Press release: Tax disputes – onus of proof

Can SARS simply raise an assessment out of thin air and leave the taxpayer to prove them wrong?

Taxpayers carry the burden of proof in most tax disputes. Most taxpayers know this. Few, however, seem to truly understand it. What does it really mean? How do you go about discharging the onus? Can SARS simply raise an assessment out of thin air and leave the taxpayer to prove them wrong given that taxpayers carry the burden of proof?

What does it really mean?
In short, it means that a taxpayer must prove, on a balance of probabilities, that:

  • Something is exempt from tax or otherwise not taxable;
  • That an amount is deductible or may be set off;
  • What the applicable rate of tax is;
  • That an amount qualifies as a reduction against tax payable;
  • That a valuation is correct; and
  • That certain decisions SARS may have taken is incorrect.

So then, if, for example, taxpayer A is seeking a tax deduction, the taxpayer must prove that the expense in question is deductible. Whether an expense is deductible is prescribed by an underlying tax Act, say, for example, section 11(a) of the Income Tax Act read with relevant case law. The taxpayer therefore must prove that the requirements of section 11(a) of the income tax Act have been satisfied in order to claim a deduction.

By way of further example: taxpayer B suffered tax in a foreign country in respect of income earned for certain work done in the foreign country. If taxpayer B seeks a reduction from its SA tax liability of the foreign taxes suffered, taxpayer B would, for example, need to prove that the requirements of section 6quat of the Income Tax Act have been satisfied.

How to go about it?
The first step is to identify what the sections are, or the relevant law is that the taxpayer is relying on. Taxpayer A, in the example above, will rely on section 11(a) read with relevant case law in order to claim the deduction.

Step two is to identify the requirements of the section or sections relied on. Taxpayer A in the example above will therefore have to identify the requirements of section 11(a).

Step three is to identify and put forward the available evidence to prove satisfaction of those requirements on a balance of probabilities. What the evidence will be will depend on the facts of the case. It is worth mentioning though that evidence can take many forms and include, for example, bank statements, contracts, financial statements, IRP5’s, affidavits, etc.

It should be noted though, in the context of a tax dispute, it is likely that only particular requirements of a section are in dispute. Assume that SARS disallowed taxpayer’s A expense on the basis that expense was not incurred in the production of income – being one of the requirements of section 11(a). In that case, taxpayer A will only have to prove that the expense was indeed incurred in the production of income and would not have to prove satisfaction of the balance of the requirements of section 11(a).

It is worth mentioning that careful thought must go into what a particular piece of evidence a taxpayer intends to rely on proves. Say, for example, taxpayer C seeks an income tax exemption available in the case of services rendered outside South Africa. A copy of the taxpayer’s passport may well prove that the taxpayer was outside South Africa, but it does not prove what the taxpayer was doing outside the country. The exemption is only available if services were rendered outside South Africa. A copy of the taxpayer’s passport alone will therefore fall short of discharging the taxpayer’s onus of proof in this example.

It is further worth noting that the standard of proof is on a balance of probabilities. Not beyond reasonable doubt. In our experience, it does happen from time to time that SARS requests evidence that would prove, for example, satisfaction of the requirements of a section beyond reasonable doubt. Identifying when this happens may be difficult, but taxpayers should be aware that the absence of a particular piece of evidence called for by SARS does not mean the taxpayer cannot discharge its onus of proof.

SARS’s obligations
Whilst taxpayers indeed carry the burden of proof in most cases, that does not mean that SARS can simply raise an assessment out of thin air and leave it to the taxpayer to prove them wrong. SARS must, when raising an additional assessment, have proper grounds for raising that assessment, meaning there must be a factual and legal basis for an assessment. By way of example: if SARS wants to raise an assessment to disallow an expense on the basis that SARS thinks the expense is not, say, in the production of income, they must have proper reasons for believing that the expense is not the production of income. They cannot simply raise an assessment on a mere suspicion that the expense is not in the production of income and leave it to the taxpayer to prove them wrong in due course. Where SARS does nevertheless raise an assessment without the requisite proper grounds, such act by SARS may well form a basis on which a taxpayer could mount a challenge against such assessment. Further still, SARS cannot call on a taxpayer to prove completely arbitrary things – where they do and the taxpayer fails to prove such things, SARS could well not have the requisite proper grounds for raising an assessment effectively thereby giving the taxpayer a defense against such assessment.

Suffice it, in conclusion, to state that in order to discharge the onus of proof, taxpayers must have a solid understanding of the substantive law that governs the issues in dispute and the skill and experience to identify and utilise available evidence. The same holds true for identifying those circumstances where SARS does not have the requisite proper grounds for raising an assessment and building a defense around it. At Unicus Tax, we have a 100% success rate in resolving tax disputes in favour of taxpayers thereby saving taxpayers literally hundreds of millions of rands. With our founder, Nico Theron, having written the book on Tax Disputes, we are exceptionally well placed in handling same on behalf of taxpayers.