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SARS v Pretoria East Motors (Pty) Ltd (291/12) [20140 ZASCA 91 (12 June 2014)

16 July 2014   (1 Comments)
Posted by: Author: Emmerentia Fischer
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Author: Emmerentia Fischer (SAIT Technical)

Introduction

The taxpayer conducted business as a car dealership in Pretoria selling new and used vehicles.  The South African Revenue Service (SARS) conducted an audit on the taxpayer in respect of its 2000 to 2004 years of assessment.  As a result, SARS raised various additional assessments in respect of  income tax under the Income Tax Act 58 of 1962 ("ITA”) and Value-Added Tax Act 89 of 1991 ("VAT Act”).  SARS furthermore imposed punitive additional tax of 200%. 

Facts

Before the Supreme Court of Appeal (hereinafter referred to as "the SCA”) there were numerous substantive issues in dispute between the taxpayer and SARS on appeal from the Tax Court. It is, however, important to note that the significance of the judgement relates to the approach that SARS adopted in respect of the audit and in raising the assessment and the SCA’s criticism thereof.

SARS mainly relied on s82 of the ITA and s37 of the VAT Act (now s102 of the Tax Administration Act, No 28 of 2011) in that, where disputes are concerned, the burden of proof lies with the taxpayer. The present appeal was therefore approached on the basis that the onus was on the taxpayer to show on a preponderance of probability that the decisions of SARS against which it appealed were wrong (CIR v SA Mutual Unit Trust Management Co Ltd 1990 (4) SA 529 A at 538D). 

The approach adopted by SARS was to examine the accounts and where a discrepancy was found that was not understood and for which, according to the SARS official, no adequate explanation was furnished, an assessment for additional tax, either income tax or VAT or in some instances both was raised.

In approaching the judgement the SCA confirmed various principles relating to tax disputes. The first being that that the Tax Court is a court of revision and not of appeal in the strict sense, therefore it has to rehear the whole matter and can substitute the Commissioner’s decision for its own. It also held that the taxpayer’s ipse dixit, which in many instances in this case went unchallenged by SARS, will not lightly be regarded as decisive, but it must be considered together with all the other evidence in the case. The interests of justice require that the taxpayer’s evidence and questions of its credibility be considered with great care. 

Furthermore, everything would depend upon the nature of the dispute between the parties as defined by the grounds of assessment and the grounds of appeal. It was stressed that SARS is under an obligation throughout the assessment process leading up to the appeal and the appeal itself, to indicate clearly what matters and which documents are in dispute so that the taxpayer knows what is needed to present its case.

Held

Before dealing with the substantive matters, the SCA criticised SARS’ approach to the assessments as being fallacious.  The SCA held that raising of an additional assessment must be based on proper grounds for believing that, in the case of VAT, there has been an under declaration of supplies and hence of output tax, or an unjustified deduction of input tax. In the case of income tax it must be based on proper grounds for believing that there is undeclared income or a claim for a deduction or allowance that is unjustified. It is only in this way that SARS can engage the taxpayer in an administratively fair manner, as it is obliged to do. This is also the only basis upon which SARS can, as it must, provide grounds for raising the assessment to which the taxpayer must then respond by demonstrating that the assessment is wrong. 

The SCA held that SARS is under an obligation throughout the assessment process leading up to the appeal and the appeal itself to indicate clearly what matters and which documents are in dispute so that the taxpayer knows what is needed to present its case.

The following substantive issues were raised on appeal by SARS and on cross appeal by the taxpayer:

SARS’ Appeal

1. Input tax on the purchase of second hand vehicles

SARS disallowed input VAT deductions on the basis that the taxpayer had not kept the necessary records as required by the VAT Act. Taxpayer contended that the relevant transactions fell into 3 categories which they had brought under the attention of the SARS auditor. The information was made available for inspection and a sample to be scrutinised by SARS. SARS’ auditors continued to treat all the transactions the same which approach the SCA held to be untenable. In respect of 2 of the categories of transactions the court held that supplier declarations under section 20(8) VAT Act, that was not retained by taxpayer, was not a requirement to fulfil the input tax requirements of section 16(2)(a) VAT Act. It was held that the appeal by SARS in relation to this ground must fail. 

2. Fuel coupons

SARS disallowed income tax deductions claimed pertaining to the use of fuel coupons to obtain fuel for demonstration vehicles, delivery of vehicles or for other internal purposes. The taxpayer contended that the coupons were used as payment for the petrol and that all the underlying supporting documentation was made available to SARS who chose not to peruse them. The court held that SARS did not reject the taxpayer’s account of the facts and merely did not respond. It was held that the appeal by SARS must fail.  

3. Parking rentals

SARS disallowed income tax and VAT input deductions in respect of rentals paid in cash to a landlord for additional parking which were not reflected on the invoice. The SCA held that the Tax Court had erred by merely addressing the purpose of the payments and not the onus pertaining thereto which the taxpayer had failed to discharge. Accordingly SARS’ appeals was upheld and referred for assessment by SARS.   

Taxpayer’s Cross Appeal

4. Difference between VAT returns and VAT report and turnover liability

SARS assessed the taxpayer on the basis of the differences on the gross amounts identified between the VAT returns and VAT reports as well as the difference between the returns and turnover liability. The court dealt with the two grounds together as only a single assessed amount could result from the differences. The taxpayer contended that SARS’ methodology was flawed in that it used the gross amounts which included amounts not subject to VAT and internal transactions that did not constitute a supply for VAT, which amounts SARS had ignored. The taxpayer’s evidence and calculations concluded that it had in fact overpaid VAT. SARS could also not explain how it established the turnover figure. After considering the submitted evidence the court upheld the taxpayers appeal for all the years but one where an under-declaration of a lesser amount than submitted by SARS was evident and only such lesser difference referred back to SARS for reassessment.  

5. The zero per cent VAT amounts

The taxpayer contended that certain vehicles were removed from regular or "floor plan” stock to be used it as "demo vehicles” or were sold to staff or directors. The finance underlying the vehicle had to be changed for such vehicles which was effected in the records as an internal sale, however no VAT output resulted from this. The SCA held that output VAT must only be collected when there is a supply by a vendor in the furtherance of the enterprise of the taxpayer. The internal transactions, reflecting only a re-allocation of existing assets, should have been disregarded and the SCA upheld the cross appeal. 

6. Sales at no consideration

According to SARS, a number of sales of vehicles by the taxpayer to third parties had apparently been effected at no consideration.  SARS was of the opinion that the cancellation of a trade-in transaction should only result in output VAT not being payable if a credit note had been issued in terms of s21(3)(a) of the VAT Act. The SCA agreed with the taxpayer’s contention that trade-in vehicles returned on cancellation of the offer to purchase of the new vehicle, where no VAT invoice for such trade invoice had in any event been issued, did not result in an output VAT liability. The SCA upheld the taxpayers cross appeal. 

7. Incentive bonus liability

SARS was of the view that the dealer incentive bonuses received by the taxpayer from Toyota SA were taxable by virtue of the definition of gross income in the Income Tax Act and also in terms of s7 of the VAT Act. The taxpayer contended that SARS had included amounts from paper workings as well that should not form part of liability. The court partially upheld the appeal in respect of the working document but not in respect of the rest of the incentive bonuses which the taxpayer had failed to support its objection.  

8. Discount and over-allowance liability

To bypass the strict rules imposed by Toyota, the taxpayer bypassed the rule by issuing cheques to their clients that could be cashed at its front desk.  The issue therefore was whether there was sufficient proof of discounts having been granted to clients. Documentary proof was provided by the taxpayer reflecting the process flow of each transaction. SARS did not refute the taxpayer’s evidence, merely that it was for the wrong period, which the court rejected. The cross appeal on this ground was therefore upheld. 

9. Journals at year end added back

Two year-end journal entries that served to reduce the company’s income were claimed by the taxpayer as a deduction from income tax.  SARS disallowed the deductions on the basis that they could not be explained together with the necessary proof. The taxpayer also failed in court to explain the amounts and the SCA held that the cross appeal on this ground should therefore fail. 

10. Stock liability

According to SARS, the taxpayer omitted certain vehicles still held in stock. The taxpayer submitted that the vehicles were sold and invoiced in the relevant year but only paid in following year, which submission was not refuted by SARS. The SCA agreed with the taxpayer’s contention and held that the removal of the vehicles from stock was correct, thus upholding the cross appeal. 

11. Creditors: accrued expenses and provision account

The taxpayer claimed various deductions in respect of provisions for accrued expenses.  It was held that these deductions were allowable at the discretion of the Commissioner. The objection by the taxpayer to those disallowances failed because the Commissioner had exercised its discretion against the taxpayer and therefore the cross appeal failed. 

12. Expenses: Liability

The taxpayer deducted a number of expenses for income tax and VAT purposes. Some of the expenses the taxpayer conceded were not deductible in terms of the Income Tax Act and for others there was no proof that those expenses had been properly incurred in the production of income.  Therefore the cross appeal failed. 

13. Salaries and wages

The total expenditure incurred in relation to salaries, directors’ remuneration and commission did not agree to the amounts reflected on the taxpayer’s IRP5 certificates and wage registers, nor did it agree to the amounts reflected in the trial balances and SARS disallowed the difference. The fact that the taxpayer failed to indicate precisely where the amounts had been dealt with resulted in the court dismissing the cross appeal. 

14. Penalties of 200% raised

SARS imposed and the Tax Court confirmed penalties of 200% in respect of various amounts of tax held to be payable by the taxpayer. The SCA found that the Tax Court had merely "rubber stamped” SARS’ decision instead of applying its own value judgement, which the SCA now had to do. The SCA held that, on the evidence before the court, the taxpayer was never found to have an intention to evade or even imputed such an intention by SARS, accordingly the cross appeal succeeded. 

Costs 

The SCA substituted the Tax Court’s costs award in favour of the taxpayer with an order that each party pay their own costs for that court on the basis that the taxpayer’s success on the wide range of matters did not warrant such an order. Oddly, the SCA awards costs in favour of the taxpayer on that exact same basis, namely that the taxpayer had substantial success on the various matters in the SCA.        

Please click here to access the judgement.                        

Comments...

Michael G. White says...
Posted 17 July 2014
Hopefully going forward the SCA’s forthright and censuring judgement will make SARS’ auditors think twice before raising assessments on taxpayers that have no sound legal basis .

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