This is the nub of the recent judgment of the Supreme Court of Appeal (SCA) in Purveyors South Africa Mine Services (Pty) Ltd v CSARS Case No 135/2021 (not yet reported) and delivered on 7 December 2021.

In January 2015, Purveyors entered into a dry lease agreement with a USA company, Freeport Minerals Corporation, for the lease of an aircraft to operate air charter services for Tenke Fungurume Mining SARL, a non-resident company owning and operating a mine in the Democratic Republic of Congo. At the date of the agreement, Freeport owned 100% of the equity of Purveyors and 80% of Tenke.  Purveyors entered into an air charter agreement with Air Katanga to manage, operate and maintain the aircraft on behalf of Purveyors.

The aircraft transported employees, sub-contractors, suppliers and business guests from Johannesburg to Lumumbashi and Katanga, generally three times a week.  When it was not in use, the aircraft was kept in a hangar leased to Purveyors OR Tambo International Airport.

In November 2016, Purveyors became a subsidiary of CMOC DRC Limited, a company incorporated and tax registered in Hong Kong.  A sister company of CMOC DRC assumed the initial dry lease agreement and concluded a new one with Purveyors.  The agreement between Purveyors and Tenke remained undisturbed.

In January 2017 Purveyors received an opinion from PwC stating that Purveyors ought to have paid value-added tax on the importation of the aircraft into South Africa.  On 30 January Purveyors then approached SARS with a view to regularising its VAT obligation. On the following day a SARS official responded in an e-mail that the aircraft was subject to penalty implications.  On 29 March 2017 the official wrote to Purveyors explaining the reasons for the penalties and informing the taxpayer of the need to appoint a clearing agent.  Purveyors replied immediately, indicating that it understood that VAT and customs duty were payable, as well as fines and penalties.  On 30 March the SARS official responded in order to clear any misunderstandings and indicated that there existed no waiver of potential penalties and that if the tax payable to SARS was late, penalties and interest would arise.  On 16 May 2017, in response to a further request from Purveyors, PwC confirmed its earlier opinion.

Purveyors took no further steps for nearly a year, until on 4 April 2018 it applied for voluntary disclosure relief under section 226 of the Tax Administration Act (TAA).  SARS countered with reference to section 227, which provides that an application falls to be rejected if it is not voluntary and contains facts of which SARS was aware prior to the application.

Purveyors appealed unsuccessfully to the tax court, which found that the application had not been voluntary as there was an element of compulsion on the part of Purveyors when it made the application.

On appeal to the SCA, following an unrewarding appeal to the High Court, the issue was whether the earlier exchanges or discussions between SARS and Purveyors had any material bearing on the application.  Purveyors contended that the prior information disclosed to SARS in the process of ascertaining its tax liability was irrelevant and should not preclude it from making a voluntary disclosure application.  The application should not be considered at the historical point but only when the application was made.  In other words, prior knowledge disclosed by the taxpayer is no bar to a valid voluntary disclosure obligation.

Purveyors relied on a comment in an article by SP van Zyl and TR Carney where the learned authors state in relation to the Purveyors case a quo: “…‘disclosure’ is neither restricted in its denotation nor does its context in the TAA limit its meaning to ‘new’ or ‘secret’  information explicitly. To argue this would be precarious in the least”.  SARS contended that the application did not disclose information or facts of which SARS was unaware, and was not voluntary as Purveyors had been prompted by SARSs with the warning that it would be liable for penalties and interest arising from its failure to pay the tax due.  The Customs officials had already gained knowledge of the default and had advised Purveyors as early as 1 February 2017 that the aircraft should be declared and VAT paid.

The court proceeded to interpret section 227 in terms of the definitive Endumeni judgment, that “consideration must be given to the language in the light of the ordinary rules of grammar and syntax; the context in which the provision appears; the apparent purpose to which it is directed and the material known to those responsible for its production”.  According to the Oxford English Dictionary on Historical Principles, “voluntary” means “performed, or done of one’s own free will, impulse or choice; not constrained, prompted or suggested by another”.  “Disclosure” means “to open up the knowledge of others, to reveal”.

These two words required, according to the court, that the application must measure up fully to the requirements of section 227.  No purpose would be served if the TAA enabled errant taxpayers to obtain informal advice from SARSs and then, when the advice did not suit them, apply for voluntary disclosure relief.

On 29 March 2017 Purveyors’ office manager sent an e-mail to the responsible SARS official, stating:

“We understand from your mail and our telephonic discussion that a VAT output is applicable and customs duties are applicable as well. However the VAT input is claimable back. Fines and penalties are applicable, however, based on the fact that the company might have been misinformed at the inception of the operation of the aircraft, you are willing to advance that as mitigating circumstances in order to waive the applicable fines and penalties.  Furthermore, if we follow the process outlined below we will be in compliance with all the laws and regulations and you (SARS) will award a document of compliance.”

The court found that this e-mail made three things clear: the application was prompted by compliance action by SARS, which was aware of the interaction between Purveyors and SARS officials; Purveyors appreciated that it was liable for fines and penalties which had to be paid before Purveyors became tax compliant; and the application was to avoid the payment of fines and penalties rather than a desire to come clean.  To grant relief in circumstances where SARS had prior knowledge of the default would be at odds with the purposes of the programme, which was to enhance voluntary compliance with the tax system by enabling errant taxpayers to disclose defaults of which SARS was unaware and to ensure the best use of SARS’ resources.

On a true analysis of the facts, Purveyors’ application did not pass the test.  It disclosed no information of which SARS was unaware.  The submission that the application should be treated as if no exchanges, approaches or contact were made prior to the application was without merit.

Purveyors attempted one further argument, namely that SARS had not given notice of an audit or investigation as contemplated in section 226.  Had SARS done so, Purveyors would have been precluded from applying under the programme.  Because there had been no such notice, Purveyors was at large to apply.  The court rejected this contention by pointing out that it was under section 227, not section 226, that SARS had correctly rejected the application.

It is difficult to take issue with this judgment.  The court, with respect, arrived at the only tenable interpretation of the voluntary disclosure programme in the TAA.

The matter in question related to SARS’ decision to disallow certain refunds claimed by the applicant in terms of section 75(1A) of the Customs and Excise Act, 1994.  The time line gives the reason for the court’s ire towards SARS.

On 26 July 2017 the applicant launched an application seeking an order setting aside SARS’ decision to disallow the refunds, setting aside all collection steps taken by SARS and that SARS be ordered to pay the amount of R664 637 in respect of funds collected by SARS through a third party agency procedure.  The application was served on SARS on 2 August 2017.

On 24 August 2017 the State Attorney filed notice of intention to oppose the application on behalf of SARS.  The answering affidavit had to be delivered by 14 September 2017.  SARS failed to file its answering affidavit when it fell due, so the applicant set the main application down on the unopposed roll on 19 December 2017.  On that date the parties agreed that SARS would file its answering affidavit by 22 January 2018 together with application for condonation, failing which the matter would revert to the unopposed roll.  This agreement was made an order of court.  SARS filed the answering affidavit, without an application for condonation, only on 30 January 2018, yet another six days late.

On 19 March 2018 the applicant’s attorneys addressed a letter to the State Attorney indicating that unless they received SARS’ condonation application within 14 days they would proceed to set the matter down on the unopposed roll.  This letter apparently finally stirred SARS from its inertia and resulted in the present application.  The applicant opposed the application on three grounds:

1. that the answering affidavit in the main application was filed extremely late;
2. that SARS’ conduct and that of its attorneys was grossly negligent, inexcusable and in contempt of court; and
3. as a result, the applicant had suffered immense prejudice.

The court traversed the law relating to condonation for failure to comply with the Rules of Court.  It was settled law that condonation was not to be had “merely for the asking” but on good cause shown.   The applicant claimed that SARS was obliged to seek condonation for both the September and the January delays.  The court rejected this contention, based on a letter by the applicant’s attorneys referring only to the January delay.

The court then proceeded to hear SARS’ reasons for the delay as SARS pleaded for condonation.  It makes head-shaking reading.  Due to internal bureaucratic processes, the State Attorney had only on 11 and 18 October 2017 received SARS’ instruction to appoint counsel.  The SARS auditor seized with the matter was stationed in Standerton while input had been required from the SARS diesel rebates officials at head office in Pretoria.

The first consultation with counsel took place only on 29 November and on 14 December 2017 counsel circulated the first draft affidavit.  By that time the applicant had already placed the matter on the roll of 19 December, on which day the parties agreed to the 22 January 2018 date which, as indicated above, was made an order of court.

The relevant SARS officials then went on leave, which meant that they could only consult with counsel again on 12 January 2018.  The additional work on the draft took far longer than had been anticipated, exacerbated by the fact that documentation had to be brought from Standerton to Pretoria in the process.

The 147 page answering affidavit was signed and commissioned on 22 January 2018 and sent to the State Attorney on 23 January – already one day overdue.  The State Attorney’s office finally delivered the affidavit on 30 January.  The reason for this further delay was that the State Attorney’s office was understaffed and under-capacitated with only three messengers servicing 80 attorneys.

Counsel for the applicant submitted that SARS and the State Attorney were both “culpably remiss and indifferent to the consequences of their failure to attend to the case diligently and timeously”.  By the time the matter was in court on 17 December 2017, almost five months after the application had been served, a final draft of the answering affidavit was not even ready.  SARS had ignored “even the basic principles of collegiality” of a request for extension of time.  In other words, they couldn’t be bothered to pick up the phone and have a word with the applicant’s attorneys.

Counsel for SARS contended that:

• the six day delay from 22 to 30 January was not extreme;
• the prospects of success by SARS in the main case were good, which is one factor courts have to consider in deciding on a condonation application;
• the applicant would not on the applicant’s founding affidavit alone be able to prove that SARS’ decision to disallow the rebate was reviewable;
• the case was important to SARS in that the policy issue raised in its answering affidavit had to be adjudicated in order to ensure that the diesel refund regime is effective, especially since VAT issues were entwined here as well.

Counsel for SARS submitted that the applicant had suffered no prejudice as a result of the late filing and would not suffer any if the application were granted.  This would allow the main application to be adjudicated upon properly and bring finality to the dispute.

Counsel for the applicant argued that the State Attorney had provided no explanation for the failure to arrange for the answering affidavit in his possession on 22 January 2018 to be served by email.  In comment on this absence of any explanation, counsel referred to the judicial principle that condonation was not to be made for the mere asking.  The person seeking condonation must show sufficient cause to enjoy the court’s indulgence.  This required a full explanation for the non-compliance and must be reasonable enough to excuse the default.  As Bosielo J had stated in Grootboom v The National Prosecuting Authority & another [2014] (2) SA 68 CC: “The respondents are not ordinary litigants.  They constitute an essential part of government.  In fact, together with the office of the state attorney, they sit at the very heart of the administration of justice.  As organs of state, the Constitution obliges them to ‘’assist and protect the Courts to ensure the independence, impartiality, dignity, accessibility and effectiveness of the Courts’”. The court agreed with these sentiments and found that SARS and the State Attorney were indifferent to the consequences of their failure to attend to the case diligently and timeously.

Nonetheless, the court found that SARS had fully explained the reasons for the delay, showing that it was not due to delaying tactics.  In the interest of justice, SARS should be given the opportunity to present its case.  The condonation was therefore granted.

However, the sting for SARS then followed.  The court rejected SARS’ argument that there was no plausible reason why the applicant had opposed the condonation application and the applicant should therefore suffer the costs.  The court felt differently.  Having treated the Rules of Court with disdain by disregarding and ignoring compliance with the court order, there was no reason why SARS should be allowed to behave in this matter.  The court therefore ordered SARS to bear the costs.

I would suggest that a legion of taxpayers could be found to testify to SARS officials rejecting objections and appeals because they were less late than the six days for which SARS was punished.  It is with wry amusement that one reads that SARS found nothing wrong with its indolence and, dare one say, arrogant disdain for the Rules.  Perhaps the new regime at SARS will implant an attitude in staff that is more accommodating of taxpayers, who are, after all, not only their clients but their employers.

SARS audited the taxpayer in May 2014.  After representations by the taxpayer in November 2014 following the audit findings furnished in August 2014, SARS issued an assessment in December 2014.  The delay between August and November marked the first instance of the taxpayer’s disregard for the peremptory time limits set out in the TAA, a disregard that was to prove costly.  The next example of this attitude was that the taxpayer submitted an objection in June 2015; this despite the fact that the “rules” issued in terms of section 104 of the TAA prescribe a 30 day period, which may be extended, but must not be so extended by more than 21 business days “unless a senior SARS official is satisfied that exceptional circumstances exist which gave rise to the delay in lodging the objection”.  The peremptory word “must” was to prove the undoing of the taxpayer.

The taxpayer should have objected by 2 March 2015.  The taxpayer had the benefit of the extra time afforded by the fact that the period from 16 December to 15 January doesn’t count as the courts are in recess, but nonetheless took a further three months beyond the return date.  On 22 June 2015 SARS rejected the late objection, in response to which the taxpayer furnished a letter of motivation on 25 June 2015 (apparently having been at long last roused from its lax attitude to the TAA).  SARS replied on 3 August 2015 confirming the 22 June decision, leaving the taxpayer saddled with the onus of showing exceptional circumstances sufficient to justify the delay.

Counsel for the taxpayer seems to have been grasping at straws in submitting five arguments in support of the application.  It is evident that several of them were irrelevant to the enquiry into the existence of exceptional circumstances.  The five submissions were:

• 65 days is not a long period when viewed in the context of the three year prescription period – a non sequitur if ever there was one;
• the August 2014 audit findings differed so little from the December assessments that the intervening correspondence could be regarded as an objection. With respect to counsel, one has only to read this submission in order to reject it, as did the court;
• the relevant SARS official failed to consider the reasons that motivated for exceptional circumstances before making the decision on 22 June 2015. As the court observed, the taxpayer tendered no such circumstances before the decision;
• the appeal was not against the decision of 22 June 2015 but against the 3 August 2015 confirmation letter. However, even at that late stage the taxpayer had tendered no exceptional circumstances; and finally
• SARS had allegedly invited the taxpayer in the 22 June letter to resubmit an amended objection and therefore the taxpayer’s 25 June letter should have been properly and reasonably considered and adjudicated in the 3 August letter. The court noted that, not only was there no evidence in the 22 June letter of any such invitation, but section 104 of the TAA would not have permitted SARS to do so.

• the objections and appeals involved complex questions of law. The court found itself without any evidence why tax on motor vehicles, PAYE not deducted from employees or any of the other matters in issue would be considered complex;
• the courts were closed during the December 2014/January 2015 recess. The court was unable to understand what impact this could have had;
• the taxpayer was busy in negotiations with SARS during the period from December 2014 to March 2015. The only evidence of this was of a visit by the taxpayer’s auditor to SARS on 19 January 2015. The court was clearly displeased by counsel’s persistence “ad nauseam” in referring to a series of meetings in the absence of evidence to this effect;
• the taxpayer became dissatisfied with the capabilities of the auditor, which led to the termination of his services and the need to obtain further professional advice. The court found little difference between this auditor’s letters and counsel’s opinion (presumably here the court was referring to the further professional advice). It thus appeared that the taxpayer’s dissatisfaction was with SARS’ response rather than with the auditor’s expertise;
• it took the taxpayer time to obtain new professional advice. The court pointed out that the taxpayer was based in Springs and yet obtained advice from a Florida based practitioner. In placing no weight on this argument the court took judicial notice of the multiplicity of attorneys’ firms operating all along the stretch of the Witwatersrand region between Springs and Florida and up into Sandton whence the taxpayer might at any time since December 2014 have enquired as to their tax expertise.

Facts

In November 2003 A Investments Ltd (A), using the taxpayer as its agent, had disposed of its 47,3% shareholding in B (Pty) Ltd, trading as BCD. In June 2006 A informed the taxpayer that it had discovered that the taxpayer had withheld material information from A when it sold its shares in BCD. This information, which was about minority shareholder protection, would have had a bearing on whether or not A sold its entire shareholding in BCD.

In August 2007 the taxpayer sold his shares in BCD for about R842 million, and in October A claimed damages from the taxpayer for its failure to represent A properly. The claim was based on the value of the shares and claims A would have enjoyed had it not sold its shares and claims in BCD. After negotiations, the parties agreed on an amount of R695 million, which the taxpayer duly paid to A.

The taxpayer then sought to link the 2003 sale by A to the taxpayer’s 2007 sale, so that it could deduct the settlement amount from the proceeds. The taxpayer’s aim was to satisfy the court that, whereas the proceeds of his disposal was R842 million, it was subject to his obligation to pay the settlement amount to A. In making this submission the taxpayer relied on paragraph 35(3) of the Eighth Schedule to the Income Tax Act, 1962, which provides that the proceeds from the disposal of an asset must be reduced by any reduction of an accrued amount forming part of the proceeds as the result of, inter alia, “the cancellation, termination or variation of an agreement or due to the prescription or waiver of a claim or release from an obligation or any other event” (emphasis added). Put differently, when the taxpayer sold his shares in 2007 he was aware that he would have to pay a settlement amount to A, and his argument was that the sale of his shares was therefore linked to his obligation to pay A the settlement amount. According to him, the obligation was “any other event” contemplated in paragraph 35(3).

Court decision

The court rejected this contention, stating that the fact that he had decided to pay the damages claim out of the proceeds did not affect the fact that he had disposed of his shares and received R842 million for the disposal.

Eiusdem generis rule

As to the taxpayer’s reliance on the phrase “any other event”, in support of which his counsel contended that the phrase was so wide that it included the settlement amount, the court found that one could not read the words in isolation. The court agreed with SARS’ submission that the phrase had to be interpreted according to the eiusdem generis or noscitur a sociis rule, in terms of which a word derives its meaning from that of its associates. In paragraph 35(3) these were cancellation, termination, variation, prescription, waiver, and release. The phrase therefore contemplated an event of a similar nature to its predecessors. Where general words follow particular and specific words, the meanings of the general words must be confined to things of the same kind as the specified ones. In addition, it was settled law that the word “any” did not extend the meaning beyond the confines of the word’s neighbours. In short, the two transactions were separate and distinct.

Penalties

Regarding the imposition of a 75% penalty for understatement by SARS, this meant that, in terms of the understatement penalty matrix in the TAA, SARS concluded that there were no reasonable grounds for the taxpayer’s treatment of the settlement amount. The taxpayer’s unchallenged evidence was that he believed that his interpretation was correct in terms of the Eighth Schedule. He had taken professional advice as well. On that basis the court found that there were reasonable grounds for the position the taxpayer had adopted. Further, in consulting the experts, he had taken reasonable care, so that his conduct was not caught by the next category in the matrix, which provides for a 50% penalty if the taxpayer has failed to take reasonable care in compiling his return. This left only the category of substantial understatement, carrying a 10% penalty, and it was clear that the taxpayer’s return had included a substantial understatement. Therefore a 10% penalty was appropriate, not the 75% imposed by SARS.

Finally, given the process by which the taxpayer had arrived at his decision, the court directed that the interest imposed by SARS should be waived.

In CSARS v Tradex (Pty) Ltd and Others Case No 12949/2013 the taxpayers were years in arrears with their tax returns and their financial records were in a mess, partly because of the administrative weakness of the main shareholder but mainly because she had been let down by successive financial managers. There was evidence of extensive efforts on the part of herself, her staff, two audit firms and an experienced tax consultant to bring order to nearly a decade of neglect of records and tax returns. Despite these efforts and much correspondence and numerous meetings with SARS, as well as several interim tax payments and undertakings to dispose of assets to raise funds with which to pay the outstanding taxes, SARS sought and obtained a provisional preservation order in August 2013. In the present matter SARS was seeking confirmation of that order. The court noted that at all times the taxpayers’ representatives had kept SARS apprised of progress.

In analysing section 163 of TAA, the court began by noting that a preservation order may be made if it is “required to secure the collection of tax”. The section does not say what circumstances would point to an order being required. The test was not one of necessity but that the order would provide a “substantial advantage in the collection of tax”, including guarding against the risk of dissipation. SARS was required to show that there was a material risk that assets that would otherwise be available to satisfy a tax liability would, without a preservation order, no longer be available.

Delinquency in a taxpayer’s conduct of its tax affairs might be part of the material from which one could infer the existence of a risk of dissipation, but there was no automatic connection between the two. The basis of SARS’ application was just this – the delinquency of the taxpayers in dealing with their tax affairs. SARS contended that delinquency could be inferred from the fact that, instead of using cash flow to pay its tax liabilities, Tradex had ploughed it back into the business. The court’s response was the obvious one that this conduct amounted to the opposite of dissipation. SARS had provided no evidence of dissipation by the taxpayers.

The court gained the impression that SARS had launched the application not so much because a preservation order was necessary but in order to bring matters to a head by placing legal pressure on the taxpayers after years of negotiation and effort. Whilst SARS’ evident frustration was understandable, this was not what the preservation provision was intended for. SARS had at its disposal other mechanisms to deal with delinquent taxpayers, such as the information-gathering provisions, the power to issue estimated and jeopardy assessments, the tax-recovery provisions, the administrative non-compliance penalties and the criminal offences created in the TAA.

A preservation order would, in the case of Tradex, an active trading entity, result in its closing down, and this would be unjust. The taxpayers had offered to register caveats against their immovable properties and, in the case of a property they were intending to sell, to procure that the proceeds be paid into their attorney’s trust account pending final assessments of taxes due.

Before concluding by refusing to confirm the provisional preservation order, the court made several observations about the application of the preservation provision.

Firstly, although SARS may apply for an order ex parte, to do so would be contrary to the principles of fairness and constitutional values in the absence of circumstances justifying a departure from ordinary procedures.

Secondly, even where an order is warranted, it doesn’t follow that all SARS’ requested terms should be included. For example, it isn’t always necessary to appoint a curator bonis, even though section 163 provides for an appointment. In the current matter there was evidence that the curator had contributed nothing and was a hindrance rather than a help.

Third, and this is perhaps the most telling comment, SARS should not frame preservation orders on a one-size-fits-all basis. The court noted that the current order was on the same terms as a similar application it had heard recently and accorded with several in the Gauteng area in recent months. Each order applied for should be tailored to the circumstances of the case.

Fourth, section 163 is a preservation procedure, not an execution mechanism. The section finds its primary application where the amount of tax has not yet been ascertained. Once the tax has been determined, several other sections of TAA assist SARS in collecting the tax. A preservation order should not, as was the case in the present matter, include a power on the part of the curator to realise assets in order to settle the taxpayer’s tax liability.

The TAA is still in its infancy and this judgment is the latest indication of how the courts are going to interpret and apply its sometimes draconian provisions.