The Supreme Court of Appeal recently handed down judgment in the Commissioner for South African Revenue Services v Pretoria East Motors (Pty) Ltd (291/12) [2014] ZASCA 91.  The main issues in dispute concerned the taxpayer's liability for income tax and VAT for the 2000 – 2004 periods.  The taxpayer was subjected to an audit by the South African Revenue Service ("SARS").  SARS raised additional assessments on the basis of information in the taxpayer's records and, in the case of the VAT assessments, the VAT 201 forms completed by the taxpayer for each period of assessment. 

In this case, the taxpayer's advisor appears to have done everything that was required of him, and more.  However, the following extracts of Judge Ponnan's assessment of the SARS auditor are telling:

"It does not appear that [the SARS auditor] sought to familiarise herself with the workings of the accounting system utilised by the taxpayer, even though the information available to her, confirmed by the evidence in the appeal, was that it was a customised system installed not by the taxpayer but by [the Taxpayer's supplier]."

"[The SARS auditor] ignored the internal character of these transactions."

"As best as can be discerned, [the SARS auditor's] approach was that if she did not understand something she was free to raise an additional assessment and leave it to the taxpayer to prove in due course at the hearing before the Tax Court that she was wrong. Her approach was fallacious."

Our experience is that most taxpayer's go to great lengths and incur significant costs to deal with and provide explanations to SARS' queries where the situation justifies.  It is frustrating when a taxpayer is met with a SARS auditor who, for whatever reason, demonstrates a reluctance to engage and, in good faith, consider explanations of unique facts and circumstances. 

SARS has many statutory powers at its disposal, for example, to gather information, raise an assessment and to collect on that assessment, often leaving the taxpayer vulnerable in its quest for administrative justice.  SARS, as the dominant administrative body, owes to the taxpayer a fair audit process, which includes affording the taxpayer an opportunity to answer SARS' queries in the best way possible and for those answers to be considered with an open mind.

For a SARS auditor to simply raise an assessment on the sole basis that certain "discrepancies" in the taxpayer's records cannot be understood was, in the court's view, procedurally unfair:

"The raising of an additional assessment must be based on proper grounds for believing that, in the case of VAT, there has been an under declaration of supplies and hence of output tax, or an unjustified deduction of input tax. In the case of income tax it must be based on proper grounds for believing that there is undeclared income or a claim for a deduction or allowance that is unjustified. It is only in this way that SARS can engage the taxpayer in an administratively fair manner, as it is obliged to do." [our emphasis]

We have increasingly experienced administrative action of a similar nature to that experienced by the taxpayer in this case and we welcome the remarks by Judge Ponnan.  For the sake of protecting the integrity of the fiscal administrative function and the tax morality of its subjects, we hope and trust that SARS will take note of this judgment.

Anton Lockem, Partner

Contact: 031 575 7413 and lockem@wylie.co.za