Navigating tax assessments and objections in South Africa: A legal roadmap
Navigating tax assessments and objections in South Africa: A legal roadmap
By Nonhle Thabethe, Junior Consultant and Seelan Muthayan, Director
Receiving a tax assessment from SARS is often the starting point for a complex journey for taxpayers. In South Africa, taxpayers have the right to contest an assessment if they believe it to be incorrect, but this process comes with its own set of rules and challenges.
Understanding the grounds of assessment and the burden of proof
Upon receiving a tax assessment, it is crucial for taxpayers to carefully review the details. If they disagree with the assessment, they have the right to lodge an objection. However, understanding the grounds on which the assessment was made is key. Unfortunately, there are instances where SARS fails to provide adequate reasons for its assessments, leaving taxpayers in the dark. In such cases, taxpayers can request the grounds for assessment within 30 business days from the date the assessment was issued. Once it has received the requested grounds for the assessment, the taxpayer has 80 business days from the date of delivery of the grounds by SARS to lodge its objection.
In any tax dispute, the burden of proof lies with the taxpayer. They must demonstrate that on a balance of probabilities, the assessment was incorrect. This burden is significant, often requiring meticulous attention to detail and expert legal advice.
Several court cases have shed light on the complexities of tax disputes in South Africa. In the court case CSARS v Pretoria East Motors 2014 (5) SA 231 (SCA), the Supreme Court of Appeal laid out guidelines regarding what constitutes adequate proof for SARS when a taxpayer needs to demonstrate the validity of their claims. The case revolved around the taxpayer, a car dealership, which was audited by SARS, leading to additional assessments for income tax and VAT, along with penalties. The taxpayer objected against these assessments, but SARS disallowed their objections. The taxpayer then appealed to the Tax Court and eventually to the Supreme Court of Appeal. The latter Court underscored that the dealership's assertions alone would not be sufficient to discharge the burden of proof; the assertions had to be evaluated in conjunction with all other evidence presented. The dealership was at a disadvantage as the burden of proof rested heavily on it. Recognizing this, the Court noted that in the interests of justice, it was imperative to meticulously consider the dealership’s testimony and the credibility of its witnesses, just as it would in any other legal case. The court criticized SARS’s approach of making additional assessments whenever they encountered something in the accounts they did not understand or believed was inadequately explained, without attempting to understand the dealership's accounting system, even though the necessary information was available to them. This practice, the Court stated, was unfair, leaving the dealership with the burden of proving these assessments wrong at their hearings. The Court concluded that SARS should raise additional assessments only on solid grounds and in a manner that allows for administrative fairness. This enables an effective response from the taxpayer, who must then demonstrate why the assessment is incorrect. This case highlights the necessity for SARS to engage with taxpayers transparently and fairly in the assessment process.
Objecting against assessments: procedures and grounds
When lodging an objection against an assessment, taxpayers must follow the specific procedures set out in the rules promulgated under section 103 of the Tax Administration Act No. 28 of 2011 (“the dispute resolution rules”). This includes completing the prescribed form, detailing the grounds of objection and providing supporting documentation and various other information.
If, for example, the grounds of objection are not stated, or are stated but the objection does not contain the documents required to substantiate the objection, SARS may regard the objection as invalid as it does not meet the requirements of a valid objection.
If a taxpayer receives a notification from SARS stating that their objection is invalid, they have an opportunity to submit a corrected objection. This must be done within 20 business days of receiving the notice of invalidity without the need to request an extension of time for lodging the objection, provided that the objection was lodged within the permitted 80 business day period.
Amending objections and appealing against disallowed objections
It is imperative that proper consideration be given to the drafting of the grounds of objection. This is because in subsequent appeal proceedings, taxpayers are in general limited to the grounds that were contained in their objection. They may however introduce new grounds unless the new grounds constitute new objections against a part or amount of the disputed assessment not (previously) objected to (rule 10(2)(c)(iii) of the dispute resolution rules).
If SARS disallows an objection entirely or only allows it in part, the taxpayer has the right of appeal. The appeal process involves filing a notice of appeal, which in most cases must be filed within 30 business days of the date of delivery of the notice disallowing the objection. Among other requirements, the notice of appeal must specify in detail in respect of which of the grounds of objection the taxpayer is appealing. Failure to meet these requirements will invariably jeopardize the appeal process.
Rectifying grounds and responding to new grounds
As indicated above, in some cases, taxpayers may need to rectify their grounds of objection or respond to new grounds introduced by SARS. This process involves careful consideration of legal requirements and procedural rules. Failure to address new grounds adequately can impact the outcome of a dispute.
The term “new ground” is not defined in the Tax Administration Act but it appears reasonable to assume that new grounds may involve adding factual or legal grounds to the existing grounds of objection.
As noted above, to a limited extent the taxpayer is allowed to include new grounds when filing a notice of appeal. Often one finds that where taxpayers themselves draft and file their notices of objection, they fail to consider all possible grounds that might apply and are barred by rule 10(2)(c)(iii) from introducing these grounds at a later stage, after specialist tax advice has been sought.
Whether an issue sought to be raised by the taxpayer was covered by its grounds of objection was the subject matter of the judgment in H R Computek (Pty) Ltd v CSARS (830/2012) [2012] ZASCA 17. In this case, the taxpayer initially objected only to the imposition of the additional tax, interest and penalty and not the principal amount of the disputed assessment. The attempt to address the capital amount only came later, when filing its statement under rule 32. When the taxpayer initially objected against the assessment, it never included an objection against the principal amount of tax. The Supreme Court of Appeal found that the taxpayer was confined to its original grounds of objection for the duration of the dispute.
Although a taxpayer may only introduce new grounds in limited circumstances, SARS has wider scope to introduce new grounds in terms of rule 31(3), which states that SARS may include in its (rule 31) statement a new ground of assessment or basis for the partial allowance or disallowance of the objection, unless it constitutes a novation of the whole of the factual or legal basis of the disputed assessment or which requires the issue of a revised assessment.
If SARS issues new grounds of assessment under rule 31, the taxpayer must respond to the new grounds in its statement of grounds of appeal under rule 32. This rule allows the taxpayer to introduce new factual or legal grounds in their statement. However, according to rule 32(3), such a new ground cannot be against a part or amount of the disputed assessment that was not previously objected to under rule 7. SARS may also respond to the new grounds in a reply to the taxpayer’s statement of grounds of appeal. This approach seeks to ensure that neither party experiences unfair disadvantage due to the introduction of new grounds by the opposing party during the appeal stage.
Conclusion and key takeaway
Navigating the complex areas of tax assessments and objections in South Africa requires a thorough understanding of legal procedures and requirements. Taxpayers must be vigilant in asserting their rights and complying with the legislated rules. Taxpayers are urged to seek expert advice whenever they are potentially involved in disputes with SARS, due to the many pitfalls that lie in wait for laypersons in dealing with these matters.
Receiving a tax assessment from SARS is often the starting point for a complex journey for taxpayers. In South Africa, taxpayers have the right to contest an assessment if they believe it to be incorrect, but this process comes with its own set of rules and challenges.
Understanding the grounds of assessment and the burden of proof
Upon receiving a tax assessment, it is crucial for taxpayers to carefully review the details. If they disagree with the assessment, they have the right to lodge an objection. However, understanding the grounds on which the assessment was made is key. Unfortunately, there are instances where SARS fails to provide adequate reasons for its assessments, leaving taxpayers in the dark. In such cases, taxpayers can request the grounds for assessment within 30 business days from the date the assessment was issued. Once it has received the requested grounds for the assessment, the taxpayer has 80 business days from the date of delivery of the grounds by SARS to lodge its objection.
In any tax dispute, the burden of proof lies with the taxpayer. They must demonstrate that on a balance of probabilities, the assessment was incorrect. This burden is significant, often requiring meticulous attention to detail and expert legal advice.
Several court cases have shed light on the complexities of tax disputes in South Africa. In the court case CSARS v Pretoria East Motors 2014 (5) SA 231 (SCA), the Supreme Court of Appeal laid out guidelines regarding what constitutes adequate proof for SARS when a taxpayer needs to demonstrate the validity of their claims. The case revolved around the taxpayer, a car dealership, which was audited by SARS, leading to additional assessments for income tax and VAT, along with penalties. The taxpayer objected against these assessments, but SARS disallowed their objections. The taxpayer then appealed to the Tax Court and eventually to the Supreme Court of Appeal. The latter Court underscored that the dealership's assertions alone would not be sufficient to discharge the burden of proof; the assertions had to be evaluated in conjunction with all other evidence presented. The dealership was at a disadvantage as the burden of proof rested heavily on it. Recognizing this, the Court noted that in the interests of justice, it was imperative to meticulously consider the dealership’s testimony and the credibility of its witnesses, just as it would in any other legal case. The court criticized SARS’s approach of making additional assessments whenever they encountered something in the accounts they did not understand or believed was inadequately explained, without attempting to understand the dealership's accounting system, even though the necessary information was available to them. This practice, the Court stated, was unfair, leaving the dealership with the burden of proving these assessments wrong at their hearings. The Court concluded that SARS should raise additional assessments only on solid grounds and in a manner that allows for administrative fairness. This enables an effective response from the taxpayer, who must then demonstrate why the assessment is incorrect. This case highlights the necessity for SARS to engage with taxpayers transparently and fairly in the assessment process.
Objecting against assessments: procedures and grounds
When lodging an objection against an assessment, taxpayers must follow the specific procedures set out in the rules promulgated under section 103 of the Tax Administration Act No. 28 of 2011 (“the dispute resolution rules”). This includes completing the prescribed form, detailing the grounds of objection and providing supporting documentation and various other information.
If, for example, the grounds of objection are not stated, or are stated but the objection does not contain the documents required to substantiate the objection, SARS may regard the objection as invalid as it does not meet the requirements of a valid objection.
If a taxpayer receives a notification from SARS stating that their objection is invalid, they have an opportunity to submit a corrected objection. This must be done within 20 business days of receiving the notice of invalidity without the need to request an extension of time for lodging the objection, provided that the objection was lodged within the permitted 80 business day period.
Amending objections and appealing against disallowed objections
It is imperative that proper consideration be given to the drafting of the grounds of objection. This is because in subsequent appeal proceedings, taxpayers are in general limited to the grounds that were contained in their objection. They may however introduce new grounds unless the new grounds constitute new objections against a part or amount of the disputed assessment not (previously) objected to (rule 10(2)(c)(iii) of the dispute resolution rules).
If SARS disallows an objection entirely or only allows it in part, the taxpayer has the right of appeal. The appeal process involves filing a notice of appeal, which in most cases must be filed within 30 business days of the date of delivery of the notice disallowing the objection. Among other requirements, the notice of appeal must specify in detail in respect of which of the grounds of objection the taxpayer is appealing. Failure to meet these requirements will invariably jeopardize the appeal process.
Rectifying grounds and responding to new grounds
As indicated above, in some cases, taxpayers may need to rectify their grounds of objection or respond to new grounds introduced by SARS. This process involves careful consideration of legal requirements and procedural rules. Failure to address new grounds adequately can impact the outcome of a dispute.
The term “new ground” is not defined in the Tax Administration Act but it appears reasonable to assume that new grounds may involve adding factual or legal grounds to the existing grounds of objection.
As noted above, to a limited extent the taxpayer is allowed to include new grounds when filing a notice of appeal. Often one finds that where taxpayers themselves draft and file their notices of objection, they fail to consider all possible grounds that might apply and are barred by rule 10(2)(c)(iii) from introducing these grounds at a later stage, after specialist tax advice has been sought.
Whether an issue sought to be raised by the taxpayer was covered by its grounds of objection was the subject matter of the judgment in H R Computek (Pty) Ltd v CSARS (830/2012) [2012] ZASCA 17. In this case, the taxpayer initially objected only to the imposition of the additional tax, interest and penalty and not the principal amount of the disputed assessment. The attempt to address the capital amount only came later, when filing its statement under rule 32. When the taxpayer initially objected against the assessment, it never included an objection against the principal amount of tax. The Supreme Court of Appeal found that the taxpayer was confined to its original grounds of objection for the duration of the dispute.
Although a taxpayer may only introduce new grounds in limited circumstances, SARS has wider scope to introduce new grounds in terms of rule 31(3), which states that SARS may include in its (rule 31) statement a new ground of assessment or basis for the partial allowance or disallowance of the objection, unless it constitutes a novation of the whole of the factual or legal basis of the disputed assessment or which requires the issue of a revised assessment.
If SARS issues new grounds of assessment under rule 31, the taxpayer must respond to the new grounds in its statement of grounds of appeal under rule 32. This rule allows the taxpayer to introduce new factual or legal grounds in their statement. However, according to rule 32(3), such a new ground cannot be against a part or amount of the disputed assessment that was not previously objected to under rule 7. SARS may also respond to the new grounds in a reply to the taxpayer’s statement of grounds of appeal. This approach seeks to ensure that neither party experiences unfair disadvantage due to the introduction of new grounds by the opposing party during the appeal stage.
Conclusion and key takeaway
Navigating the complex areas of tax assessments and objections in South Africa requires a thorough understanding of legal procedures and requirements. Taxpayers must be vigilant in asserting their rights and complying with the legislated rules. Taxpayers are urged to seek expert advice whenever they are potentially involved in disputes with SARS, due to the many pitfalls that lie in wait for laypersons in dealing with these matters.