By PWC Tax Synopsis
PWC considers whether a decision by SARS to investigate a taxpayer constitutes administrative action under PAJA. This includes a discussion of the SCA judgment inCorpclo 2290 CC t/a U-Care v Registrar of Banks  ZASCA 156. Adecision by SARS to embark on an audit of the taxpayer would not, in and of itself, constitute a decision, as defined in PAJA, and therefore would not trigger the procedural and substantive provisions of PAJA.
The Promotion of Administrative Justice Act 3 of 2000 (PAJA) and its muscular interpretation by the courts has added a significant new dimension to taxpayers’ rights and provides a substantial counterweight to SARS’s draconian statutory powers.
However, it has taken more than a decade for the full impact of this legislation in the fiscal dimension to become apparent.
As the Supreme Court of Appeal observed in Investigating Directorate: Serious Economic Offences v Hyundai Motor Distributors (Pty) Ltd: In re Hyundai Motor Distributors (Pty) Ltd v Smit NO & others  ZACC 12; 2001 (1) SA 545 (CC) at para 21 –
‘All statutes must be interpreted through the prism of the Bill or Rights’ and this injunction of course holds as true for fiscal legislation as for all other legislation. PAJA is, in its own right, constitutional legislation for it is the legislation, foreshadowed in the Constitution, that was to give detailed expression to the right to fair administrative action that is merely adumbrated in the text of the Constitution itself.
The thrust of PAJA is to create a right to take on judicial review any administrative action, which is defined in section 1 of that Act as –
‘any decision taken, or any failure to take a decision, by —
(a) an organ of state, when —
(i) exercising a power in terms of the Constitution or a provincial constitution; or
(ii) exercising a public power or performing a public function in terms of any legislation; which adversely affects the rights of any person and which has a direct, external legal effect.
Is a decision by SARS to audit a taxpayer "administrative action”, and thus subject to judicial review under PAJA?
An important issue, on which there has hitherto been no direct authority, is whether a decision by SARS to audit a taxpayer, or to embark on other investigatory activity, in and of itself constitutes administrative action as envisaged in PAJA. If the answer to that question is affirmative, SARS would be obliged in terms of section 3(2)(b) of PAJA to give the taxpayer notice of the nature and purpose of the proposed audit and the opportunity to make representations as to why no audit should be carried out.
Moreover, if the answer to that question is affirmative, SARS’s decision to conduct an audit could be challenged as irrational on the basis that there was no reason or insufficient reason to do so and that the decision was therefore capricious and arbitrary – or was taken for an improper purpose, such as harassment. The taxpayer could then apply to court to set aside the decision to embark on the audit, thereby suffocating the investigation at birth and pre-empting any adverse findings.
The Supreme Court of Appeal has now spoken on the underlying principle
A Supreme Court of Appeal judgment has now laid down a principle which supplies an authoritative answer as to whether a decision by SARS to embark on an audit or other investigation of a taxpayer would constitute administrative action, thereby triggering the application of PAJA.
The judgment in question is that in Corpclo 2290 CC t/a U-Care v Registrar of Banks  ZASCA 156, handed down on 2 November 2012.
The background to the High Court application for an interdict in this case was that the Registrar of
Banks had instigated an investigation by PricewaterhouseCoopers into whether Corpclo CC, which traded under the name U-Care (and was an entity that solicited contributions from the public
which, after deduction of commissions and expenses, were to be distributed to charities) was conducting the business of a bank in contravention of section 11(1) of the Banks Act 94 of 1990.
When the Registrar of Banks applied to the High Court for an order in terms of section 81 of the Banks Act for an interdict prohibiting U-Care from continuing a business practice in contravention of the Banks Act, U-Care argued, inter alia (emphasis added) that –
"The Registrar should not have been entitled to investigate and arrive at adverse decisions impacting on the rights of Corpclo [trading as U-Care] without showing due respect for Corpclo’s administrative rights to procedural fairness.”
In addition to finding fault with the procedural aspects of U-Care’s challenge to the application for an interdict, the Supreme Court of Appeal held as follows (footnotes omitted and emphasis added) –
" Regarding the appellants’ right to just administrative action in terms of s 33 of the Constitution, the appellants’ heads of argument attack the Registrar’s decision ... to appoint inspectors to investigate the appellants and to institute proceedings against them on the grounds that these were administrative decisions taken by an organ of State in the course of implementing legislation and that the Registrar failed to act in a manner that was lawful, reasonable and procedurally fair. This would require, so it is contended, that the appellants be given adequate notice of the nature and purpose of the administrative action, a reasonable opportunity to make representations, a clear statement of the administrative action and adequate notice of the right to request reasons and of any right of review. It is also contended that administrative action must not be taken arbitrarily, capriciously, in bad faith or for an ulterior purpose. In support of these contentions the appellants refer to ss 1,3 and 6 of PAJA. ...
 ... [T]he appellants’ reasoning is seriously flawed. ... [T]he Registrar’s
decisions to investigate the appellants’ business and institute proceedings
against the appellants for an interdict in terms of s 81 of the Act were not
administrative actions for the purposes of PAJA as they did not (as required by
the definition of ‘administrative action’ in s 1 of PAJA) adversely affect the
rights of the appellants or have a direct, external legal effect or have that
capacity. ... A decision to investigate and the process of investigation, which
exclude a determination of culpability, could not adversely affect the rights of
the appellants in a manner that has a direct and external legal effect. So too a
decision to institute proceedings in the high court for an interdict does not
affect the rights of the appellants or have that capacity. It is the high court
which decides that the Act is being contravened and decides to grant the
The court held accordingly that there was no merit in U-Care’s appeal against the granting of the interdict and dismissed its appeal. The ratio of this judgment can be extrapolated to apply to a decision by SARS to embark on an audit of (or any other investigation into) a taxpayer’s affairs in terms of its powers under fiscal legislation.
The essence of the Corpclo judgment
The Corpclo judgment holds in effect that a decision by an organ of state to conduct an investigation does not, in and of itself, adversely affect the rights of the person concerned or have a direct, external legal effect and it therefore does not constitute administrative action that can be the subject of judicial review in terms of PAJA.
It follows that a decision by SARS to embark on an audit of the taxpayer would not, in and of itself, constitute a decision, as defined in PAJA, and therefore would not trigger the procedural and substantive provisions of that Act. From this it follows that SARS is not obliged to give the taxpayer advance notice of its intention to conduct an audit; the taxpayer is not entitled to demand reasons for the proposed audit; and a decision by SARS to audit a taxpayer cannot, in and of itself,be the subject of judicial review on the grounds that the decision was irrational in that there were no reasonable grounds for embarking on such an audit.
Of course, once it is under way or complete, the process of the audit (as distinct from its outcome) canbe the subject of constitutional challenge, either under the Constitution itself or under PAJA.
Such a challenge could take the form of an application for judicial review, for example, on the grounds that the manner in which the audit was conducted constituted ‘conduct’ that violatedthe taxpayer’s constitutional right to the privacy of confidential or privileged information. The results of the audit, when incorporated into an assessment, can of course be challenged on the merits by way of objection and appeal.