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The Tax Administration Act, Taxpayers’ rights and SARS Audits

31 January 2013   (0 Comments)
Posted by: Author: Prof Daniel N. Erasmus
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The Tax Administration Act, Taxpayers’ rights  and SARS Audits

With the commencement of the new Tax Administration Act, issues such as prescription of assessments, the pay-now-argue-later principle, penalties, legal professional privilege and the excessive powers of SARS will remain under the spotlight and deservingly so. If anything, the TAA has highlighted the significance of taxpayers’ rights.

For more than a decade, I have focused on taxpayers’ rights at the commencement of an audit. In Viking Pony Africa Pumps (Pty) Ltd t/a Tricom Africa v Hidro-Tech Systems (Pty) Ltd and another 2011 (1) SA 327 (CC) para 37:

[37]PAJA defines administrative action as a decision or failure to take a decision that adversely affects the rights of any person, which has a direct, external legal effect 1. This includes "action that has the capacity to affect legal rights”2. Whether or not administrative action, which would make PAJA applicable, has been taken cannot be determined in the abstract. Regard must always be had to the facts of each case3.

In Corpclo 2290 cc t/a U-Care v The Registrar of Banks (755/11) [2012] ZASCA 156 (2 November 2012)] the SCA held at para [26] that the 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 capacity4. Whether or not administrative action, which would make PAJA applicable, has been taken, cannot be determined in the abstract. Regard must always be had to the facts of the case5. 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 effect6. 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 capacity7. It is the High Court which decides that the Act is being contravened and decides to grant the interdict.

Many readers who have attended my lectures and talks in the past will know that I say something different. I am not the SCA, so it is appropriate for me to justify why I say a decision to audit a taxpayer is administrative action. My views are based on my draft PhD thesis which analyses the inter-relationship in particular between ss 2, 33, 41(1), 172(1), 195(1) and 237 of the Constitution 108 of 1996; s 4(2) of the South African Revenue Service Act 34 of 1997 (SARS Act); the Promotion of Administrative Justice Act 3 of 2000 (PAJA); and a decision by the Commissioner for the South African Revenue Service to exercise his powers under ss 40, 46, 47 and 48 of the Tax Administration Act 28 of 2011 by requiring taxpayers to submit, produce or make available relevant material. My thesis concludes that such a decision by the Commissioner (or SARS) constitutes administrative action as defined in s 1 of PAJA.

THIS CONCLUSION IS REACHED ON THE BASIS THAT SUCH A DECISION WILL:

  • have been taken by an organ of State exercising a public power or performing a public function in terms of legislation;
  • involve the exercise of a discretionary power, in that it is for SARS to determine whether and in what circumstances it will require any particular taxpayer to submit, produce or make available relevant material;
  • adversely affect taxpayers’ rights, and has a direct, external legal effect. The fact that the power in question is preliminary and investigative, and that its exercise does not in itself determine whether any tax, penalties and interest is payable, does not detract from the conclusion that tax, penalties and interest may become payable as a result of the preliminary investigation. The decision imposes on taxpayers an obligation to do something (to submit, produce or make available relevant material) which, but for the exercise of the power, taxpayers would not in law be obliged to do: normally taxpayers would have a right to keep private and confidential information, documents and things that must now be produced or provided to a SARS official. A failure by taxpayers to comply exposes them to criminal prosecution under s 234(d) and (i) of the Tax Administration Act. Furthermore, these powers exercised by SARS are not made specifically subject to the normal objection and appeal processes in the Tax Administration Act.

Lastly, there is no relevant exclusion in the definition of administrative action that removes this type of decision from that definition in PAJA. In exercising this power, despite the decision not being subject to objection and appeal, SARS is obliged to act in a lawful, reasonable and procedurally fair manner, adhering to its constitutional obligations. A failure to do so would render its decision to invoke its powers under these sections liable to be set aside on review on any applicable codified review grounds stated in s 6(2) of PAJA.

Consequently, in order for taxpayers to satisfy themselves that their constitutional rights to lawful, reasonable and procedurally fair conduct from SARS have not been violated, they are entitled in terms of s 3(1) and (2) of PAJA to adequate notice and to adequate reasons in terms of s 5(1) and (2) of PAJA for its decision made in terms of ss 40, 46, 47 and 48 of the Tax Administration Act on the basis that such a decision materially and adversely affects the rights of the taxpayer. Through the analysis of the inter-relationship between ss 40, 46, 47 and 48 of the Tax Administration Act, the Constitution, the SARS Act and PAJA, the thesis concludes that even if PAJA were not applicable (primarily because the ‘administrative action’ definition may be held to be too restrictive to include a decision in terms of ss 40, 46, 47 and 48 of the Tax Administration Act), SARS would still be bound by its constitutional obligations to comply with the principle of legality, as stated by the Constitutional Court in various cases.

These include the important case of Pharmaceutical Manufacturers Association of SA and another: in re ex parte President of South Africa and others, CCT 31/99, which entails a basic level of rationality in SARS’s decision-making, that SARS should apply its mind properly in deciding whether and in what manner to exercise its discretionary investigative powers, and that SARS should exercise such powers only for the purposes they were conferred. In other words, not in an arbitrary or irrational manner: satisfying the jurisdictional facts of the empowering provisions of ss 40, 46, 47 and 48 of the Tax Administration Act, read with the SARS’s constitutional obligations and those in terms of s 4(2) of the SARS Act. Often it is not evident to taxpayers that the information and documents have been requested for purposes lawfully mandated by the legislation and read with the constitutional obligations set out in the Constitution.

Further, it may not be evident that SARS has properly applied its mind in deciding to target a particular taxpayer for enquiry and audit in formulating its demands by adhering to the SARS Code of Conduct and the legitimate expectations created by SARS. SARS is to ensure its conduct is not inconsistent and, in doing so, must adhere to the Constitution, by fulfilling its constitutional obligations, such as those in terms of ss 41(1), 195(1) and 237 of the Constitution. These stipulate that only power conferred by the Constitution should be assumed and public administration must be governed by the democratic values and principles enshrined in the Constitution, including a high standard of professional ethics; impartial, fair and unbiased conduct; efficient, economic and effective use of resources; accountability and transparency, providing the public with timely, accessible and accurate information. In terms of s 4(2) of the SARS Act, SARS is specifically enjoined to perform its functions in the most cost- effective manner and in accordance with the values and principles mentioned in s 195 of the Constitution. Failure to adhere to these obligations will entitle taxpayers to approach the courts to declare the conduct of SARS invalid.

Where SARS’s conduct is unlawful, unreasonable or procedurally unfair in exercising its powers in making a decision in terms of ss 40, 46, 47 and 48 of the Tax Administration Act, taxpayers must first and foremost attempt to bring a review application in terms of s 6(1), 7(1) and 8(1) of PAJA to the High Court on the basis that the decision is administrative action as defined in PAJA. Failing that, a Rule 53 application must be submitted to the High Court on the basis that SARS has transgressed the principle of legality. Taxpayers would also be entitled to raise the defence of just cause in s 49 of the Tax Administration Act for refusing to submit, produce or make available relevant material to SARS, escaping criminal prosecution under s 234 of the Tax Administration Act. Remember, the SCA held: regard must always be had to the facts of the case8. In the case of an audit by SARS, it is almost certain that "a direct, external legal effect” will follow, or that the decision by SARS will have that capacity.

Source: By Prof Daniel N. Erasmus (TaxTalk)


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