SARS has an obligation not to levy taxes that are not legally payable
SARS has an obligation not to levy taxes that are not legally payable
By Edlan Jacobs, Senior Manager
The process of defining issues in a dispute, and the grounds in support thereof, has always been of immense value - the documents containing these are the pleadings, and they are the foundation of the case, identifying the issues and informing the other party of the case they must meet.
In CSARS v Free State Development Corporation ZASCA 84, the Supreme Court of Appeal (SCA) decided in which circumstances it is permissible to amend the grounds of appeal and delivered its judgment on 31 May 2023. The matter was recently revisited, due to the Commissioner for the South African Revenue Service (SARS) having noted an appeal to the Constitutional Court which was dismissed without a hearing on 12 February 2024.
The taxpayer, The Free State Development Corporation, a registered VAT vendor, rendered its VAT returns declaring zero-rated taxable supplies. SARS disagreed and subjected the supplies to VAT at the standard rate.
The taxpayer filed an objection contending that there were no actual supplies, only deemed supplies, which were zero-rated. SARS disallowed the objection. In its appeal, the taxpayer maintained that the supplies were zero-rated. The matter proceeded to the Tax Court:
SARS opposed the amendment stating that:
‘The amendment will permit the true issue between the parties to be ventilated. This basic principle of tax law is underscored by section 143(1) of the TAA, which provides that SARS has a duty “to assess and collect tax according to the laws enacted by Parliament and not to forgo a tax which is properly chargeable and payable”. This principle must also relate to the corollary – SARS’s obligation not to levy taxes which are not payable in terms of the law. This could be the situation if the amendment was not granted.’
The suggestion by SARS that because section 25 regards a return to be full and true, a taxpayer is bound by its own prior declarations in the return, is surprising for two reasons:
Section 25 requires that a return must be full and true, but clearly this does not mean that returns are necessarily free from errors. Section 222 of the Tax Administration Act clearly envisages that bona fide inadvertent errors can arise. The re-submission of returns may thus be required.
The purpose of Tax Court Rules governing the exchange of pleadings is to ensure that fairness is achieved and that neither party is procedurally or substantively ‘ambushed’. Its purpose is not to prevent the true issues from being adjudicated if they are foreshadowed in the taxpayer’s objection. However, it is unclear what degree of foreshadowing would be sufficient for the taxpayer to be permitted to amend its pleadings. It appears to have been important that both sets of grounds relied on the same factual basis.
Was the permission to amend the pleadings granted because the original objection was based on there being a deemed supply and not an actual supply? It is trite that a deeming provision recognises that something is in fact not what it is deemed to be and a legal ‘fiction’ is thus created. The weight of this finding is difficult to assess because the court also held that both the objection and the amendment to the pleadings were concerned with whether VAT was lawfully imposed on the transactions.
In the Tax Court decision of ITC 45710, argued and decided before CSARS v Free State Corporation, the taxpayer introduced a new ground of appeal. Its ground of objection had been that an amount was an allowable deduction in terms of section 11(a) read with 23(g) of the Income Tax Act but in its Rule 32 statement the taxpayer presented a new ground that that the amount was not received or accrued within the meaning of the “gross income” definition. The Tax Court held that this was not a permissible new ground because:
If this Tax Court decision is evaluated against the subsequent findings of the SCA in CSARS v Free State Corporation, it is difficult to say if the outcome would be different. The degree of foreshadowing would have to be assessed, and there are legitimate differences between this case and that of CSARS v Free State Corporation.
On the basis that SARS has an obligation to assess and collect tax according to the law and must not to forgo a tax which is properly chargeable and payable, SARS may likewise also introduce new grounds of assessment at the appeal stage provided it is not a novation of the entire factual or legal basis of the disputed assessment (see Rule 31(3)).
Taxpayers should always seek advice at the earliest stage of a dispute to ensure that the objection is based on the proper grounds and that the correct part or amount is objected against. Those taxpayers who have already lodged objections should be aware that they may introduce new grounds of appeal in the circumstances envisaged in the CSARS v Free State Corporation case.
The process of defining issues in a dispute, and the grounds in support thereof, has always been of immense value - the documents containing these are the pleadings, and they are the foundation of the case, identifying the issues and informing the other party of the case they must meet.
In CSARS v Free State Development Corporation ZASCA 84, the Supreme Court of Appeal (SCA) decided in which circumstances it is permissible to amend the grounds of appeal and delivered its judgment on 31 May 2023. The matter was recently revisited, due to the Commissioner for the South African Revenue Service (SARS) having noted an appeal to the Constitutional Court which was dismissed without a hearing on 12 February 2024.
The taxpayer, The Free State Development Corporation, a registered VAT vendor, rendered its VAT returns declaring zero-rated taxable supplies. SARS disagreed and subjected the supplies to VAT at the standard rate.
The taxpayer filed an objection contending that there were no actual supplies, only deemed supplies, which were zero-rated. SARS disallowed the objection. In its appeal, the taxpayer maintained that the supplies were zero-rated. The matter proceeded to the Tax Court:
- SARS delivered its Rule 31 statement, and the grounds of assessment were that in terms of section 7(1)(a) of the VAT Act and the definition of ‘supply’ in section 1 of that Act, the taxpayer must levy and pay over VAT at the standard rate.
- In its Rule 32 statement the taxpayer stated that it supplied services under two funding arrangements (managing and monitoring the funding). However, it derived no financial benefit and was a mere conduit.
- SARS, responding in its Rule 33 statement, submitted that the taxpayer did not enjoy the zero-rate.
- The issue in the amended grounds was covered by the substance of the objection, and it was therefore permitted by the Rules.
- The amendment is based on the same facts but reaches the correct legal conclusion.
SARS opposed the amendment stating that:
- It introduced grounds of appeal against a part of the assessments not previously objected to.
- That the ground of objection was a taxable supply subject to the zero-rate and it was not a ground of objection that the supplies do not constitute taxable supplies.
- SARS also submitted that a taxpayer is bound by its own declarations in a return and did not indicate that this was incorrect prior to the amendment (section 25 of the Tax Administration Act).
- The amendment was based on the same facts but reached the correct legal conclusion.
- The amendment claimed that the transactions were not subject to VAT because there was no supply. The basis of the objection claiming the zero-rating was likewise based on the nature of the transactions, and that it had no relation to an actual supply.
- The amended grounds of appeal were clearly foreshadowed in the objection.
- The nature of the taxpayer’s objection to the whole of SARS’s assessment was always, and continued to be, whether VAT was lawfully imposed on these transactions.
- On a proper interpretation, the taxpayer was not precluded from raising a new ground of appeal in its amended statement, in particular when the grounds were, in substance, the same as those stated in its initial objection.
‘The amendment will permit the true issue between the parties to be ventilated. This basic principle of tax law is underscored by section 143(1) of the TAA, which provides that SARS has a duty “to assess and collect tax according to the laws enacted by Parliament and not to forgo a tax which is properly chargeable and payable”. This principle must also relate to the corollary – SARS’s obligation not to levy taxes which are not payable in terms of the law. This could be the situation if the amendment was not granted.’
The suggestion by SARS that because section 25 regards a return to be full and true, a taxpayer is bound by its own prior declarations in the return, is surprising for two reasons:
- It is settled law that a taxpayer can object against its own assessment (see paragraph 25 of the SCA decision in GB Mining and Exploration SA (Pty) Ltd v CSARS SA 605 (SCA)), and
- an assessment only becomes final after a period of 3 years, where assessed by SARS, or 5 years where self-assessed (section 99 of the Tax Administration Act), permitting taxpayers to revise a self-assessment any number of times within that period unless SARS has issued a notice of assessment which must be addressed through the chapter 9 dispute process.
Section 25 requires that a return must be full and true, but clearly this does not mean that returns are necessarily free from errors. Section 222 of the Tax Administration Act clearly envisages that bona fide inadvertent errors can arise. The re-submission of returns may thus be required.
The purpose of Tax Court Rules governing the exchange of pleadings is to ensure that fairness is achieved and that neither party is procedurally or substantively ‘ambushed’. Its purpose is not to prevent the true issues from being adjudicated if they are foreshadowed in the taxpayer’s objection. However, it is unclear what degree of foreshadowing would be sufficient for the taxpayer to be permitted to amend its pleadings. It appears to have been important that both sets of grounds relied on the same factual basis.
Was the permission to amend the pleadings granted because the original objection was based on there being a deemed supply and not an actual supply? It is trite that a deeming provision recognises that something is in fact not what it is deemed to be and a legal ‘fiction’ is thus created. The weight of this finding is difficult to assess because the court also held that both the objection and the amendment to the pleadings were concerned with whether VAT was lawfully imposed on the transactions.
In the Tax Court decision of ITC 45710, argued and decided before CSARS v Free State Corporation, the taxpayer introduced a new ground of appeal. Its ground of objection had been that an amount was an allowable deduction in terms of section 11(a) read with 23(g) of the Income Tax Act but in its Rule 32 statement the taxpayer presented a new ground that that the amount was not received or accrued within the meaning of the “gross income” definition. The Tax Court held that this was not a permissible new ground because:
- It constituted an entirely new case on appeal, aimed at the reduction of an amount not previously objected against.
- The new ground was not merely a “re-packaging” of the legal basis upon which the taxpayer disputed the amount for the purposes of determining its income tax liability.
- It was incorrect to say that an objection against an expense amount is equivalent to an objection against the gross income amount.
If this Tax Court decision is evaluated against the subsequent findings of the SCA in CSARS v Free State Corporation, it is difficult to say if the outcome would be different. The degree of foreshadowing would have to be assessed, and there are legitimate differences between this case and that of CSARS v Free State Corporation.
On the basis that SARS has an obligation to assess and collect tax according to the law and must not to forgo a tax which is properly chargeable and payable, SARS may likewise also introduce new grounds of assessment at the appeal stage provided it is not a novation of the entire factual or legal basis of the disputed assessment (see Rule 31(3)).
Taxpayers should always seek advice at the earliest stage of a dispute to ensure that the objection is based on the proper grounds and that the correct part or amount is objected against. Those taxpayers who have already lodged objections should be aware that they may introduce new grounds of appeal in the circumstances envisaged in the CSARS v Free State Corporation case.