Monday 1 December 2014

UCT Celebrates 100 Years of Income Tax in South Africa

During 1914, General Jan Smuts, in his capacity as Minister of Finance, tabled legislation in the Parliament of the Union of South Africa introducing income tax in the country with the Income Tax Act of 1914. Taxpayers in the Union of South Africa became liable to income tax with effect from 20 July 1914. [Source: Wikipedia]

In 2014, twenty years since South Africa became a constitutional democracy , the University of Cape Town marked this milestone since with the "INCOME TAX IN SOUTH AFRICA: THE FIRST 100 YEARS 1914 – 2014" conference.   

Dr Beric Croome addresses attendees at the
 "Income Tax in South Africa: The First 100 Years" conference,
with Prof Jennifer Roeleveld, a conference organiser, looking on

[Photograph Michael Hammond].
I was privileged to be part of this special occasion and presented a paper called "The shift to a constitutional democracy in 1994 and the impact thereof on tax law in SA." This paper, together with all the other conference papers, will be published in 2015 by Juta's Law, who also hosted the gala dinner.
The Deputy Tax Ombud of South Africa, Advocate Hanyana Eric Mkhawane, speaking at the Gala Dinner held in Smuts Hall at the University of Cape Town
[Photograph Michael Hammond].
You can read a media report on this conference here . You can view the UCT Finance and Tax  conference photo album HERE and the Juta Law's Gala Dinner photo album HERE. Below are some photos from the conference:
Prof Jennifer Roeleveld, Head: Taxation, Department of Finance and Tax,
 University of Cape Town and a co
nference organiser chats to Mr Kent Karro, Chairman of Horwath Zeller Karro and Chairman of SAICA's monthly tax journal Integritax's editorial panel.
[Photograph Michael Hammond].

[Photograph Michael Hammond].
Thanks to the University of Cape Town's Professors Jennifer Roeleveld, Craig West and Johann Hattingh for an excellent conference and to Jutas Law Mr Wayne Staples and Ms Melanie Wagner for an entertaining Gala Dinner. 
Prof Peter Surtees addresses the attendees
[Photograph Michael Hammond].
Here are some of the items from the "goody bag" the attendees received: 

Monday 10 November 2014

Western Cape High Court Rules on Purpose of Preservation Orders

Section 163 of the Tax Administration Act 28 of 2011 (“TAA”) provides that a senior SARS official may authorise an ex parte application to the High Court for an order for the preservation of any assets of a taxpayer, or other person prohibiting any person, subject to the conditions and exceptions as specified in the preservation order, from dealing in any manner with the assets to which the order relates.

The TAA provides that a preservation order may be granted if required to secure the collection of tax. The preservation order will apply in respect of realisable assets seized by SARS in terms of section 163(2), which allows SARS to attach assets in anticipation of being granted a preservation order by the court. 

Furthermore, the preservation order would typically be granted in respect of realisable assets as may be specified in the order, and which may be held by the person against whom the preservation order is being made. In terms of section 163(4) of the TAA, the court to which an application is made may grant a provisional preservation order having immediate effect. In addition, the court may grant a rule nisi calling on the taxpayer or any other person, on a business day mentioned in the rule, to appear and satisfy the court as to why the preservation order should not be made final.

The TAA requires that the preservation order must provide for notice to be given to the affected taxpayer and the person from whom the assets are seized.
Where a preservation order is granted in terms of section 163 of the TAA, the court may make any ancillary orders regarding how the assets must be dealt with, including:
·         authorising the seizure of all movable assets
·         appointing a curator bonis in whom the assets of that taxpayer or another person liable for tax vests
·         realising the assets in satisfaction of the tax debt
·         making provision as the court may think fit for reasonable living expenses of a person against whom the preservation order is made, or
·         any other order which the court considers appropriate for the proper, fair and effective execution of the order.

The court which grants the preservation order may vary or rescind that order if the circumstances set out in section 163(9) of the TAA are complied with.
Once a preservation order has been granted, it remains in force pending the setting aside thereof on appeal, or until the assets subject to the preservation order are no longer required for purposes of the satisfaction of the tax debt.

The TAA provides that assets seized under section 163 of the TAA must be dealt with in accordance with the directions issued by the High Court which granted the relevant preservation order.

Rogers J in Commissioner for the South African Revenue Service v Tradex (Pty) Ltd (case number 12949/2013) as yet unreported, was required to decide whether to confirm the provisional preservation order granted in terms of section 163(4) of the TAA. In the Tradex case the affected taxpayers had been delinquent in that tax returns had not been submitted timeously to SARS, and it was accepted that amounts were due to SARS for various tax debts payable to SARS.
Using such an order as a tactic by Sars comes in for criticism by judge
In the case before the court, the taxpayers repeated an offer of security made in negotiations with SARS by way of continued operation of caveats in respect of various immovable property which the taxpayer contended had a value of approximately R7.5 million. In addition, Tradex offered SARS a cession in securitatem debiti of the company’s book debts to the value of R10.5 million.

SARS, in its papers filed with the court, continued to be dismissive of the value of the book debts offered as security by the taxpayer.

SARS approached the court for confirmation of the preservation order and that the taxpayers be prohibited from disposing, dissipating of any assets and that SARS be authorised to cause caveats to be registered over the taxpayer’s immovable properties. In addition, SARS sought that a Mr Nel be appointed as the taxpayer’s curator bonis with all of the taxpayer’s assets vesting in him. Rogers J expressed the view that he did not think that the legislature intended that a preservation order would routinely be available to SARS in every case of an actual or anticipated tax liability. The court was of the view that there must be a material risk that assets will be dissipated in order to justify the granting of a final preservation order.

In the case at hand, SARS did not satisfy the court that there was an appreciable risk of the assets owned by the taxpayer being diminished. SARS did not in its replying and supplementary replying papers allege that the taxpayer was causing the company to dissipate its assets by distributing dividends or paying unreasonable salaries or engaging in other suspicious transactions.

At paragraph 54 Rogers J stated as follows:

“One gains the distinct impression that SARS launched the application not so much because a preservation of the respondents’ assets was required but in order to bring the matters to a head by placing legal pressure on the respondents.”

The court expressed the view that the granting of a final preservation order would have the effect of forcing the company to shut down and the granting of a preservation order in such circumstances would not be just. The court made the point that the taxpayers had offered SARS caveats over the immovable property and had those been accepted by SARS, the litigation would have been resolved far earlier than what was the case.

In the result the court ordered that the caveats registered against the immovable properties remain in place unless the taxpayer and SARS agree thereto in writing or the court otherwise directs.

The court was critical of the appointment of the curator bonis by way of the provisional preservation order on the basis that that appointment increases the costs of the taxpayer and was not strictly necessary to preserve the assets in question. The court also made the point that section 163 of the TAA is a procedure for preserving assets and is not a means of execution on the basis that once tax has been assessed or is otherwise due and payable, the “pay now, argue later” rule applies. In terms of the provisions of the TAA, SARS has various provisions in terms of which it can institute proceedings to recover assessed tax from a delinquent taxpayer.

The court ordered SARS to pay a large portion of the taxpayer’s costs and dismissed SARS’ application to confirm the provisional preservation order.

The grant of a preservation order is an intrusion into the life of a taxpayer and confirmation of an interim preservation order will not be granted lightly by the courts, based on the Tradex decision.

Dr Beric Croome is a Tax executive: Edward Nathan Sonnenbergs Inc. This article first appeared in Business Day, Business Law & Tax Review (November 2014). Please contact me if there are copyright issues relating to use of image.

Monday 13 October 2014

The Pistorious Case: Taxability of Amounts Received for Information Supplied

The Washington Post reported on 5 March 2014 that NBC News had agreed to pay the family of the late Reeva Steenkamp, the woman killed by Oscar Pistorius, for its co-operation in a series of interviews.

The question that arises in this regard is the nature of such payments for tax purposes, that is, whether such amounts received by a person supplying information constitutes gross income and therefore liable to income tax under the provisions of the Income Tax Act, No. 58 of 1962 (‘the Act’), as amended or falls outside of the taxing statute.

Should Reeva Steenkamp's family pay tax on the fee paid to them by NBC news?
(Steenkamp's mother, June Steenkamp, above, in court for Oscar Pistorious' trial)
It is appropriate to refer to the case of the Commissioner for South African Revenue Service v Kotze, [2002] 64 SATC 447 where Mr Kotze received a reward from the police for information leading to the arrest and conviction of persons involved in illicit diamond buying. 

In that case, the taxpayer indicated that the reason for supplying the information to the police was to protect himself against any appearance of involvement in criminal activity and to protect his good name, his business and standing in the community of Springbok. Mr Kotze received an amount of R200,000 from the South African Police for the information supplied by him, which contributed to the criminals being charged and ultimately convicted.

The Tax Court, in ITC 1683 [2000] 62 SATC 406, accepted that there was no relationship of employer and employee between the police and Mr Kotze and it held that the amount did not constitute gross income and therefore was not liable to tax. The Commissioner was dissatisfied with the decision of the Tax Court and the matter proceeded on appeal to Cape High Court.

The High Court considered the definition of “gross income” in the Act and particularly paragraph (c) of the definition thereof which provides as follows:

“any amount, including any voluntary award, received or accrued in respect of services rendered or any amount…received or accrued in respect of or by virtue of any employment or the holding of any office.”

The court accepted that Mr Kotze was not employed by the South African Police Service and it was therefore necessary to determine whether the amount was received by him in respect of “services rendered”. In Kotze, the taxpayer’s counsel contended that the amount was fortuitously received and that it was unreasonable to tax the recipient on such an amount because he was performing, what he had perceived as a civic duty.

The court indicated that where a person rescues a drowning child and is rewarded by a grateful parent, such amount would be regarded as an accolade and would not  be regarded as a receipt received by the taxpayer in respect of services rendered.

Foxcroft J came to the conclusion that Mr Kotze was rewarded for having provided information to the police which lead to the arrest and conviction of the persons who had approached him. The court therefore decided that had Mr Kotze not provided the information in question, he would not have received the reward from the police.

The court unanimously concluded that the payment received by Mr Kotze, which amount he kept and did not give back to the police, was received for information which had been provided.

The court accepted that the police exercised a discretion in making payment to Mr Kotze but once that discretion had been exercised, the amount paid to him was in respect of services rendered and not as a reward for good conduct in the exercise of a civic duty.

The High Court therefore came to the conclusion that there was an adequate link between the service rendered and the payment of the reward. In the result, the High Court confirmed the assessment issued by the Commissioner to subject Mr Kotze to tax on the amount received from the police for the information supplied regarding the illicit diamond transactions, which resulted in the arrest and conviction of the perpetrators thereof.

Thus, where a person receives payment from a journalist for information supplied, it is submitted that such amount will constitute income fully liable to tax based on the decision of the court in Kotze’s case. The gross income definition is extensive and applies even though there may not be an employer/employee relationship between the parties concerned.

Thus, payment for information  supplied by one party to another will generally constitute gross income liable to income tax at the rate applicable to the recipient concerned.

In addition, where payments are received for the use of materials such that the press or advertising agencies pay an amount for the privilege of filming in a person’s home, those amounts will also constitute income on the basis that the amounts are paid for the use of the taxpayer’s assets. Clearly, where a taxpayer disposes of an asset and is not a dealer in such asset, the amount received will constitute proceeds for the purposes of capital gains tax which will result in the gain realised on that disposal being subjected to tax at a favourable rate, currently a maximum of 13.3% for natural persons.

However, where a person receives consideration for information supplied or for the use of their assets, such amounts will constitute gross income fully liable to income tax at the rate applicable to the person concerned, such that the rate could amount to 40%. 

Where the recipient of the consideration can show that expenses were incurred relating to the income generated for the information received or other similar payments, such expenditure should be deductible under the general deduction formula contained in the Act.

Taxpayers must remember that when they complete their tax returns, that they make full disclosure of all amounts received by them, failing which they would be subjected to the imposition of penalties under the Tax Administration Act, which can range from 0 to 200% of the tax that would otherwise have been payable, depending on the precise circumstances and when the amount that should have been subjected to tax is identified by SARS.

Dr Beric Croome: Tax executive Edward Nathan Sonnenbergs Inc. This article first appeared in Business Day, Business Law and Tax Review, October 2014. Image from The

Monday 8 September 2014

New Tax Disputes Resolution Rules Promulgated

The new rules governing objections and appeals were promulgated under section 103 of the Tax Administration Act No. 28 of 2011 (‘TAA’) in Government Gazette 37819 on 11 July 2014. 

These rules replace the rules which were promulgated under section 107A of the Income Tax Act and for all practical purposes the new rules took effect on 11 July 2014 and will therefore regulate the resolution of tax disputes going forward.

The new rules comprise some 68 rules whereas the old rules comprised some 29 rules. The new rules are very similar to the High Court rules regulating litigation and it is important that taxpayers are aware of the provisions of the rules should they entered into a dispute with the Commissioner: South African Revenue Service (‘SARS’).

The rules contain a number of definitions but one that must not be overlooked is that the term “day” means a business day as defined in section 1 of the TAA which excludes Saturdays, Sundays and public holidays and those days between 16 December of each year and 15 January of the following year. 

The rules define the term “deliver” as meaning to issue, give, send or serve a document to the address specified for such purpose under the rules and includes via eFiling. It is intended therefore that most of the documents required under the rules can be lodged via eFiling.

SARS must come to the party in terms of adhering to the time frames set out in new rules
The rules authorise SARS and the taxpayer to agree to extend the time period set out in the rules when necessary.

Under rule 6 a taxpayer can request reasons prior to lodging an objection and should consider doing so where proper reasons have not been made available at the time that the assessment is issued.  A request for reasons must be made in the prescribed form and manner and specify the address at which the taxpayer will accept delivery of the reasons.

The taxpayer must request reasons within 30 days of the date of assessment and SARS is in turn required to provide those reasons within 45 days.

The period of 45 days may be extended by a maximum of 45 days where exceptional circumstances, complexity of the case, principle or the amount involved justify an extension.

If the SARS official is satisfied that reasons have been supplied previously, the taxpayer is required to be informed thereof within 30 days and SARS must refer specifically to the documents which contain those reasons.

Under Rule 7, a taxpayer is required to deliver their notice of objection within 30 days after receiving reasons or the date of the assessment in question. 

The taxpayer is required to complete the prescribed form and must specify the grounds of objection in detail, that is, that part or specific amount of the disputed assessment to which the taxpayer objects, as well as the grounds of assessment which are disputed. 

At the time of filing the objection the taxpayer is required to submit those documents which have not previously been delivered to SARS in substantiation of the grounds of objection.

SARS may regard the objection as invalid where the requirements contained in rule 7 are not met and is obliged to inform the taxpayer within 30 days thereof.

The taxpayer will then be permitted to submit a new compliant objection within 20 days, this was previously 10 days, following the delivery of the notice of invalidity. 

Unfortunately we are seeing too many cases where SARS regards an objection as invalid on various grounds instead of actually dealing with the merits of the objection and taxpayers need to be aware of this problem.

Once the taxpayer has filed their objection, SARS may call for the submission of substantiating documents which are required to be lodged within 30 days of the request being made.

SARS is required to inform the taxpayer of their decision on the objection within 60 days under Rule 9, this period was previously 90 days. 

The period may be extended by a period of 45 days where SARS requests further information and the period may be extended by a period of 45 days where exceptional circumstances or the complexity of the matter, principle or amount involved justify that extension.

Where the taxpayer receives a notice of disallowance of objection, they are entitled to appeal against that decision under Rule 10 and must deliver the notice of appeal in the prescribed form and manner within 30 days after delivery of the notice of disallowance of the objection.

The taxpayer is required to specify in detail the grounds on which they are appealing, as well as the grounds for disputing the basis of the decision to disallow the objection and to specify a new ground on which the taxpayer is appealing. It is at this stage that the taxpayer is entitled to request that the matter be referred to Alternative Dispute Resolution (‘ADR’). 

It must be noted that the taxpayer may not appeal on a ground that constitutes a new objection against a part or amount of the disputed assessment not objected to under Rule 7.

It is therefore critical that when the taxpayer drafts their objection that they deal with all items in dispute, as the failure to do so at the right time will mean that the taxpayer cannot raise disputes later.

The taxpayer would then have the right to have the matter heard by the Tax Board, where the tax in dispute does not exceed R500,000 and SARS and taxpayer agree that the matter should proceed to the Tax Board, which is less costly and less formal than proceeding to the Tax Court.

The new rules contain a new process whereby a case may be designated as a test case under Rule 12, whereby one case will proceed to the Tax Court and similar cases are stayed until the test case is decided.

Instead of proceeding to the Tax Court, the taxpayer may decide to ask that the matter be referred to ADR and this often does result in the tax dispute being resolved. The processes regarding ADR are governed by Rules 17 to 25 and are largely similar to the rules which were previously in place.

Where the case proceeds to the Tax Court, SARS is required to file a statement containing their grounds of assessment and opposing appeal (Rule 31) within 45 days of the taxpayer filing their notice of appeal or the failure of ADR. 

The statement is required to set out the statement of consolidated grounds of disputed assessment, as well as which facts or legal grounds in the taxpayer’s notice of appeal SARS admits and which are opposed. SARS is not entitled to include a ground which constitutes a novation of the whole or factual legal basis of the disputed assessment, or which requires the issue of a revised assessment.

The taxpayer is then required to deliver their statement of grounds of appeal (Rule 32) within 45 days after delivery of SARS’ statement or after discovery of documents by SARS.

The taxpayer must set out their grounds of appeal and which facts or legal grounds are admitted and those which are opposed. The taxpayer is precluded from including a ground of appeal that constitutes a new ground of objection against a part or amount of the disputed assessment not objected to under Rule 7.

Under Rule 33 SARS may then deliver a reply to the taxpayer’s statement of grounds of appeal. The issues in the appeal are those contained in the Rule 31 and 32 statements. The rules allow for the parties to agree that the statements made under Rule 31, 32 or 33 be amended.

As is the case with civil litigation, the parties are required to make discovery of documents in accordance with Rule 36. Rule 37 regulates the notice of expert witnesses. A pre-trial conference is required to be arranged not later than 60 days before the hearing of the appeal.

Under Rule 39 the taxpayer is required to apply to the Registrar of the Tax Court for a date of hearing of the appeal by the Tax Court within 30 days of delivery of the statement of grounds of appeal or SARS’ reply thereto.

SARS in turn is required to compile a dossier for the Tax Court and submit that at least 30 days before the case is heard by the Tax Court.

Part F of the new rules regulate applications on notice either in terms of the TAA itself or under the rules governing objections and appeals, which would include applications for orders to compel the taxpayer or SARS to comply with the provisions of the rules and related matters. Part G of the new rules contains the transitional arrangements, which in principle provide that the new rules will apply to disputes currently in progress.

The frustration that taxpayers experienced in the past was that SARS often failed to adhere to the time frames contained in the old rules. It must be noted that the new rules seek to shorten the time frame for resolution of tax disputes and it is hoped that SARS will adhere to those periods.

Dr Beric Croome Tax Executive: Edward Nathan Sonnenbergs Inc. This article first appeared in Business Day, Business Law and Tax Review, 8 September 2014. Image purchased from 

Monday 11 August 2014

The Supreme Court of Appeal Admonishes the South African Revenue Service

Under the provisions of the Tax Administration Act, the Commissioner: South African Revenue Service (‘SARS’) is entitled to request that a taxpayer submits relevant material that SARS requires in terms of section 46 of the Tax Administration Act No. 28 of 2011 (‘TAA’).

Section 1 of the TAA in turn defines ‘relevant material’ as meaning:

“any information, document or thing that is foreseeably relevant for the administration of a Tax Act as referred to in section 3.”

Section 3 in turn contains an extensive definition of what constitutes the administration of a Tax Act and in essence encompasses information required for purposes of assessing taxpayers for tax purposes.

Under the general provisions of the TAA a taxpayer bears the onus that an amount is not subject to tax or that a deduction claimed is deductible for tax purposes. Section 102 of the TAA, which replaced the erstwhile onus provision contained in section 82 of the Income Tax Act, provides that a taxpayer bears the burden of proving:

·         ‘that an amount, transaction, event or item is exempt or otherwise not taxable;
·         that an amount or item is deductible or may be set-off;
·         the rate of tax applicable to a transaction, event, item or class of taxpayer
·         that an amount qualifies as a reduction of tax payable;
·         that a valuation is correct; or
·         whether a “decision” that is subject to objection under appeal in the Tax Act, is incorrect.’

However, the burden of proving whether an estimate envisaged in section 95 of the TAA deals with estimation of assessments the burden shifts to SARS which is required to show that the estimate is reasonable. 

Furthermore, where SARS imposes an understatement penalty SARS must prove the facts on which it based the understatement penalty levied under chapter 16 of the TAA.

It must be remembered that where a person is charged with a criminal offence, the state has the obligation to prove that the person committed that offence beyond any reasonable doubt, which is a very high threshold. 

Insofar as discharging of the onus under tax legislation is concerned, the taxpayer must show on a balance of probabilities that the facts or assertions made are correct.

When SARS conducts an audit and requires information to satisfy SARS that deductions have been properly claimed, the question often arises as to the extent of documentary evidence that is required to be submitted by a taxpayer to discharge the onus placed upon the taxpayer under the TAA.

In the Supreme Court of Appeal case of The Commissioner for the South African Revenue Service v Pretoria East Motors (Pty) Ltd, case number 291/12 [2014] ZASCA 91 in which judgment was delivered by Ponnan JA on 12 June 2014 clear guidelines were set out as to what constitutes sufficient proof which should be acceptable to SARS in a taxpayer discharging the onus borne by a taxpayer.

In the Pretoria East Motors case the taxpayer carried on business as a car dealership in Pretoria selling new and used vehicles. During June and July 2003 SARS officials conducted a detailed audit of the taxpayer’s affairs covering the period 2000 to 2004.

In concluding the audit SARS issued additional income tax and value-added tax assessments. 

The taxpayer lodged objections against the various assessments and that having been disallowed by SARS it then appealed to the Tax Court in Pretoria.  Both the taxpayer and SARS were dissatisfied with the decision of the Tax Court and the case proceeded to the Supreme Court of Appeal.

The Court pointed out that much of the evidence presented at the Tax Court took the form of documentary exhibits, including documents obtained or prepared by SARS during the course of the audit.

The Court pointed out that the taxpayer’s ipse dixit will not lightly be regarded as decisive. It is necessary that the taxpayer’s ipse dixit is considered together with all of the other evidence of the case. 

The Court made the point that the interests of justice require that the taxpayer’s evidence and questions of its credibility be considered with great care. 

It is required that the taxpayer’s evidence under oath and that of its witnesses must be properly considered by the court and the credibility of the taxpayer’s witnesses must be assessed no different to any other case that comes before a court.

SARS issued additional assessments on the basis of information obtained from the taxpayer’s records and the court indicated that the SARS official, namely Ms Victor, was to examine the taxpayer’s accounts and where she identified a discrepancy that she did not understand be raised in assessment to additional tax either for income tax or VAT or in some cases both. 

The court pointed out that Ms Victor did not seek to familiarise herself with the workings of the taxpayer’s accounting system even though the information was available to her. Certain of the transactions concluded by the taxpayer were purely internal to the taxpayer’s operations and were being reflected as sales on that internal system did not comprise sales in the true sense for fiscal purposes. 

The court pointed out that Ms Victor ignored the internal character of the transactions of the taxpayer and she levied VAT thereon. At paragraph 11 the court stated as follows:

“As best as can be discerned, Ms Victor’s approach was that if she did not understand something she was free to raise an additional assessment and leave it to the taxpayer to prove in due course at the hearing before the Tax Court that she was wrong. Her approach was fallacious. The raising of an additional assessment must be based on proper grounds  for believing that, in the case of VAT, there has been an under declaration of supplies and hence of output tax, or an unjustified deduction of input tax. In the case of income tax it must be based on proper grounds for believing that there is undeclared income or a claim for a deduction or allowance that is unjustified. It is only in this way that SARS can engage the taxpayer in an administratively fair manner, as it is obliged to do. It is also the only basis on which it can, as it must, provide grounds for raising the assessment to which the taxpayer must then respond by demonstrating that the assessment is wrong. This erroneous approach led to an inability on Ms Victor’s part to explain the basis for some of the additional assessments and an inability in some instances to produce the source of some of the figures she had used in making the assessments. In addition, as a matter of routine, all the additional assessments raised by her were subject to penalties a the maximum rate of 200 per cent, absent any explanation as to why the taxpayer’s conduct was said to be dishonest or directed at the evasion of tax.”

It is clear that the Supreme Court of Appeal has held that in auditing a taxpayer the Commissioner is required to properly consider the documentation provided and to understand that information. It is not sufficient for SARS to merely request information and then disregard it and to issue an assessment as it sees fit.

The court made the point that where the SARS auditor issues an assessment based on the taxpayer’s accounts and records but has misconstrued those records then it will be sufficient for the taxpayer to explain the nature of SARS’ misconception, point out the flaws in the analysis and to explain how those records and accounts should be properly understood.

Whilst it is clear from the judgment that the taxpayer did not succeed in all of its challenges to the VAT and tax assessments issued by the Commissioner, the taxpayer did succeed in satisfying the court that SARS had gone too far in reaching the conclusions it did by disregarding information provided to it.

It is clear under the right to administrative justice in section 33 of the Constitution that taxpayers are entitled to fair administrative action and this includes the conduct of SARS officials in concluding an audit into the affairs of the taxpayer. 

The law requires that SARS officials properly evaluate the documentary evidence presented and where taxpayers reach the conclusion that this is not the case they should challenge SARS’ decision or alternatively seek to raise the problem directly with the office of the Tax Ombud which office has been created to deal with abuses of power by SARS and where SARS does not comply with proper procedures in administering the tax laws of South Africa.

SARS, in the case under consideration alleged that insufficient proof had been made available by the taxpayer. 

In fact the taxpayer had offered SARS sight of all of the taxpayer’s ledger accounts and this invitation was declined. It is clear that in the case the SARS auditors had been given access to the documents substantiating the taxpayer’s accounts but chose not to examine them.

Thus, taxpayers who are subject to audit by SARS need to be aware of the rights that they have flowing from the Constitution and also the level and standard by which SARS is required to operate which are enshrined in the Constitution under fiscal laws of the country.

Dr Beric Croome, Tax Executive: Edward Nathan Sonnenbergs Inc.  This article first appeared in Business Day, Business Law and Tax Review, August 2014. Image purchased from

Monday 14 July 2014

Should the South African Revenue Service adopt a Taxpayer Bill of Rights?

A Taxpayers’ Charter setting out the rights and obligations of taxpayers in South Africa was published for the first time during 1997. That Charter contained a statement of intent insofar as taxpayers’ rights in South Africa is concerned. On 19 October 2005 the SARS Client Service Charter was released setting out the levels of service that taxpayers could expect in their dealings with the South African Revenue Service (‘SARS’).

Currently, (at date of writing this article), neither the Taxpayers’ Charter nor the SARS’ Service Charter Standards can be located on the SARS website and it would appear to be a matter of ‘out of sight out of mind’.

It is appropriate to revisit the matter in light of the fact that the Internal Revenue Service (‘IRS’) in the United States of America announced on 10 June 2014 the adoption of a Taxpayer Bill of Rights that will become a cornerstone document to provide that country’s taxpayers with a better understanding of their rights. 

The US Taxpayer Bill of Rights consolidates the various existing rights imbedded in the Internal Revenue Code and groups those into ten broad categories making them more visible and easier for taxpayers to find on the IRS website. 

The National Taxpayer Advocate, Professor Nina E. Olson, similar to the Tax Ombud in South Africa, listed the desire to see a Taxpayer Bill of Rights released as a top priority in her most recent annual report to Congress, and stated as follows:

‘However, taxpayer surveys conducted by my office have found that most taxpayers do not believe they have rights before the IRS and even fewer can name their rights. I believe the list of core taxpayer rights the IRS is announcing today will help taxpayers better understand their rights in dealing with the tax system.’

The US Taxpayer Bill of Rights sets out ten rights which taxpayers have in their dealings with the IRS. The first right is that to be informed so that taxpayers know what they need to do to comply with the tax laws of the United States. In addition, taxpayers are entitled to clear explanations of the laws and IRS procedures in all tax forms, instructions, publications, notices and correspondence.

The taxpayer has the right to quality service which entitles them to receive prompt, courteous and professional assistance in their dealings with the IRS and to be spoken to in a way that they can easily understand.

The Bill of Rights lays down that taxpayers have the right to pay only the amount of tax legally due, including interest and penalties and to have the IRS apply all tax payments properly.

Furthermore, US taxpayers have the right to raise objections and provide additional documentation in response to formal IRS actions or proposed actions or to expect that the IRS will consider their timely objections and documentation promptly and fairly and to receive a response where the IRS does not agree with their position.

In addition, US taxpayers are entitled to a fair and impartial administrative appeal of most IRS decisions, including penalties and have the right to receive a written response regarding the Office of Appeals’ decision. Taxpayers also have the right to take their cases to court.

Furthermore, taxpayers have the right to finality and they have the right to know  the maximum amount of time they have to challenge the IRS’ position, as well as the maximum amount of time that the IRS has to audit a particular tax year or collect a tax debt. Related to this, US taxpayers have the right to know when the IRS has finished an audit.

The Taxpayer Bill of Rights sets out that taxpayers have the right to expect that any IRS enquiry, examination or enforcement action will comply with the law and be no more intrusive than necessary and will respect all due process rights.

In the US taxpayers have the right to expect that any information they provide to the IRS will not be disclosed unless authorised by the taxpayer or by law. US taxpayers have the right to expect appropriate action will be taken against employees and others who wrongfully use or disclose taxpayer return information.

In addition, taxpayers have the right to retain an authorised representative of their choice to represent them in their dealings with the IRS. Taxpayers have the right to seek assistance from a Low Income Taxpayer Clinic in the event that they cannot afford representation. 

This is unfortunately something that is lacking in South Africa and consideration should be given to creating non-governmental organisations which can provide assistance to those low income taxpayers who may need assistance in their dealings with SARS.

Finally, the Taxpayer Bill of Rights provides that taxpayers have the right to expect the tax system to consider facts and circumstances that might affect their underlying liabilities, ability to pay or ability to provide information timely. 

Furthermore, US taxpayers have the right to receive assistance from the Taxpayer Advocate Service if they are experiencing financial difficulty or in the event that the IRS has not resolved their tax issues properly and timeously through its normal channels. 

It is hoped, that in time the Tax Ombud will be conferred the powers available to the Taxpayer Advocate in the USA to direct SARS from taking action against taxpayers until the Tax Ombud has reviewed the particular case.

In the media release published by the IRS it is indicated that the IRS will add posters and signs in the coming months to its public offices so that taxpayers visiting the IRS can easily see and read the information regarding the Taxpayer Bill of Rights. 

Furthermore, a document summarising the rights that taxpayers have under the Bill of Rights will be mailed to taxpayers as taxpayers start to receive follow up correspondence regarding the 2014 filing season. The IRS Commissioner, Mr Koskinen, pointed out that the information contained in the taxpayer Bill of Rights is critically important for taxpayers to read and understand, particularly when they interact with the IRS. 

It's accepted that the US Taxpayer Bill of Rights does not create new rights for taxpayers but rather seeks to highlight and showcase the rights for people to understand and become familiar with those rights and be in a position to enforce them in their dealings with the IRS.

In South Africa, the rights which taxpayers have in their dealings with SARS flow from the Bill of Rights contained in the Constitution of the Republic of South Africa and it is unfortunate that many taxpayers are not aware of the rights which they have in their dealings with SARS officials. It is also unfortunately the case that not all SARS officials are mindful of the rights which taxpayers have under the tax system.

SARS and the National Treasury should consider compiling and publishing a Taxpayer Bill of Rights similar to that in the United States, so as to remind taxpayers of the rights that they have in dealing with SARS and also serve as a useful reminder to SARS officials of the rights which they are required to adhere to in their interactions with taxpayers.

Dr Beric Croome, Tax Executive, ENSAfrica. This article first appeared in Business Day, Business Law and Tax Review, July 2014. Image created from

Tuesday 10 June 2014

Preservation Order Assists SARS in Tax Action

Prior to the enactment of the Tax Administration Act No. 28 of 2011 (“TAA”), the Commissioner: South African Revenue Service (“Commissioner”) was required to apply for a preservation order under the common law, as the Income Tax Act did not itself contain a mechanism whereby the Commissioner could apply for a preservation order under the fiscal statutes to ensure the preservation of assets where there was a concern that a taxpayer may dissipate assets and frustrate SARS’ attempts to recover the tax due.

Section 163 of the TAA regulates the manner in which SARS may obtain a preservation order from the High Court to prevent the dissipation of assets. The High Court was recently required to adjudicate the application of section 163 of the TAA in the case of The Commissioner for the South African Revenue Service v C van der Merwe in re: In the exparte application of: The Commissioner for the South African Revenue Service and G van der Merwe and various others.

The case has as yet not been reported but judgment was handed down by Savage AJ of the Western Cape Division of the High Court on 28 February 2014 in respect of case number 13048/13.

The judgment indicates that Ms C van der Merwe worked as a model declaring taxable income ranging from R20,023.00 in 2009 to R45,366.00 in the 2012 year of assessment. During May 2013  she acquired an Audi R8 and during June 2013 she acquired a Land Rover SD4 coupe. 
The Act prevents dissipation of assets
which SARS may lay claim to in
a tax recovery operation.
Both vehicles were not financed and the purchase price was paid in cash by unknown persons. During May 2013 Standard Bank received the amount of USD$15.3 million for the benefit of C van der Merwe. The person remitting the funds from abroad was identified as a Mr Rawas and the funds were transferred from a bank in Lebanon. C van der Merwe instructed the bank to sell the foreign currency in her favour and gave as the contact details  those of her father and she indicated that the funds constituted a gift received from Mr Rawas. 

On 30 August 2013 a provisional preservation order was granted ex parte by Rogers J on application by the Commissioner under the provisions of section 163 of the TAA. In accordance with the order granted by Rogers J, the respondents were required to show why a final preservation order should not be granted and Savage AJ had to determine whether the provisional preservation order granted should be confirmed.

The judgment reports that C van der Merwe’s father is engaged in various disputes with the Commissioner over a number of years and that her father and various other entities controlled by him are liable to SARS for payment of approximately R291 million in respect of tax, additional tax penalties and interest. Furthermore, criminal charges have been instituted against C van der Merwe’s father.

SARS contends that Mr van der Merwe, together with the assistance of other parties,  intentionally manipulated the value of certain assets owned by non-registered VAT entities which sold second hand goods, comprising aircraft vessels and spare parts  to vendors in order to enable the registered vendors to claim national input tax under section 16(3) of the VAT Act. 

The judgment indicates that payment in terms of the various agreements was largely made by transferring shares, the values of which have been manipulated according to SARS.  The Commissioner  contended that the various transactions undertaken by Mr van der Merwe constituted a scheme as envisaged by section 73 of the VAT Act  and that C van der Merwe, either in her own right owes SARS taxes or holds assets on behalf of her father, or some of the other respondents against which assets SARS may execute in order to ensure the collection of taxes due.

A curator bonis is envisaged in section 163(7)(b) of the TAA, was appointed in accordance with the provisional preservation order to take charge of the assets of the various respondents and to identify assets which can be executed against for the collection of taxes due to SARS.

The van der Merwe family opposed the confirmation of the preservation order on the basis that C van der Merwe has no interest in the business affairs of her father and that the funds received by her were received for her own benefit.

The Commissioner submitted that C van der Merwe’s opposition to the preservation order lacked merit and that she had not raised any bona fide dispute of the fact that she had not adequately explained who Mr Rawas is, nor the rationale for the alleged gift she received of USD$15.3 million.

The Court reviewed the provisions of section 163 of the TAA and confirmed that the preservation order is granted to prevent realisable assets from being disposed of or removed, which may frustrate the collection of the full amount of tax that is due and payable.

Savage AJ indicated that it is not required that the Court determines whether the tax is as a matter of fact due and payable by a taxpayer or other person contemplated in section 163 of the TAA, as that will be determined by a subsequent inquiry. At the preservation stage it is necessary that the Court is supplied sufficient information to determine whether the preservation order should be granted against the persons it is sought. 

The Commissioner argued that the receipt of the R142 million by Mr van der Merwe’s daughter, over which he had signing powers, indicated that Mr van der Merwe had control over his daughter’s funds. 

SARS  argued that the daughter held the assets on behalf of her father or some of the other respondents  and that the assets should be preserved to secure the collection of tax. Furthermore, SARS submitted that receipt of the amount of R142 million by C van der Merwe probably has tax complications itself which need to be investigated. 

The Court therefore decided that reasonable grounds were shown for the preservation order against C van der Merwe to secure tax in relation to assets while the receipt of the funds is being investigated. Savage AJ reached the following conclusion insofar as the receipt of the alleged gifts is concerned:

“the probabilities that a young model, earning in the region of R20,000 per annum, would following a few short visits to a resort in the Seychelles, enjoy the serial generosity of a donor or benefactor on an unparalleled scale I find to be far-fetched and implausible.”

The Court was therefore not prepared to accept the explanation provided by C van der Merwe as to the nature of the funds she received from Mr Rawas. In addition, no details were provided in respect of the donor who purchased the two vehicles which were made available and registered in the name of C van der Merwe.

C van der Merwe asked the Court to dismiss the preservation order, or alternatively to postpone  the matter pending the determination of constitutional and other relevant issues which may be raised by her or the other respondents. 

The Court reached the conclusion that there was no basis on which to grant either order requested by C van der Merwe.

At the end of the day the Court therefore reached the conclusion that the provisional preservation order granted in terms of section 163(3) of the TAA should be confirmed.

In reviewing the judgment it is clear that SARS has the power to apply to the High Court for a preservation order to protect assets where there is a concern that a taxpayer may dissipate  assets which would otherwise be available to SARS to settle tax debts due. 

The Court will also not likely refuse to confirm a preservation order where a taxpayer does not adequately explain the nature of amounts received by them.

Dr Beric Croome, Tax Executive, ENSAfrica Inc. This article first appeared in Business Day, Business Law and Tax Review June 2014. Image purchased from