From time to time, our courts are called upon to remind public officials that compliance with the requirements of provisions in legislation is necessary to enable them to enforce the powers entrusted to them. The requirements are in place to enable the public to understand the reasons for the administrative action and to determine whether the action is compliant with the law.
One such provision was found in section 79(1) of the Income Tax Act (now repealed and replaced by section 99(2) of the TAA). This provision precluded SARS from issuing an additional assessment more than three years after the date of the original assessment:
unless the Commissioner is satisfied that the amount which should have been assessed to tax was not so assessed or the fact that the full amount of tax chargeable was not assessed, was due to fraud or misrepresentation or
non-disclosure of material facts.
The facts
In Case No. IT12951 (judgment delivered 12 January 2016), heard in the Tax Court, Durban, SARS had investigated the tax affairs of the taxpayer for the 2004, 2005 and 2006 years of assessment and had raised numerous issues relating to the information in its returns of income for those years.
SARS had determined that, in the 2004 and 2005 years of assessment, wear and tear in respect of motor vehicles had not been correctly claimed and that, in the 2005 year of assessment, the taxpayer had failed to provide proof to substantiate amounts claimed as deductions in respect of casual wages and salaries.
The dates of the original assessments for 2004 and 2005 were 1 March 2006 and 1 May 2006, respectively.
Additional assessments were dated 1 November 2009 for both years of assessment.
It was clear that more than three years had elapsed between the dates of the original assessments and the date of the additional assessments.
The letter of findings issued by SARS on 12 August 2009 made no reference to the lapse of time of more than three years and merely stated SARS intention to issue additional assessments as the onus of proof of deductibility of the expenditure has not been discharged.
When the assessments were issued, the assessment letter made no mention of the lapse of time either.
The taxpayer requested reasons for the assessment and specifically asked whether there were any other reasons other than the issue of onus for the additional assessment. SARS response concluded with the following statement:
We are unable to provide any reason other than onus and we believe that the onus provision suffices as a basis for the assessment.
The taxpayer filed objections to the 2004 and 2005 additional assessments, stating that the original assessments had prescribed as a period of more than three years had elapsed since their issue.
The first mention of section 79 came when the objections were disallowed. At this time SARS stated that the veil of prescription had been lifted in respect of the disallowance of claims for wear and tear on vehicles because these had been misrepresented in the returns of income. However, no mention was made of misrepresentation in the disallowance of the deduction for casual wages and salaries.
Even after an appeal had been noted against the disallowances, SARS did not, in its notice of grounds of assessment, raise the issue of prescription in respect of the casual wages and salaries, but persisted with the issue of burden of proof.
The decision
In a thorough examination of the law, Vahed J dealt with the requirements for displacing immunity from additional assessment after the lapse of more than three years.
- The Commissioner must provide evidence that he was satisfied that the circumstances for displacing the immunity existed and should state the particular conduct of the taxpayer supporting that conclusion (i.e. fraud, misrepresentation or non-disclosure).
- The alleged conduct must have caused the Commissioner not to have assessed the correct amount of tax.
- In the case of non-disclosure, the facts must be material. (Note: In this instance the Court stated that the amounts in question were not material amounts.)
- The Commissioners satisfaction as to the circumstances cannot be presumed from the correspondence and actions taken by SARS it is a substantive and far-reaching determination, which should be communicated to the taxpayer (citing Corbett JA in Natal Estates Limited v SIR [1975] 37 SATC 193).
- The Commissioner must be able to show that he was satisfied as to the nature of the conduct and the link to the failure to assess at the time that the additional assessment was issued.
Vahed J therefore found, at paragraphs [34] to [35]:
[34] In the present matter, the respondent did not contend anything with regard to the issue of prescription prior to the additional assessments being issued and, in fact, when asked whether there were any reasons other than that of onus, confirmed categorically that there was no other reason beyond onus and, as such, cannot be said to have applied his mind to the issue of prescription prior to the raising of the additional assessment.
[35] I can find nothing to infer that the respondent was satisfied at the time of the assessment or during the process because it is fair to say that the question of prescription was not part of the respondents focus.
The amended legislation
The Taxation Laws Amendment Act, 2011, became effective from 1 October 2012, and section 99(2) now deals with the rights of SARS to issue additional assessments after the lapse of more than three years from the date of issue of the original assessment.
Section 99(1) sets out, inter-alia, that an additional assessment may not be issued more than three years after the date of issue of an original assessment.
Section 99(2)(a) then states:
Subsection (1) does 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 of material facts
The amended requirements place question marks over the long-established procedural requirements that have been laid down by the courts.
Firstly, SARS has a right to issue additional assessments if the fact that the failure to assess fully was due to the circumstances enumerated.
The provision is silent on whether this fact should be communicated to the taxpayer, and when.
However, it is submitted that the additional assessment cannot be issued unless SARS is aware of the nature of the conduct that caused it to fail to assess the amount properly chargeable to tax.
Further, section 99(2)(a) does not relieve SARS of the burden of establishing that the failure to assess the correct amount of tax was caused by conduct referred to in that subsection. That is, that SARS, having become aware of the conduct, has identified that this conduct was the cause of the failure to assess the amount of tax properly chargeable.
In other words, SARS cannot issue the additional assessment unless and until it is aware of an act of fraud, misrepresentation or misstatement of a material fact and it has established that this led to its failure to assess the amount properly chargeable to tax within the prescribed period.
Whether SARS is obliged to notify the taxpayer of its findings in this respect is also a point of conjecture. It should be recalled that section 79(1) of theAct did not expressly require communication of the Commissioners state of mind, yet the courts have made it clear repeatedly that the Commissioners right to disturb the taxpayers immunity from reassessment can only be exercised if the Commissioner has satisfied himself:
- that there has been conduct referred to in the relevant section; and
- that the conduct was the cause of the failure to properly assess the taxpayer to tax.
It is submitted that the requirement that SARS should disclose the conduct upon which it relies to justify disturbing the immunity from additional assessment is not eliminated in the TAA. A taxpayer is entitled to request reasons for assessment, and if reasons for an additional assessment are requested, it is incumbent upon SARS, if not at an earlier stage, at least at that time to disclose the conduct and the causal connection that entitled it to issue the additional assessment after the lapse of more than three years.
Therefore, it is to be expected that SARS should be required to inform the taxpayer of the facts entitling it to issue an assessment outside the three-year limit and the nature of the conduct that it infers from those facts. This notification should be made either at the time that the assessment is issued or at the earliest opportunity after the issue of the assessment where the taxpayer requests reasons for the assessment or notes an objection to the assessment.
The application of section 99 of the TAA has not yet been raised in our courts, and the timing of SARS obligation to inform the taxpayer and the manner in which it should do so remain uncertain.
PwC
TAA: sections 99(1) and 99(2)
ITA: section 79
Editorial Comment: Sections 99(3) and 99(4) were added to the TAA by the Tax Administration Laws Amendment Act 23 of 2015 to provide for the extension of the prescription period in other circumstances.