The circumstances under which SARS may raise an assessment post prescription.
In a recent case [1], a taxpayer tried to defend himself against an assessment raised by SARS after the original assessment prescribed. The gist of the taxpayer’s defence, insofar relevant here, was that SARS was not allowed to have raised the assessment in question because the original assessment had prescribed and that SARS had not objectively satisfied themselves of the existence of the requisite fraud. What ensued was, amongst other things, an analysis by the court regarding the circumstances under which SARS may raise an assessment post prescription. Whilst the analysis by the court of these circumstances relate to the now-repealed section 79 of the Income Tax Act, 58 of 1962 (“the ITA”), suffice it state that in the judgment, the court likens the current sections 92 and 99 of the Tax Administration Act, 28 of 2011 (“the TAA”) to the now-repealed section 79 of the ITA.
According to the court, SARS can lift the veil of prescription under section 99(2) of the Act (in respect of assessments that are not self-assessments), if SARS is satisfied that the correct amount was not assessed to tax on the original assessment due to fraud, misrepresentation or non-disclosure of material fact (hereinafter collectively referred to as “misconduct”). SARS’s satisfaction of the existence or otherwise of the misconduct follows, based on the judgment when one reads sections 92 and 99(2) together. Those sections read as follows:
Section 99(2)
(2) Subsection (1) does not apply to the extent that— (a) in the case of assessment by SARS, the fact that the full amount of tax chargeable was not assessed, was due to— (i) fraud; (ii) misrepresentation; or (iii) nondisclosure of material facts;
Section 92
“assessments.—If at any time SARS is satisfied that an assessment does not reflect the correct application of a tax Act to the prejudice of SARS or the fiscus, SARS must make an additional assessment to correct the prejudice.”
The court concludes that it is sufficient for SARS’s satisfaction regarding the existence of the misconduct to have been reached subjectively. What this means is that the relevant SARS official must be of the opinion there was misconduct and may then lift the veil of prescription by raising an additional assessment. SARS cannot, however, according to the court, form its opinion arbitrarily. It must, says the court, base its subjective opinion on objective facts in compliance with SARS’ constitutional obligations towards taxpayers. SARS must therefore have reasonable grounds for its subjective opinion.
This interpretation of sections 92 and 99 raises at least two important questions: (a) If SARS need only subjectively believe, based on reasonable grounds, that there was misconduct, is the objective existence of misconduct irrelevant to whether SARS may lift the veil of prescription? And (b) if the objective existence of misconduct is not required to lift the veil of prescription, what exactly will SARS have to prove in discharging its onus of proof and perhaps more importantly, when will SARS need to prove that?
It is trite that the purpose of the prescription rules is to achieve finality[2]. In other words, once an assessment prescribes, whether that assessment is correct or not, it cannot be changed. It is also trite though that incorrect assessments may nevertheless be changed by SARS post prescription in the case of a dishonest taxpayer (i.e. taxpayers guilty of misconduct). If the objective existence of misconduct is not a requirement for lifting the veil of prescription, taxpayers who are not actually guilty of any misconduct may never get the benefit of finality. Whilst indeed SARS must have based its subjective opinion on reasonable grounds according to the judgment in the recent case, the mere fact that there may be reasonable grounds to believe that there was misconduct does mean there was in fact any misconduct.
It is also trite that SARS bears the burden of proving that it may lift the veil of prescription. To this end, SARS needs to prove that there was misconduct and further, that the misconduct was the cause of SARS not assessing the taxpayer correctly. If SARS’ subjective satisfaction of the existence of the misconduct is sufficient for SARS to lift the veil of prescription, this would arguably mean that SARS need only prove that (a) it is reasonable for SARS to believe that there were misconduct and (b) that it is reasonable for SARS to believe that the “alleged” misconduct caused SARS to assess the taxpayer incorrectly. This simply cannot be.
On careful reading of sections 92 and 99 it is evident that SARS’ satisfaction is only required under section 92. In terms of section 92, SARS can raise an additional assessment if satisfied that the original assessment is incorrect. Indeed, section 92 only requires SARS’ subjective satisfaction, based on reasonable grounds, in order to raise an additional assessment (see in this regard Commissioner South African Revenue Services v Pretoria East Motors (Pty) Ltd (291/12) [2014] ZASCA 91; [2014] 3 All SA 266 (SCA); 2014 (5) SA 231 (SCA) (12 June 2014). SARS’ ‘satisfaction’ regarding the existence of the misconduct is, however, absent from the wording of section 99(2). Section 99(2), when read in isolation, requires the objective existence of misconduct.
When section 99(2) is read with section 92, it appears that the legislature intended to add a further qualification to the raising of an additional assessment post prescription. The first, in terms of section 92, is that SARS must form a subjective opinion based on reasonable grounds that the original assessment is incorrect. Secondly, in terms of section 99(2), the assessment must be incorrect because of/as a result of the objective existence of misconduct. On this interpretation, the objective existence of the misconduct is a pre-requisite to the raising of an additional assessment post prescription and SARS’ subjective satisfaction regarding the misconduct is irrelevant.
The interpretation that the existence of misconduct must be objectively established accords with the purpose of the prescription rules as a taxpayer not actually guilty of any misconduct will enjoy the benefit of prescription, despite the fact that SARS may believe that the original assessment is incorrect. Taxpayers who are factually guilty of misconduct will not. This would also mean that SARS must prove the existence of the misconduct and that the proven misconduct is the cause of the incorrect assessment.
In practice, SARS typically raise assessments post prescription after the conclusion of an audit on the taxpayer. An audit of the taxpayer, in the true sense of the word ‘audit’, triggers the application of section 42 of the TAA and, invariably, the requirements of section 96(2) of the TAA in relation to any additional assessment following conclusion of such audit.
In broad terms and insofar relevant here, section 42 requires of SARS to provide the taxpayer with a document containing the outcome of the audit and the grounds for what would at that stage be, SARS’ proposed assessment. In practice, this document is often called “a letter of audit findings”.
If SARS eventually does raise the additional assessment, SARS would have to comply with section 96(2) of the TAA by providing the grounds for its assessment in the actual notice of assessment.
If SARS proposes to raise an additional assessment post prescription, SARS must, in its letter of audit findings, state clearly on what facts it relies to conclude that there was misconduct. This is supported by the judgment in ABC Trust v The Commissioner for the South African Revenue Service Adm (00052/2018) (03 May 2019) (“the ABC trust case”), where it was held, at paragraphs 28 to 29, that:
“In my view, the paragraphs relied upon by SARS in the finalisation of audit imply that the treatment of capital gains in applicant’s 2012 return caused SARS to make an incorrect assessment that did not reflect the full amount of applicant’s tax liability. … in my view that was insufficient because in order to make an objection applicant should not be left with uncertainty as to what SARS has given as its reasons … What is to be implied from reasons expressed may be ambiguous and subject to later dispute. Hence SARS should have made express in its correspondence stating its reasons what it has clarified and rendered express in the passages of its answering affidavit in these proceedings to which I have referred.”
It is submitted that SARS cannot, in subsequent dispute proceedings try to establish the misconduct as it must objectively have existed for SARS to have raised the assessment in the first place. This objective existence of the requisite misconduct must be expressly stated in SARS’ letter of audit findings. Failure by SARS to comply with this requirement may render SARS’ assessment unlawful (see in this regard, ITC 1921 83 SATC 373). Taxpayers would do well to raise such non-compliance by SARS as defence in placing such assessments under dispute (as to whether the tax court would have jurisdiction to hear such arguments, see, South Atlantic Jazz Festival (Pty) Ltd v Commissioner, South African Revenue Service 2015 (6) SA 78 (WCC), Wingate-Pearse v Commissioner for the South African Revenue Service (29208/15) [2019] ZAGPJHC 218; 2019 (6) SA 196 (GJ); [2019] 4 All SA 601 (GJ) (17 July 2019), Medox Ltd v C: SARS (49017/11) [2014) ZAGPPHC 98 (“Medox v CSARS”), Appellant Company (Pty) Ltd v CSARS IT 13950 (30 January 2017), A Way to Explore v CSARS [2017] ZAGPPHC 541 ((2018) 80 SATC 211), to name but a few).
In addition, SARS should, in compliance with section 96(2), expressly illustrate, in the notice of assessment, the objective existence of the requisite misconduct. If SARS fails to do so, SARS would have “… acted unlawfully and unconstitutionally”[3], arguably rendering such additional assessment, unlawful and unconstitutional. Such non-compliance by SARS should, however, be raised by the taxpayer in disputing such assessment.
Too often, in practice, it is seen that misconduct is effectively only alleged by SARS in raising additional assessments post prescription, seemingly on the basis that the issue of ‘misconduct’ is a matter of evidence to be led in court (as was argued by SARS in the ABC trust case). Whilst it may perhaps indeed be a matter of evidence that should be dealt with during the eventual trial, SARS must nevertheless still place the objective facts before the taxpayer already at the time of proposing to raise an assessment and in its notice of assessment. If SARS were not required to do so, the balance of power will be dangerously favour SARS who can only be called upon by a court, some months or even years after the assessment has been raised, to discharge its onus of proof, all the while the taxpayer needs to deal with the consequences of SARS’ assessment. The fact that a taxpayer may object would not mitigate the consequences of an assessment raised as, “once the assessment is done, the [SARS] may insist on payment of the assessed amount”[4].
[1] Wingate-Pearse v Commissioner of the South African Revenue Service and others (2019 (6) SA 196 (GJ), [2019] 4 All SA 601(GJ)) 82 SATC 21
[2] Commissioner for the South African Revenue Service v Brummeria Renaissance (Pty) Ltd & Others (391/06) [2007] ZASCA 99; [2007] SCA 99 (RSA) ; [2007] 4 All SA 1338 (SCA) ; 2007 (6) SA 601 (SCA) (13 September 2007)
[3] Nondabula v Commissioner: SARS (2018 (3) SA 541 (ECM) (27 June 2017)
[4] Brits and Others v CSARS, (2017/44380) [2017] ZAGPJHC (28 November 2017) at para. 11
