By Johan van der Walt (DLA Cliffe Dekker Hofmeyr Tax Alert)
Chapter 5 of the Tax Administration Act, No 28 of 2011 (TA Act) significantly extends the information gathering powers of the South African Revenue Service (SARS).
In SARS's recently published Short Guide to the Tax Administration Act it is stated: "SARS's information gathering powers are supplemented or extended by TA Act. This is essentially to address the problem that too many requests for information by SARS results in protracted debates as to SARS's entitlement to certain information. However, taxpayer's rights are amplified and made more explicit to counterbalance SARS's new information gathering powers."
Despite SARS's extended information gathering powers it's certainly not carte blanche – where appropriate, taxpayers should resist potential abuse of those powers. A recent Canadian judgment is instructive regarding the limitations on the information gathering powers of a revenue authority (in this instance the Canadian Revenue Authority (the CRA)).
The case ofR. v. He 2012 BCCA 318 (judgment by the Court of Appeal for British Columbia on 25 July 2012)involved a CRA programme called the "Electronic Records Evaluation Pilot Project". This programme, used by the CRA's Audit Division, targeted certain businesses for research purposes such as restaurants, convenience stores and small supermarkets to evaluate their record-keeping compliance. The He family in Vancouver ran a small sushi restaurant. The CRA suspected that it had used sales suppression software (a so-called 'zapper' programme) to suppress $1.6 million in sales revenue over a four year period. Initially the CRA stated that it was not auditing the restaurant. However, inconsistencies found subsequently resulted in a CRA audit and investigation culminating in criminal charges. The question waswhether the CRA was authorised to seize and examine the He family's records under the circumstances of this case.
At the criminal trial of the three He family members, the judge stated that the CRA's letter requesting the taxpayer's voluntary cooperation in the research project was misleading and deceptive. He pointed out that said letter even reassured that the review "... was not an audit, but rather a limited review of your current record keeping practices to determine if they are adequate for purposes of the Income Tax Act and Excise Tax Act." The judge therefore ruled that the evidence obtained from the restaurant's point of sale system was inadmissible. On appeal this finding was confirmed by the Supreme Court of British Columbia. The CRA then appealed to the BCCA.
In its judgment the BCCA referred to sec 231.1 of the Canadian Income Tax Act, 1985 (ITA). This section empowers the CRA to demand taxpayer information "for any purpose related to the administration or enforcement of" the ITA. The BCCA considered the reasoning of the Supreme Court of Canada inJames Richardson & Sons v. M.N.R.,  1 S.C.R. 614and other cases laying down the parameters of the CRA's information gathering powers. In the end the BCCA agreed with the judge and the Supreme Court of British Columbia that the examination of the restaurant's books and records was not authorised by sec 231.1 of the ITA.
The Supreme Court of Canada in theJames Richardsoncase acknowledged that the CRA's information gathering powers were unquestionably broad. It nevertheless warned that the revenue authority should not be allowed to undertake a 'fishing expedition'. TheJames Richardsoncase applied the reasoning inCanadian Bank of Commerce v. Attorney General of Canada,  S.C.R. 729.The last-mentioned case held that a request for taxpayer information could only be made where such information was relevant to the tax liability of a person or persons and on the basis that the CRA was engaged in a "genuine and serious inquiry into the tax liability of some specific person or persons ... for purposes of the administration or enforcement of the Act...". Any demand for taxpayer information not meeting that yard-stick could not be said to be related to the administration or enforcement of the Act.
The wording in the local TA Act is comparable to that of corresponding provisions in the Canadian ITA. For example, section 45(1) [dealing with 'Inspection'] and section 46(1) [dealing with 'Request for relevant material'] of the TA Act provide that "SARS may, for purposes of the administration of a tax Act in relation to a taxpayer" require certain information to be submitted to it.
The Canadian experience shows that, before a taxpayer complies with any information request, it should clearly understand exactly what information is being requested by the revenue authority, the statutory basis for the request and the purpose for which said information is needed. The He family discovered to their detriment that the road from research to audit to investigation to criminal prosecution gets blurred quite easily – especially when travelled by over-zealous revenue officials.
Although locally the TA Act might have supplemented and extended SARS's information gathering powers, those powers are by no means unfettered. Taxpayers should be aware of their rights and obligations when it comes to SARS demanding information from them.