Prior to the coming into
force of the Tax Administration Act (‘TAA’) on 1 October 2012, the burden of
proof in tax matters was regulated by way of section 82 of the Income Tax Act
(‘the Act’).
Under section 82 the burden of proof was on the taxpayer to show
that an amount was either taxable or exempt or that any deduction was allowable
under the Act. Historically when a taxpayer challenged the imposition of
additional tax the burden of proof effectively fell on the taxpayer.
With the
introduction of the TAA this changed by virtue of section 102 of that Act which
now provides that the burden of proof regarding facts on which the South
African Revenue Service (“SARS”) based the imposition of an understatement
penalty under chapter 16 of the TAA is on SARS. Clearly, where a tax dispute
relates to whether an amount is deductible or not or is exempt or not otherwise
taxable, the burden of proof remains on the taxpayer.
However, where SARS
imposes the understatement penalty, the burden of proof lies on SARS and in a
tax dispute before the Tax Court, SARS is required to commence the proceedings where
after the taxpayer is entitled to respond. In all other disputes, the burden of
proof lies on the taxpayer and the taxpayer is required to commence proceedings.
In the case of Mrs X v The Commissioner for the South
African Revenue Service, case number: 13380 decided by the Tax Court in
Johannesburg on 27 January 2016 as yet unreported, an appeal was lodged against
the imposition of the penalty of R5 456 484.60 imposed under section 76 of the
Act. In this case the penalty was imposed prior to the coming into force of the
TAA as the penalty related to the 2009 year of assessment but the dispute was
regulated by section 129(2)(b) of the TAA.
The Tax Court had to deal with
points in limine before considering
the merits of the case. The two points in
limine argued by the parties related
to the incidence of the burden of proof pertaining to the imposition of
additional tax and whether the duty to commence illegal proceedings was on the
applicant, that is the taxpayer or on SARS. As indicated above, the penalty was
imposed under section 76 of the Act, and that Act was repealed with effect from 1 October 2012 by way of section 270(2)(d) of the TAA. Section 270(2)(d) of the
TAA contains transitional rules regulating the conclusion of actions or
proceedings taken or instituted under the provisions of a tax act repealed by the TAA but not competed by 1 October 2012
and states clearly that the acts or proceedings must be continued or concluded under
the provisions of the TAA as if they were taken or instituted under that Act.
SARS subjected the
taxpayer to 100 % additional tax in terms of section 76 of the Act and that decision
was made by SARS in terms of the law as it was prior to 1 October 2012. The
objection, disallowance of objection and appeal were all lodged prior to 1
October 2012 when the TAA came into force.
Prior to the coming into force of
the TAA the burden of proof was always on the taxpayer under section 82 of the
Act. The Court reviewed various cases dealing with the position where one
statute is repealed and replaced by another. SARS sought to argue that the
transitional provisions in the TAA required the taxpayer to discharge the onus
of proof regarding the imposition of the penalty.
The Tax Court did not agree
with SARS’s argument in this regard and noted that the appeal was only being dealt
with three years after the TAA took effect. The Court therefore decided that
the provisions of section 102(2) and 129(3) of the TAA dealing with the burden
of proof is applicable when dealing with penalties imposed and apply to the
dispute under consideration.
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Prior to the coming into force of the TAA
the burden of proof was always on the taxpayer
Image purchased from www.iStock.com ©iStock.com/"conflict" by alexskopje
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The Tax Court noted that
the provisions of section 102(2) of the TAA have reversed the onus and that
SARS has to prove the case regarding the imposition of the penalty. It was
pointed out that the sole issue before the court and the present appeal related
to the imposition of the additional tax and thus the Court found that the
burden of proof pertaining to the imposition of additional tax is upon SARS
under the provisions of the TAA and that it has the duty to commence the
proceedings in the dispute.
If the dispute related to
whether an amount was subject to tax or not or whether a deduction was lawfully
claimed the onus of proof would have been on the taxpayer and the taxpayer
would have been required to commence the proceedings in the Tax Court. However
by virtue of the fact that the dispute related only to the imposition of
additional tax SARS was required to commence the proceedings relating thereto.
The Court considered the
imposition of the penalty by SARS and the reduction thereof from 100 % to 50 %
and taking account of SARS evidence as well as the taxpayers’ arguments decided
to reduce the penalty to 35 %.
Furthermore, counsel for
the taxpayer contended that SARS should pay the costs of the litigation on an attorney
and client scale. Pretorius J decided that SARS had not acted vexatiously or
wrongly by contesting the taxpayer’s appeal and therefore decided that no order
should be made as to costs.
It must be noted that
section 130 of the TAA regulates the award of costs by the Tax Court. Generally,
the parties to a tax dispute namely, the taxpayer and SARS, will pay their own legal
costs unless the requirements set out in section 130 are met where the court is
entitled to award costs to a party.
It is important that
taxpayers take note of this decision and remember that where penalties are
imposed the onus of proof in litigation lies on SARS insofar the imposition of
the penalty is concerned and not on the taxpayer.
Dr Beric Croome is a Tax Executive at ENSafrica. This article first appeared in Business Day, Business Law and Tax Review, July 2016
