Author: Erich Bell (SAIT Technical)
This case stems from disallowed and partially disallowed objections raised against revised assessments for the 2003-2006 tax years of the appellant, GB Mining, where the matter went on appeal through the Pretoria Tax Court which dismissed the appeal except for certain management fees which do not form part of the appeal to the SCA. This case clearly highlights the importance of supporting information submitted with a return and the burden of proof on the taxpayer when disputing an assessment.
The following three questions are answered in this case:
- When can a reduced assessment be issued?
- Can a taxpayer, who supplied incorrect information in a return which caused an incorrect assessment to be issued by the CSARS claim to be ‘aggrieved’ by the assessment and consequently object thereto?
- What burden of proof rests upon the taxpayer when contesting an assessment?
GB Mining, in its objections raised against the assessments which included point 1, 2 and 3 of this summary’s facts (see below), contended that its tax returns contained incorrect information. The SCA determined whether it was allowed to object and appeal to the assessments rather than requesting a reduced assessment in terms of sec 79A of the Income Tax Act (No. 58 of 1962) (hereinafter referred to as ‘the Act’) which, before it was repealed, read as follow:
‘(1) The Commissioner may, notwithstanding the fact that no objection has been lodged or appeal noted in terms of the provisions of Part III of Chapter III of this Act, reduce an assessment –
(a) . . .
(b) where it is proved to the satisfaction of the Commissioner that in issuing that assessment any amount which –
(i) was taken into account by the Commissioner in determining the taxpayer’s liability for tax, should not have been taken into account; or
(ii) should have been taken into account in determining the taxpayer’s liability for tax, was not taken into account by the Commissioner:
Provided that such assessment, wherein the amount was so taken into account or not taken into account, as contemplated in subparagraph (i) or (ii), as the case may be, was issued by the Commissioner based on information provided in the taxpayer’s return for the current or any previous year of assessment.’
The mirror provision of sec 79A of the Act is sec 93 of the Tax Administration Act (No. 28 of 2011) (hereinafter referred to as ‘the TAA’), of which the relevant part reads as follow:
‘(1) SARS may make a reduced assessment if—
…
(d) SARS is satisfied that there is an error in the assessment as a result of an undisputed error by –
(i) SARS; or
(ii) the taxpayer in a return.
(2) SARS may reduce an assessment despite the fact that no objection has been lodged or appeal noted.’
Before I continue with this overview, it is worthy to note the similarities between sec 79A of the Act and sec 93 of the TAA which would be summarised in the table below.
| Sec 79A of the Act | Sec 93 of the TAA | |
| Burden of proof | Sec 79A(1)(b): ‘where it is proved to the satisfaction of the Commissioner’ | Sec 93(1)(d): ‘SARS is satisfied that there is an error’ |
| What about objection and appeal? | Sec 79A(1): ‘The Commissioner may, notwithstanding the fact that no objection has been lodged or appeal noted in terms of the provisions of Part III of Chapter III of this Act, reduce an assessment…’ | Sec 93(2): ‘SARS may reduce an assessment despite the fact that no objection has been lodged or appeal noted.’ |
| Who must be liable for the error? | Does not specify, but wording implies that it may have been made by either the taxpayer or SARS. | Sec 93(1)(d)(i) and (ii): can be made by SARS or the taxpayer in its return. |
| What type of error? | Does not specify, only requires that an amount must have incorrectly been taken into account in the assessment. | Sec 93(1)(d): requires an ‘undisputed error’ i.e. a simple error like the omission of a deduction to which the taxpayer would otherwise be entitled to. |
The SCA held that, in accordance with sec 79A(1) of the Act, that a taxpayer may request a reduced assessment without objecting to the assessment in terms of sec 81 of the Act (now contained sec 104 of the TAA) and that the CSARS may reduce an assessment ‘… even where it flows from incorrect information provided in the taxpayer’s return’. The important principle that can be drawn from this case is at par [28] where it was held that the taxpayer requesting the reduced assessment would have the onus of satisfying the CSARS that a reduction in the assessment is justified. The SCA, at par [22] of the judgement stated the following in this regard:
‘In addition, the power of the Commissioner is not restricted to its mero motu exercise, because the error in the assessment has to be ‘proved to the satisfaction of the Commissioner’. To discharge this burden of proof the taxpayer must place information before the Commissioner to substantiate the error relied upon.’
The SCA held that the part of sec 79A(1) which reads as follow: ‘The Commissioner may, notwithstanding the fact that no objection has been lodged or appeal noted in terms of the provisions of Part III of Chapter III of this Act, reduce an assessment’ would imply that ‘an alternative route for a taxpayer to follow is by way of objection and, if necessary, appeal’. Swain AJA for the SCA consequently referred to and agreed with the conclusion of Hurt J in ITC 1785 67 SATC 98, where the following was held:
’. . . the fundamental object of tax legislation is to exact from each citizen his due. What is “due” is, in each case (questions of penalty aside), strictly prescribed by statute and the amount of the taxpayer’s taxable income must, in the process of assessment, be accurately determined preparatory to the calculation of the amount which he (or she) is required to hand over to the fiscus. In that light, it is clear that a taxpayer whose taxable income has been determined on an erroneous basis, is always “aggrieved” even if the source of error is entirely attributable to him.’
The SCA consequently held that a taxpayer may be ‘aggrieved by any assessment’ for purposes of sec 81 of the Act (and for that matter, sec 104(1) of the TAA) irrespective of whether it provided the erroneous information in the return. It was therefore held that GB Mining was allowed to take the objection route against the assessments which included point 1, 2 and 3 of this summary’s facts.
From the above it can clearly be concluded that either of the two mechanisms i.e. sec 79A of the Act (now sec 93(1)(d) of the TAA) or objection and appeal in terms of Part III of the Act (now Chapter 9 of the TAA) may be pursued by a taxpayer. However, sec 93(1)(d) of the TAA, in its current form, would qualify this conclusion as it only allows for a reduced assessment to be issued for ‘undisputed errors’, which supposedly refers to simple calculation errors or omission of deductions.
It is therefore strongly advised, that should you as tax professional not be certain whether you are dealing with an ‘undisputed error’ for purposes of sec 93(1)(d) that you object to the assessment in terms of Chapter 9 of the TAA read with the Rules within the 30 days as provided for by Rule 4(e), as it may be used in the alternative to requesting a reduced assessment in terms of sec 93(1)(d) of the Act. Should a taxpayer have missed the objection deadline and SARS doesn’t allow an extension for the period to lodge the objection in terms of sec 104(4) of the TAA read with Sec 104(5) of the TAA (which is allowed at SARS’ discretion), then the taxpayer would not have any other remedy available in terms of the TAA if the assessment does not contain an ‘undisputed error’. The scope of sec 98(1)(d) of the TAA to withdraw an assessment is also too narrow to deal with disputes not involving a processing error or undisputed factual error.
Sec 93 of the Act also does not put any time constraints on SARS to reduce the assessment, whilst the Rules and sec 106(1) of the TAA would compel SARS to provide the outcome of the objection within the periods prescribed therein. There is therefore no guarantee that a reduced assessment would be issued in less time than taking the objection and appeal route – although, practically, one would imagine that the reduced assessment would be issued in less time.
GB Mining also attempted to challenge the constitutionality of sec 82 of the Act (now contained in sec 102 of the TAA), but did not succeed as it did not follow Rule 10A of the Uniform Rules of Court in the process.
With regards to the onus on GB Mining to satisfy the CSARS that the assessments were based on the incorrect information, the SCA held the following at par [28] to [30]:
‘[28]… In order to do this, additional evidence would have to be placed before the Commissioner. The nature of this evidence will depend upon the facts of each case and particularly the nature of the erroneous information supplied to the Commissioner. So for example, the fiscus might rightly ask how it can be expected to alter or reduce an assessment when information supplied by a taxpayer is not withdrawn or substituted so as to enable the reduction or alteration contended for.
[29] In terms of regulation A2 of the Regulations issued under s 107 of the Act (Government Notice R105 – in Government Gazette Extraordinary No 1011 of 22 January 1965) any return must ‘be accompanied by all such balance sheets, trading accounts, profit and loss accounts and other accounts of whatever nature, as are necessary to support the information contained in the return’. The evidence to ‘support’ the information in the return must accordingly ‘corroborate’ it (Concise Oxford English Dictionary, 12 ed). Balance sheets and accounts perform a vital and formal role in corroborating the information in the return. The Commissioner must be able to rely upon the veracity and accuracy of this evidence which forms the basis for the assessment. The Commissioner is entirely dependent upon the taxpayer to furnish this evidence. In the event of incorrect information being included in the balance sheets or accounts, evidence would have to be furnished to explain the precise nature and extent of the incorrect information and how it was included. All relevant supporting documentation to verify the correct information would have to be submitted. An amended balance sheet or account may have to be submitted to the Commissioner, together with a full explanatory note to clarify the amendment.
[30] Each of the contested determinations made by the Commissioner must be approached on the basis that GB Mining bears the onus of proving that the Commissioner was wrong. In addition, where GB Mining contends that the determination was based upon incorrect information supplied to the Commissioner by GB Mining, whether in the form of balance sheets and accounts or otherwise, GB Mining must show that it has provided credible and reliable evidence to explain the error
Rulings
This case considers various transactions and headings will therefore be used to distinguish the different disputes from each other.
1. Payments made to OTR Mining Ltd as part of a financial rescue offer
GB Mining started off as a shelf company acquired by two persons (Mr Barnard and Mr Gardner) to exploit a unique process developed by Mr Barnard to extract platinum from chrome mining tailings. In order do business, GB Mining needed to obtain a source of chrome tailings (identified Kroondal dump for this purpose), as well as financing which would have been obtained from OTR Mining Ltd (OTR), a JSE listed company of which Mr Gardner has previously been the managing director and which was at the time in financial distress. The intention was for GB Mining to gain access to public funds through the JSE by transferring its business to and becoming the sole shareholder of OTR. Given OTR’s financial distress, GB Mining entered into a rescue operation to save OTR from being delisted by providing loan capital to OTR in order to allow it to pay its employees and creditors in exchange for shares in proportion to the amount of the loan. OTR got delisted on 22 August 2003 and to that date, GB Mining advanced an amount of R 2 638 070 to OTR in order to allow it to pay its employees and general office expenses. GB Mining attempted to claim the above amount as a deduction in terms of sec 11(a) and 23(g) of the Act as it contended that OTR’s employees were employed by it. The CSARS and the Tax Court, however, held that the amount so advanced was a loan and that it is therefore capital in nature. No deduction was therefore allowed and this is the first item for consideration by the SCA.
Held
The payment was accounted for in GB Mining’s financial statements for the year ending 29 February 2014 as an ‘OTR loan’. The financial statements were signed by the sole director and its auditors. In giving evidence, the director of GB Mining explained that ‘the mechanism was such that the expenditure that was incurred by GB on behalf of OTR would be repaid in terms of the shares’. Further correspondence between GB Mining and SARS as well as with OTR indicated that the amount constituted a loan and that GB Mining does not have complete control over OTR and the employment decisions thereof.
GB Mining failed to provide credible and reliable evidence to explain the alleged error in its financial statements (where the payment was described as an ‘OTR loan’) and the appeal against this item consequently failed.
2. Disposal of rights in Kroondal dump to Aquarius Platinum (South Africa) (Pty) Ltd
Before the final rescue offer of OTR failed, GB Mining purchased the mineral rights on Kroondal dump for a purchase price of R 2 400 000 plus 1 250 000 OTR shares and 625 000 OTR options with the ultimate intention of transferring the mineral rights to OTR in terms of the rescue offer.
In order to obtain further capital, GB Mining concluded an agreement with Aquarius Platinum (South Africa) (Pty) Ltd (hereinafter referred to as ‘Aquarius’) to jointly exploit the Kroondal dump on a 50:50 basis and to make use of the equipment of a wholly owned subsidiary of Aquarius to process the material in exchange for a R 14 million contribution by Aquarius for its 50 per cent share. The contribution consisted out of a R 3.5 million payment, a 25 per cent share in the Consortium and another 25 per cent for cash at the cost of the plant. The R3.5 million payment made to GB Mining gave rise to the second item for consideration by the SCA as the CSARS contended that, in exchange for this payment, Aquarius acquired 50 per cent of the mineral rights in the Kroondal dump and that the mineral rights were therefore disposed of (which was also held to be the case by the Tax Court). GB Mining, however, contended that no disposal took place as the mineral rights remained ceded to it, which it only made available to the joint venture as its capital contribution.
Held
The schedule to GB Mining’s tax return for the 2003 tax year stated ‘calculation of capital gain/(loss) GB Dump – sold to Aquarius’ and the note relating to this item stated ‘sold 50 per cent to Aquarius at R 1 300 000’. The tax return of GB Mining was signed by the director as being true and correct in every respect. The sale intention was later changed where the director and Mr Gardner referred to subsequent agreements which were not concluded for purposes of selling the Kroondal dump.
Again, GB Mining’s evidence was not reliable and creditable and contained various inconsistencies. The SCA consequently held that the rights in the Kroondal dump constitutes an asset as defined in par 1 of the Eighth Schedule to the Act and that the amount must be subject to capital gains tax with proceeds equal to R 3.5 million and a base cost equal to R 1780 771. The appeal against this item consequently failed.
3. Disposal of mineral rights and intellectual property to a joint venture
GB Mining raised further capital from foreign investors, Mr Sher and others, and registered Gardner and Barnard (UK) Limited (hereinafter referred to as ‘GBUK’) as a company in the United Kingdom which became the holding company of GB Mining. Mr Sher and others received 32 per cent of the GBUK shares, whilst Mr Gardner and Barnard held the remaining 68 per cent. Mr Gardner and Barnard shortly thereafter resigned from GB Mining to become shareholders of GBUK.
To secure additional chrome tailings, GB Mining concluded agreements with two other companies in the Kroondal dump area, namely Xstrata SA (Pty) Ltd (hereinafter referred to as ‘Xstrata’) and Bayer (Pty) Ltd (hereinafter referred to as ‘Bayer’), where both of the agreements stated that GB Mining would cede and assign all its rights and obligations in terms of this agreement to a joint venture. From the agreement of the joint venture, the CSARS determined that GB Mining has contributed certain mineral rights and intellectual property to the joint venture and that it has subsequently disposed of an asset with proceeds equal to R 8 million and a base cost of R nil. GB Mining, however, contended that it has not disposed of an asset as it acquired the Xstrata and Bayer minerals for and on behalf of the joint venture. Again the Tax Court upheld the CSARS’ determination and the SCA must now decide on this matter.
Held
The accounts of the joint venture contained an entry that GB Mining contributed a capital contribution of R 8 million thereto which Mr Gardner could not explain. Furthermore, all the other evidence pointed to GB Mining disposing of the mineral rights and intellectual property to the joint venture. The SCA held that GB Mining’s ipse dixit (own evidence) based on a trial balance was never withdrawn and never properly explained, which proved to be fatal at the end of the day. The appeal on this matter consequently failed.
4. Deductibility of overseas travel expenditure
The period of overseas travel to raise capital by Mr Gardner and other GB Mining representatives caused GB Mining to incur travel costs which it attempted to deduct in terms of sec 11(a) of the Act. The CSARS disallowed 50 per cent thereof, as according to him, it was expenditure incurred in acquiring a source of profit and was therefore capital in nature. The Tax Court came to the same conclusion and this matter is now also challenged before the SCA.
Held
The SCA referred to New State Areas Ltd v Commissioner for Inland Revenue 1946 AD and Commissioner SARS v BP South Africa (Pty) Ltd 2006 (5) SA 559 (SCA) to determine if the travel expenditure contained a capital element. By referring to CIR v Nemojim (Pty) Ltd 1983 (4) SA 935 (A) at 951 C-E, the SCA held that ‘If the purpose of the overseas travel was partially to produce income for GB Mining and partially to improve the income-earning structure of GB Mining, an apportionment of the expenses incurred can be made on the basis of ‘what would be fair and reasonable in all the circumstances of the case’. Again, Mr Gardner was not able to provide suitable evidence as to the purpose of the travel expenses i.e. whether it has been incurred to enhance the income-earning operations or the income-earning structure (as per the New state Areas case). Consequently, the SCA held that the 50:50 apportionment applied by the CSARS and Tax Court was fair and reasonable and the appeal failed.
5. Disposal of interest in the joint venture
Mr Barnard died in Oct 2003 which caused Mr Gardner, in terms of the shareholding agreement to hold 62 per cent of the total shares in GBUK. As at 28 February 2004, GBUK acquired RKR Mining UK Ltd (RKUK) which had a wholly owned subsidiary, RK Mining SA (RKMSA) which carried on a similar process to the one in the joint venture from a different area which related to the processing of feedstock. Mr Gardner also held 62 per cent of the shares in RKUK with the rest of the 32 per cent shareholding therein being held by Mr Sher and others. Early in 2005, the shareholding in GBUK and RKUK was terminated to ensure that each of the companies would become wholly owned by one of the two groups of shareholders (i.e. Mr Gardner owning the one company and Mr Sher and others owning the other). The profit share in the two projects however remained unchanged. Mr Gardner consequently acquired the majority interest in GBUK in exchange for his majority interest in RKUK. In order to transfer stakes in the two joint ventures to each of the shareholding groups, it was held that GB Mining (which held the interest in the first project/venture) would hold 38 per cent of that interest on behalf of RKMSA and that RKMSA would hold 62 per cent of the interest in the second project (the one that RKMSA started) on behalf of GB Mining.
The CSARS subsequently held that the 38 per cent interest that GB Mining held in the first project on behalf of RKMSA constituted a disposal of an asset in the 2005 tax year. The CSARS determined the proceeds as R 23 277 530 and the base cost as R 8 284 506, which was bumped-up with donations tax in terms of par 20(1)(c) read with par 22 of the Eighth Schedule of the Act. The Tax Court, however, held that the transaction didn’t involve a donation but that GB Mining did dispose of 38 per cent of the joint interest in the first project/venture for proceeds equal to 62 per cent of the value of the interest held by RKMSA in the second project/venture. The CSARS is now contending for the capital gain on this disposal to be consequently increased (due to the reduced base cost as a result of not taking into account the donations tax as above).
GB Mining contented that no capital gain came into existence as the transaction was in the form of a ‘… multiparty agreement between two groups of shareholders and their companies, which entailed the exchange of assets of equal value…’. This also constitutes an issue which must be decided upon by the SCA.
Held
The SCA held that the agreement between GB Mining and RKMSA triggered a ‘disposal’ in terms of par 11(1)(a) of the Eighth Schedule to the Act, which includes a ‘cession’. It was held that the proceeds must be determined in terms of par 38 of the said Schedule on the 38 per cent share ceded to RKMSA, as the disposal took place for proceeds not measurable in money. The SCA agreed with the Tax Court’s interpretation that no donations tax was payable on the disposal and consequently held that the base cost must be reduced from R 8 284 506 to R 3 629 000 which would result in an increase of the capital gain from R 14 993 024 to R 19 648 530 for GB Mining’s 2005 tax year. The appeal accordingly failed.
6. Additional tax on disputed items
The CSARS raised additional tax in terms of sec 76(1) of the Act in respect of the tax assessed for each of the disputed items as he contended that there was either an omission in terms of sec 76(1)(b) or an incorrect statement in terms of sec 76(1)(c) of the Act. The CSARS, however, used his discretion to reduce all of the additional taxes to different percentages. GB Mining contended that the grounds for imposing the penalties were not present. The Tax Court however held that the penalties were appropriate and this matter is now also before the SCA.
Held
The SCA held that there was no incorrect statement or omission in respect of the travel expenditure and the OTR payment and that the CSARS consequently raised these additional taxes in error. The SCA, however, held that the CSARS raised additional taxes correctly on the other items (disposal of rights in Kroondal dump to Aquarius, disposal of mineral rights and intellectual property to a joint venture and the disposal of interest in the joint venture) at appropriate rates. Consequently the appeal succeeded with regards to the additional tax raised in respect of the travel expenditure and the OTR payment but it failed with regards to the additional tax raised in respect of the remaining items.
Cost order
The SCA ordered the CSARS to pay 10 per cent of the GB Mining’s costs in the appeal.