alleges that it has difficulty finalising certain audits within prescription periods due to their sheer complexity.
There are certain far-reaching amendments to the rules of prescription which were proposed in clause 51(c) of the Tax Administration Laws Amendment Bill No. 30 of 2015 (the Bill), introduced by the Minister of Finance to the National Assembly on 27 October 2015 and subsequently enacted on 8 January 2016.
Section 99 of the Tax Administration Act, 2011 (the TAA) regulates prescription for all tax types.
Section 99(1) provides that an assessment cannot be raised:
- for income tax, three years after the date of an original income tax assessment;
- for self-assessment taxes, such as value-added tax, five years after the date when the taxpayer self-assessed or paid (as the case may be);
- if the amount which should have been assessed under the preceding assessment (or paid as in the case where no return is submitted) was not assessed (or paid as the case may be) due to the practice generally prevailing at the time of the preceding assessment (or date of payment as the case may be);
- in respect of a dispute which has been resolved.
Section 99(2) provides that prescription will not apply to the extent that:
- in the case of assessment by SARS, the fact that the full amount of tax chargeable was not assessed was due to fraud, misrepresentation or non-disclosure;
- in the case of self-assessment, the fact that the full amount of tax chargeable was not assessed was due to fraud, intentional or negligent misrepresentation or intentional or negligent non-disclosure of material facts or the failure to submit a return or, if no return is required, the failure to make the required payment of tax;
- SARS and the taxpayer agree;
- it is necessary to give effect to a resolution of a dispute or a judgment pursuant to an appeal where there is no further right of appeal.
The prescription provisions as noted above are clear, well-known and do not contain any unilateral powers of extension for the Commissioner. However, as illustrated below, this has now changed.
Clause 51(c) of the Bill proposed the insertion of two new sub-sections to section 99 of the TAA, namely sections 99(3) and (4) and provides (with our emphasis) as follows:
“(3) The Commissioner may, by prior notice of at least 30 days to the taxpayer, extend a period under subsection (1) or an extended period under this section, before the expiry thereof, by a period approximate to a delay arising from:
(a) failure by a taxpayer to provide all the relevant material requested within the period under section 46(1) or the extended period under section 46(5); or
(b) resolving an information entitlement dispute, including legal proceedings.
(4) The Commissioner may, by prior notice of at least 60 days to the taxpayer, extend a period under subsection (1), before the expiry thereof, by three years in the case of an assessment by SARS or two years in the case of self-assessment, where an audit or investigation under Chapter 5 relates to—
(i) the application of the doctrine of substance over form;
(ii) the application of Part IIA of Chapter III of the Income Tax Act, section 73 of the Value-Added Tax Act or any other general anti-avoidance provision under a tax Act.
(iii) the taxation of hybrid entities or hybrid instruments; or
(iv) section 31 of the Income Tax Act.”
It is apparent from the above amendments that, unlike previously, the Commissioner will be given fairly wide unilateral powers to extend the prescription periods in certain circumstances.
The power to extend the prescription period in the new section 99(3) is not limited to any specific time period and an extension of time is permitted by a period ‘approximate to a delay’. Although the term ‘ approximate’ is not defined, by tying the extension to an event appears to impose some kind of limit on the Commissioner’s power to extend the prescription period.
In addition, the new section 99(3)(a) allows the Commissioner to unilaterally determine the extension of time with reference to a taxpayer’s provision of ‘relevant material’. Due to the fact that what constitutes ‘relevant material’ is also something which is determined with reference to the opinion of SARS as to what is foreseeably relevant, the determination of an extension of prescription period by the Commissioner in these circumstances involves a fairly wide discretion for the Commissioner. This leaves the taxpayer in an uncertain position and has the effect of watering down the current prescription rules.
The new section 99(4) allows the Commissioner to unilaterally extend prescription periods by significant time periods where an audit or investigation relates to certain complex issues. This amendment leaves the ball entirely in the Commissioner’s court as regards the determination as to whether an audit or investigation involves these issues. The section makes no reference as to what stage of the audit or investigation such a decision may be made by the Commissioner. It appears that the Commissioner, accordingly, has free reign to extend the periods for prescription any time during an audit or investigation, even at a stage where it may not yet be certain whether any one of the issues listed in the new section 99(4) are indeed of application. If prescription is extended on this basis and a taxpayer is assessed on bases other than those contained in section 99(4), there may be arguments open to a taxpayer that the extension of prescription was invalid.
The amendments to section 99, as they currently read, are far-reaching and will have a significant impact on prescription, which is currently a very strong defence for compliant taxpayers. Although it is acknowledged that the complexity of matters gives rise to very lengthy audits in many cases, it is important that a balance be found to deal with this. The amendments certainly have the ability of resulting in the normal prescription periods being applicable in significantly fewer cases. A taxpayer bears the onus of proof in tax disputes and in light of the fact that when there is a SARS audit, there will now be a possibility of the extension of prescription periods, and it is important for taxpayers, during the early stages of an audit, to take proactive steps to gather both documentary and oral evidence in support of any case which may have to be defended in a dispute. Since the introduction of the TAA, and even more so now, it is therefore critically important for a taxpayer to take proper legal advice as to its rights and obligations early on in a SARS audit so as to ensure that it adequately protects itself and has the appropriate defences available to it should a dispute arise.
TAA: Section 99
Tax Administration Laws Amendment Bill No. 30 of 2015