Prescription period limitations: The court’s approach in the I-cat case
Prescription period limitations: The court’s approach in the I-cat case
By Thato Mgoboli, Junior Tax Consultant and Associate Professor David Warneke, Tax Director
On 24 April 2023, in I-Cat International Consulting (Pty) Ltd v Commissioner for the South African Revenue Service (Case no 41667/2021) [2023] ZAGPPHC 268 (24 April 2023), the Gauteng High Court handed down judgment on whether an assessment had become prescribed in terms of the Tax Administration Act, 28 of 2011 (“the TAA”).
This was an application by I-Cat International Consulting (Pty) Ltd (“I-Cat”) to review and set aside the South African Revenue Service’s (“SARS”) decision to refuse application for a reduced assessment in respect of I-Cat’s 2015 tax year. SARS contended that the 2015 assessment had passed the prescription period of 3 years and on that basis refused the request for application for a reduced assessment.
It is interesting to note that before the commencement of the hearing, I-Cat had contended that the 2015 assessment should be regarded as a ‘self-assessment’ as defined in section 1 of the TAA. This was an interesting argument by I-Cat as this would have meant that the prescription period applicable to the 2015 assessment would have been 5 years and not 3 years and that the assessment in question would not have become prescribed. Assessments issued in respect of tax returns submitted for value-added tax and dividends tax among others, are ‘self-assessments’ as defined whereas income tax returns are not. This is because ‘self-assessment’ is defined as the determination by a taxpayer of an amount of tax payable under a tax Act and the submission of a return which incorporates the determination of the tax or, if no return is required, making a payment of the tax. In the case of an income tax return, the tax payable is not incorporated into the return and is determined by SARS once the return has been assessed.
It is unclear that the basis for I-Cat’s argument was on this issue but it may have been that the current system, whereby income tax returns are assessed by SARS, has similar characteristics to a self-assessment system. For example, a SARS official generally does not apply his or her mind at the time an assessment for income tax is issued. The process has been automated.
However, I-Cat conceded that the assessment was not a ‘self-assessment’ - the prescription period that the court had to consider was thus 3 years meaning that the assessment in respect of the 2015 year had potentially become prescribed.
Facts of the case
The origin of this case was I-Cat’s 2014 assessment. In completing its 2014 income tax return, I-Cat deducted an amount of R17 171 433 under the general deduction formula (section 11(a)) as part of the cost of its stock. This amount was paid to a third party as compensation for royalties, resulting from the cancellation of a distribution agreement. I-Cat based its treatment of the royalty payment on tax advice that it had sought. The tax opinion concluded that the amount incurred met the requirements of the general deduction formula and as such that it was deductible in the 2014 tax year.
On 15 July 2015, SARS disallowed the amount as a deduction on the sole ground that it was an amount of a capital nature. I-Cat objected to the disallowance shortly after this, on 15 September 2015.
On 26th February 2016, I-Cat filed its 2015 income tax return, absent of any claim for a deduction relating to the royalty payment of R17 171 433. On the same date SARS assessed the 2015 return, meaning that the normal 3-year prescription period for the 2015 assessment commenced to run from this date and would become final (prescribe) on 25th February 2019. After an assessment has become prescribed, a taxpayer cannot raise any objections nor can SARS alter the assessment (i.e. raise an additional or reduced assessment), other than in the special circumstances provided for in section 99 of the TAA.
On 5th October 2018, SARS filed its Rule 31 statement in respect of the 2014 assessment. In this document, for the first time, SARS raised an alternative defense, that only R7 007 633 was actually incurred in the 2014 tax year and the balance of the R17 171 433 payment was incurred in 2015 tax year.
On 28th October 2019, I-Cat’s appeal against the 2014 assessment was due to be heard in the Tax Court. On the same date (28th October 2019), I-Cat and SARS settled the 2014 assessment dispute, and the Tax Court made the settlement an order of Court.
The settlement agreement included a statement that the issues pertaining to the deductibility of the amount as it related to the 2015 tax year fell outside of the issues dealt with in the 2014 assessment appeal and that ‘the appellant may endeavour to address such issues in terms of section 93 of the TAA’. Section 93 of the TAA allows SARS to make reduced assessments in a number of circumstances.
On 26th January 2021 SARS refused the application for reduced assessment for the 2015 assessment, based on the view that the 2015 assessment had become prescribed in terms of section 99 of the TAA.
The question before the Gauteng High Court was whether SARS was correct in refusing I-Cat’s application for a reduced assessment in respect of its 2015 assessment on the basis that the assessment had prescribed.
I-Cat’s argument
I-Cat argued that both sections 99(2)(d)(i) and (iii) of the TAA applied on the facts of the case.
Section 99(2)(d)(i) provides that prescription does not apply to the extent that it is necessary to give effect to the resolution of a dispute under chapter 9 of the TAA. Section 99(2)(d)(iii) of the TAA provides that prescription does not apply if the assessment that SARS is seeking to make is a reduced assessment in terms of section 93(1)(d) of the TAA and if CSARS became aware of the readily apparent undisputed error in the return in question, before the expiry of the prescription period.
I-Cat argued that at the time when SARS lodged its Rule 31 statement (which was prior to the expiry of the prescription period), SARS knew of the error that affected the 2015 assessment and that the settlement agreement related to both the 2014 and 2015 years.
SARS’ argument
SARS argued that the appeal to the Tax Court related only to the 2014 assessment, not the 2015 assessment and that the Tax Court is limited to the specific year(s) in dispute. It also argued that SARS was not bound to make a decision in I-Cat’s favour regarding the 2015 assessment and that I-Cat should have objected to the 2015 assessment prior to the end of the prescription period of 25 February 2019.
The Gauteng High Court held in favour of I-Cat, that section 99(2)(d)(i) of the TAA was applicable (i.e. that prescription does not apply to the extent that it is necessary to give effect to the resolution of a dispute under chapter 9 of the TAA) and therefore that SARS was not precluded from issuing a reduced assessment in relation to 2015, despite the normal three-year prescription period having lapsed. In arriving at its finding, the Court reasoned as follows.
Regarding the CSARS argument that I-Cat should have objected against the 2015 assessment, CSARS only raised this issue in the Tax Court and then only as an alternative defense. It was clear from I-Cat’s proceedings that it believed in its case and there was no reason for it to have objected to the 2015 assessment.
Although the Tax Court would only be ruling on the 2014 assessment, in arriving at its findings it would also have provided certainty, albeit indirectly, in respect of the position for the 2015 assessment. For example, if only a portion of the R17 171 433 was actually incurred in the 2014 tax year, it would follow that the balance would have had to have been actually incurred in 2015 tax year.
At the time the settlement was entered into, SARS knew that the balance of the amount had been incurred in 2015. Although SARS could not bind itself to the outcome of a section 93(1)(d) of the TAA approach, by using the term ‘endeavour’, at least the taxpayer was given the right to apply.
If SARS’ argument were to stand, it would imply that at the time the settlement was agreed to, SARS knew that the taxpayer’s section 93(1)(d) request would have to be denied on the basis that the 2015 assessment had prescribed. This would have rendered this wording of the settlement agreement superfluous.
In summing up its views on how the wording of the settlement should be interpreted, the court cited with approval the following extract from Wellworths Bazaars Ltd v Chandler’s Ltd and Another 1947 (2) SA 37 (A): “[Legal documents] should not, without necessity or some sound reason, impute to its language tautology or superfluity and should be rather at the outset be inclined to suppose every word intended to have some effect or be of some use.”
Hence, I-Cat’s request for re-assessment of its 2015 year of assessment was remitted back to SARS for reconsideration on the merits of the request. CSARS was ordered to pay costs of the application on a party and party scale.
From a practical perspective, the case illustrates that it is crucial for care to be taken in the terms included in settlement agreements with SARS, especially in circumstances such as these in which the treatment of a disputed item may have a ‘knock-on’ effect to subsequent years of assessment. The implications of such knock-on effects and how SARS would deal with them should they arise, should ideally be set out in the settlement agreement. This would remove any doubt that SARS was aware of the effects prior to expiry of the prescription periods of the subsequent years of assessment and would also leave the door open to the taxpayer, as in this case, to argue that the resolution of the knock-on effects is part of the resolution of the dispute.
On 24 April 2023, in I-Cat International Consulting (Pty) Ltd v Commissioner for the South African Revenue Service (Case no 41667/2021) [2023] ZAGPPHC 268 (24 April 2023), the Gauteng High Court handed down judgment on whether an assessment had become prescribed in terms of the Tax Administration Act, 28 of 2011 (“the TAA”).
This was an application by I-Cat International Consulting (Pty) Ltd (“I-Cat”) to review and set aside the South African Revenue Service’s (“SARS”) decision to refuse application for a reduced assessment in respect of I-Cat’s 2015 tax year. SARS contended that the 2015 assessment had passed the prescription period of 3 years and on that basis refused the request for application for a reduced assessment.
It is interesting to note that before the commencement of the hearing, I-Cat had contended that the 2015 assessment should be regarded as a ‘self-assessment’ as defined in section 1 of the TAA. This was an interesting argument by I-Cat as this would have meant that the prescription period applicable to the 2015 assessment would have been 5 years and not 3 years and that the assessment in question would not have become prescribed. Assessments issued in respect of tax returns submitted for value-added tax and dividends tax among others, are ‘self-assessments’ as defined whereas income tax returns are not. This is because ‘self-assessment’ is defined as the determination by a taxpayer of an amount of tax payable under a tax Act and the submission of a return which incorporates the determination of the tax or, if no return is required, making a payment of the tax. In the case of an income tax return, the tax payable is not incorporated into the return and is determined by SARS once the return has been assessed.
It is unclear that the basis for I-Cat’s argument was on this issue but it may have been that the current system, whereby income tax returns are assessed by SARS, has similar characteristics to a self-assessment system. For example, a SARS official generally does not apply his or her mind at the time an assessment for income tax is issued. The process has been automated.
However, I-Cat conceded that the assessment was not a ‘self-assessment’ - the prescription period that the court had to consider was thus 3 years meaning that the assessment in respect of the 2015 year had potentially become prescribed.
Facts of the case
The origin of this case was I-Cat’s 2014 assessment. In completing its 2014 income tax return, I-Cat deducted an amount of R17 171 433 under the general deduction formula (section 11(a)) as part of the cost of its stock. This amount was paid to a third party as compensation for royalties, resulting from the cancellation of a distribution agreement. I-Cat based its treatment of the royalty payment on tax advice that it had sought. The tax opinion concluded that the amount incurred met the requirements of the general deduction formula and as such that it was deductible in the 2014 tax year.
On 15 July 2015, SARS disallowed the amount as a deduction on the sole ground that it was an amount of a capital nature. I-Cat objected to the disallowance shortly after this, on 15 September 2015.
On 26th February 2016, I-Cat filed its 2015 income tax return, absent of any claim for a deduction relating to the royalty payment of R17 171 433. On the same date SARS assessed the 2015 return, meaning that the normal 3-year prescription period for the 2015 assessment commenced to run from this date and would become final (prescribe) on 25th February 2019. After an assessment has become prescribed, a taxpayer cannot raise any objections nor can SARS alter the assessment (i.e. raise an additional or reduced assessment), other than in the special circumstances provided for in section 99 of the TAA.
On 5th October 2018, SARS filed its Rule 31 statement in respect of the 2014 assessment. In this document, for the first time, SARS raised an alternative defense, that only R7 007 633 was actually incurred in the 2014 tax year and the balance of the R17 171 433 payment was incurred in 2015 tax year.
On 28th October 2019, I-Cat’s appeal against the 2014 assessment was due to be heard in the Tax Court. On the same date (28th October 2019), I-Cat and SARS settled the 2014 assessment dispute, and the Tax Court made the settlement an order of Court.
The settlement agreement included a statement that the issues pertaining to the deductibility of the amount as it related to the 2015 tax year fell outside of the issues dealt with in the 2014 assessment appeal and that ‘the appellant may endeavour to address such issues in terms of section 93 of the TAA’. Section 93 of the TAA allows SARS to make reduced assessments in a number of circumstances.
On 26th January 2021 SARS refused the application for reduced assessment for the 2015 assessment, based on the view that the 2015 assessment had become prescribed in terms of section 99 of the TAA.
The question before the Gauteng High Court was whether SARS was correct in refusing I-Cat’s application for a reduced assessment in respect of its 2015 assessment on the basis that the assessment had prescribed.
I-Cat’s argument
I-Cat argued that both sections 99(2)(d)(i) and (iii) of the TAA applied on the facts of the case.
Section 99(2)(d)(i) provides that prescription does not apply to the extent that it is necessary to give effect to the resolution of a dispute under chapter 9 of the TAA. Section 99(2)(d)(iii) of the TAA provides that prescription does not apply if the assessment that SARS is seeking to make is a reduced assessment in terms of section 93(1)(d) of the TAA and if CSARS became aware of the readily apparent undisputed error in the return in question, before the expiry of the prescription period.
I-Cat argued that at the time when SARS lodged its Rule 31 statement (which was prior to the expiry of the prescription period), SARS knew of the error that affected the 2015 assessment and that the settlement agreement related to both the 2014 and 2015 years.
SARS’ argument
SARS argued that the appeal to the Tax Court related only to the 2014 assessment, not the 2015 assessment and that the Tax Court is limited to the specific year(s) in dispute. It also argued that SARS was not bound to make a decision in I-Cat’s favour regarding the 2015 assessment and that I-Cat should have objected to the 2015 assessment prior to the end of the prescription period of 25 February 2019.
The Gauteng High Court held in favour of I-Cat, that section 99(2)(d)(i) of the TAA was applicable (i.e. that prescription does not apply to the extent that it is necessary to give effect to the resolution of a dispute under chapter 9 of the TAA) and therefore that SARS was not precluded from issuing a reduced assessment in relation to 2015, despite the normal three-year prescription period having lapsed. In arriving at its finding, the Court reasoned as follows.
Regarding the CSARS argument that I-Cat should have objected against the 2015 assessment, CSARS only raised this issue in the Tax Court and then only as an alternative defense. It was clear from I-Cat’s proceedings that it believed in its case and there was no reason for it to have objected to the 2015 assessment.
Although the Tax Court would only be ruling on the 2014 assessment, in arriving at its findings it would also have provided certainty, albeit indirectly, in respect of the position for the 2015 assessment. For example, if only a portion of the R17 171 433 was actually incurred in the 2014 tax year, it would follow that the balance would have had to have been actually incurred in 2015 tax year.
At the time the settlement was entered into, SARS knew that the balance of the amount had been incurred in 2015. Although SARS could not bind itself to the outcome of a section 93(1)(d) of the TAA approach, by using the term ‘endeavour’, at least the taxpayer was given the right to apply.
If SARS’ argument were to stand, it would imply that at the time the settlement was agreed to, SARS knew that the taxpayer’s section 93(1)(d) request would have to be denied on the basis that the 2015 assessment had prescribed. This would have rendered this wording of the settlement agreement superfluous.
In summing up its views on how the wording of the settlement should be interpreted, the court cited with approval the following extract from Wellworths Bazaars Ltd v Chandler’s Ltd and Another 1947 (2) SA 37 (A): “[Legal documents] should not, without necessity or some sound reason, impute to its language tautology or superfluity and should be rather at the outset be inclined to suppose every word intended to have some effect or be of some use.”
Hence, I-Cat’s request for re-assessment of its 2015 year of assessment was remitted back to SARS for reconsideration on the merits of the request. CSARS was ordered to pay costs of the application on a party and party scale.
From a practical perspective, the case illustrates that it is crucial for care to be taken in the terms included in settlement agreements with SARS, especially in circumstances such as these in which the treatment of a disputed item may have a ‘knock-on’ effect to subsequent years of assessment. The implications of such knock-on effects and how SARS would deal with them should they arise, should ideally be set out in the settlement agreement. This would remove any doubt that SARS was aware of the effects prior to expiry of the prescription periods of the subsequent years of assessment and would also leave the door open to the taxpayer, as in this case, to argue that the resolution of the knock-on effects is part of the resolution of the dispute.