Several court decisions have clearly illustrated that taxpayers’ rights can and will be protected when the South African Revenue Service (Sars) does not follow due process.
In a recent unreported case – on the validity of a tax audit process – the tax court reversed an entire assessment because Sars did not meet the requirements of the Tax Administration Act (TAA).
Beric Croome, tax executive at ENS, says the case serves as a “useful reminder” of taxpayers’ rights when Sars conducts an audit into their affairs.
In this particular case Sars disallowed a taxpayer’s farming expenditure of R1.7 million, and his retrenchment payment of R7 million was taxed as normal tax and not at the special rate applicable to retrenchment lump sums.
The taxpayer objected to the new assessment and when the objections were disallowed the taxpayer, a former CEO of a company which retrenched more than 30% of its workforce, went to court.
The taxpayer only realised he was audited when he received Sars’s statement of grounds for assessment. The court found Sars’s reliance on a procedurally flawed audit, conducted without the taxpayer’s knowledge, “impermissible”.
The breach of the legality principle was further compounded by Sars’s failure to comply with the TAA which requires Sars to provide the taxpayer with a report on the status of completion of the audit. The taxpayer also did not receive a letter of findings following the completion of the audit.
Patricia Williams, tax partner at Bowmans, says Sars appears to be of the view that a letter of findings is only required when a formal audit is conducted and not with verifications.
“Sars is, however, wrong that a letter of findings is not necessary in terms of a verification,” she says. The Promotion of Administrative Justice Act requires any administrator (which includes Sars) to give a person adequate notice of the nature and purpose of proposed administrative action, and a reasonable opportunity to make representations.
“In my view Sars must give taxpayers an opportunity to respond to a proposed assessment, in terms of the Promotion of Administrative Justice Act, whether or not this obligation is explicitly contained in the Tax Administration Act.”
The purpose of a letter of audit findings is to give taxpayers advance warning of a potential tax assessment and the opportunity to respond to the findings.
Williams says there are some common violations in relation to audits or verifications.
These include repeated requests for verification, without Sars actually applying its mind to the documents submitted by the taxpayers; extended or repeated audits, which deny taxpayers the right to finality; overly broad requests for information or documentation; issuing assessments based on extremely tenuous legal arguments, seemingly in an attempt to postpone a taxpayer’s entitlement to a tax refund; and providing inadequate reasons for an assessment.
Another frustration for taxpayers is Sars not asking for the right documents, and then arguing that the taxpayer did not meet the burden of proof.
She says this is very much like Sars saying: “I asked you for nothing; and the nothing that you gave me does not convince me you are entitled to a tax deduction, so I will assess you.”
The South African Institute of Tax Professionals (Sait) said in an earlier submission to National Treasury that many taxpayers are receiving inquiries from Sars without understanding the reasons for the inquiry. They are often confused as to what Sars is really looking for.
“The net result is a prolonged guessing game, leaving many taxpayers apprehensive caused by uncertainty.”
Keith Engel, CEO of Sait, says an underlying problem is Sars’s reluctance to engage with taxpayers directly to clarify their matters.
“At some point, Sars institutionalised an overly rigid system of engagement to prevent corruption. The unfortunate side-effect has been a loss of open-dialogue, resulting in the guessing game causing so much anxiety.”
Sait recommended an amendment to the Tax Administration Act which makes it compulsory for Sars to comply with the requirement to provide taxpayers with a letter of audit findings.
It said the section should be applicable not only to any “audits”, but also to any verifications, or any other process of which the result is a potential assessment being raised.
“The taxpayer should be entitled to receive a letter of findings setting out the potential adjustments of a material nature, and 21 business days within to respond, before any additional assessment is issued by Sars,” Sait said.
The submission was made for possible inclusion in the annexure in the 2018 budget which deals with additional tax policy and administrative adjustments.
“Instead, there were virtually no taxpayer rights issues in the budget. This is disappointing, but unsurprising given Sars’ stance on taxpayer rights over the last few years,” notes Williams.
The only reference to “taxpayer rights” in the budget related to the proposal that a taxpayer has to be notified at the start of an audit as part of efforts to keep all parties informed.
Croome says if Sars fails to adhere to its statutory obligations the court will set aside any additional assessments. It is more likely than not to also award costs against Sars for not complying with the law.
In the case of the former CEO, the court ruled that Sars had to pay the cost of his appeal.