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 As indicated above, the penalty was imposed under section 76 of the Act, and that Act was repealed with effect from 1 October 2012 by way of section 270(2)(d) of the TAA.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rules regulating the conclusion of actions or proceedings taken or instituted under the provisions of a tax act repealed by the TAA but not competed by 1 October 2012 and states clearly that the acts or proceedings must be continued or concluded under the provisions of the TAA as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.
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
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
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