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 www.iStock.com
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