SARS v Pretoria East Motors (Pty) Ltd (291/12) [20140 ZASCA 91 (12 June 2014)
16 July 2014
Posted by: Author: Emmerentia Fischer
Author: Emmerentia Fischer (SAIT Technical)
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%.
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
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.
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:
1. Input tax on the purchase of second hand
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.
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.