A recent appeal case South African Revenue Service v Pretoria East Motors (Pty) Ltd, sets out the standard that SARS is expected to uphold when auditing taxpayers. SARS must try to understand the systems used by taxpayers before raising additional assessments and imposing penalties for incorrect tax treatment. The court criticised SARS for employing bullying tactics when dealing with taxpayers.
SARS conducted an income tax and VAT audit of the taxpayer, a car dealership business. The taxpayer used a customised system supplied by the franchisor which provided both the financial information of the taxpayer and statistical information critical to managing the risk inherent in the dealership business. One of the peculiar features of this system was that it reflected certain internal transactions as actual ‘sales’. SARS treated the internal transactions as sales and VATable supplies respectively for income tax and VAT purposes.
When conducting the audit SARS ignored the bespoke nature of the system and resorted to imposing penalties and raising additional assessments, based on what the system appeared to report, ignoring the facts behind the reports. As a result, if the officials did not understand an entry or transaction, they raised an additional assessment. Further, they ignored the taxpayer’s attempt to show that SARS’ conclusion was wrong and why.
To add insult to injury, all the additional assessments raised were subject to penalties at the maximum rate of 200%, without any explanation why the taxpayer’s conduct was said to be dishonest or directed at the evasion of tax, which is the requirement before SARS may impose a 200% penalty.
Generally, taxpayers bear the burden of proof in tax disputes with SARS. In other words, it is up to the taxpayer to prove a claim, an exemption or non-liability. The court accepted that the taxpayer bears the onus in any dispute with SARS, but held that this does not mean that SARS is free to adopt a passive attitude. The court emphasised that “… the onus was on the taxpayer to show on a preponderance of probability that the decisions of SARS … were wrong. That, however, is not to suggest that SARS was free to simply adopt a supine attitude. It was bound before the appeal to set out the grounds for the disputed assessments and the taxpayer was obliged to respond with the grounds of appeal and these delineate the disputes between the parties”. Thus, although the taxpayer bears the onus in tax matters, SARS is equally obliged to engage with the facts and verify the grounds on which an assessment is based.
The court also found that the raising of penalties with an additional assessment must be based on proper grounds for believing that there has been an under-declaration of supplies or income for VAT and income tax. SARS cannot ignore explanations or reasons from taxpayers and raise additional assessments and penalties without seeking to understand the taxpayer’s systems. SARS officials are obliged to familiarise themselves with the systems used by taxpayers. The conduct of SARS will only be considered administratively fair if the taxpayer is afforded this treatment.
If SARS officials are unable or unwilling to get to grips with the systems in operation, it doesn’t lie with them to impose tax as they see fit and leave it to the taxpayer to explain and justify the system in court. If they adopt this approach, their decisions will not be based on proper grounds and the taxpayer’s rights will be compromised.
Thus taxpayers must assert their rights before a dispute even reaches the tax court by requesting SARS to provide the grounds on which it is raising an additional assessment.
With acknowledgment to Rivalani Mutshinya and Andrew Wellsted of Norton Rose Fulbright Tax Services
