A taxpayer is entitled to object to an assessment on the grounds that the information given in his return was incorrect

supreme cort of appeal 1One of the issues in GB Mining v Commissioner: SARS [2014] ZASCA 29 was the deductibility or otherwise of expenditure that had been outlaid by the taxpayer, GB Mining and Exploration (SA) (Pty) Ltd, in an attempted rescue of a company listed on the Johannesburg Stock Exchange, OTR Mining Ltd, with the intent that GB Mining would transfer its business to OTR and become its principal shareholder, thereby securing access to the JSE.

The rescue was, according to the judgment (see para [7]), a ‘formal rescue offer’ in terms of which GB Mining was to provide funds for OTR to enable the latter company to pay its creditors and employees. In return, GB Mining was to be allotted shares in OTR in proportion to the amount of the funds so expended.

At issue was whether those funds took the form of a loan to OTR (which gave rise to a non-deductible capital loss when it proved irrecoverable) or whether those funds comprised tax-deductible salaries paid to persons who were employed by GB Mining, and office expenses of that company.

The assessments in question had treated these amounts as irrecoverable loans, the loss of which was a capital loss that did not qualify for deduction in terms of section 11(a) of the Income Tax Act 58 of 1962, and this was also the view taken by the Tax Court on appeal.

An objection lies in respect of an assessment that is erroneous as a result of incorrect information given by the taxpayer in its return.

GB Mining contested the assessment on the grounds (see para [20]) that the information it had supplied to SARS in its own tax returns in relation to these amounts was incorrect.

In principle it was open to GB Mining to seek to correct the consequential alleged error in its assessments by way of objection and appeal or,alternatively, by asking for the assessments to be reduced, but without filing an objection – a process countenanced by section 79A of the Income Tax Act (a provision since repealed with the coming into force of the Tax Administration Act 28 of 2011 and replaced by section 98(1) of the latter Act).

GB Mining chose to seek relief by way of objection and appeal, even though the alleged error in the assessment was attributable to the information it had furnished in its returns. The Supreme Court of Appeal held (at para [25]) that it was permissible for GB Mining to seek relief by this process.

Balance sheets, profit and loss, and other documents must accompany a return

The court was at pains to point out that it is not sufficient merely to point to an error, but that the basis for that error must also be established. The court took into account that the financial information submitted to the Commissioner is integral to the process of filing and assessing a return, and held that –

[28] The taxpayer accordingly bears the onus of satisfying the Commissioner that the information furnished [by the taxpayer in his return] is incorrect and that a reduction in the assessment is justified. 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. (Emphasis added.)

The taxpayer failed to prove that the information given in its return was incorrect.

Upholding the decision of the Tax Court, the Supreme Court of Appeal held (see para ]33]) that GB Mining had not provided credible and reliable evidence to explain why the amounts in question had been described in its financial statements as an OTR loan and why its auditors had similarly described these amounts.

Indeed, said the court, all the available information pointed emphatically in the opposite direction to that contended for by GB Mining, and the Commissioner’s view, endorsed by the Tax Court, was therefore plainly correct that this was indeed a loan that was written off when the OTR rescue attempt failed and that these amounts were not – as the taxpayer had contended – expenditure by way of salaries and office expenses paid by GB Mining in respect of persons who were its own employees.

Consequently, it was held that the amounts in question did not qualify as a deduction in terms of section
11(a) of the Income Tax Act.