Prescription of Assessments
31 January 2013
Posted by: Author: Ernest Mazansky
Prescription of Assessments
As is well known, the general rule is that the SARS is prohibited from raising an assessment more than three years after the date of issue. The purpose of this is to bring finality to the situation so that, as was stated by the Supreme Court of Appeal in C:SARS v Brummeria Renaissance Proprietary Limited 69 SATC 205, the dispute should come to an end as this is in the public interest; and that it would be unfair to an honest taxpayer if the Commissioner were to be allowed to continue to change the basis upon which the taxpayer was assessed until the Commissioner got it right.
As the court rationalised, memories fade, witnesses become unavailable and documents are lost. Thus the law seeks to achieve a balance – it allows the SARS three years to collect the tax, but it will not protect a taxpayer guilty of fraud, misrepresentation or non-disclosure of material facts (and it must be remembered that the misrepresentation need not be fraudulent or negligent – even innocent misrepresentation triggers the provision).
Prior to the introduction of the Tax Administration Act, 2011 (TAA) this issue was governed by section 79 of the Income Tax Act, 1962 (ITA).
In a nutshell, proviso (i) to section 79(1) of the ITA precluded SARS from raising an assessment after the expiration of three years from the date of the assessment unless the Commissioner was satisfied that the under-assessment of tax was due to fraud or misrepresentation or nondisclosure of material facts.
While generally a taxpayer has the onus to prove non-taxability of income or deductibility of expenses, the law does not place the onus to prove everything on the taxpayer. There are certain circumstances where the Commissioner bears an onus.
One of those circumstances is in relation to ignoring prescription. Under the proviso to section 79(1) of the ITA there were, in effect, two things in respect of which the Commissioner bore an onus: the first was to show that there was indeed fraud, misrepresentation or nondisclosure of material facts; while the second was that he had to show that he was satisfied that the fraud, etc resulted in the under-assessment of tax.
In ITC 1856 74 SATC 76, the court was dealing with an appeal relating to whether a share scheme, which operated on the deferred delivery basis, could nevertheless give rise to tax on the excess of the market value of the shares over their cost when the shares were actually delivered. Part of the dispute related to prescription. The taxpayer had acknowledged that there was no disclosure in the tax return for the relevant year. On the other hand, the Commissioner acknowledged in court that, at the time of the assessment, it was not SARS’s practice to tax the gains on delivery; that was a view that SARS arrived at later.
Accordingly it was held that the Commissioner could never have been satisfied that the failure to tax arose from the non-disclosure. (Note that, in respect of the remaining years, the taxpayer’s appeal on the merits failed. Although the taxpayer appealed the decision to the High Court, the Commissioner did not cross-appeal on the prescription aspect. Thus, in regard to prescription, the decision stands.)
Section 79 of the ITA has been repealed and the issue is now governed by section 99 of the TAA. Subsection (1)(a) states that SARS may not make an assessment three years after the date of assessment of an original assessment. Subsection (2)(a) goes on to state that subsection (1) (i.e. the prescription) does not apply to the extent that the full amount of tax chargeable was not assessed due to fraud, misrepresentation or nondisclosure of material facts.
It will be noted that the requirements are very similar to those contained in section 79 of the ITA, save that now there is no longer the requirement that the Commissioner must be satisfied. Nevertheless, it is submitted that nothing much really changes in this regard.
Section 99(2)(a) clearly states that prescription can be ignored only if there was under-assessment due to fraud, etc. It is thus clear that there must be a clear causal connection between
(a) the failure to assess the proper amount; and
(b) the fraud, etc.
Thus the Commissioner still bears the onus of proving, first, that there was fraud or misrepresentation or non-disclosure of material facts; and then, secondly, that it was this fraud, etc that resulted in the under-assessment of tax.
One can frame the issue slightly differently by asking the following question: even if there was, say, material non-disclosure, assuming that there had been no such non-disclosure, would SARS have assessed the taxpayer in the way that it is now seeking to do by raising the additional assessment, or would it have assessed the taxpayer in exactly the same way? If the answer is the latter, then SARS could not say that the under-assessment was due to the non-disclosure.
In my view, if ITC 1856 was being decided under section 99 of the TAA, the court would have come to exactly the same conclusion.
Source: By Ernest Mazansky (TaxTalk)