SARS’ Information-gathering powers, the amended definition of “relevant material”
26 January 2015
Posted by: Author: Johan van der Walt
Author: Johan van der Walt (KPMG)
Johan van der Walt provides an in-depth
analysis of the ways in which the amended definition of "relevant” material has
impacted upon SARS’ power to gather taxpayer information.
"But if thought corrupts language,
language can also corrupt thought.” George
The Draft Tax Administration Laws Amendment Bill,
2014 (TALAB) introduced a far-reaching amendment to the definition of "relevant material” (as found in section 1 of the Tax Administration Act, 2011 (the
to the amendment the definition read: "relevant
material means any information, document or thing that is foreseeably relevant
for the administration of a tax Act as referred to in section 3.”
Now it reads: "relevant
material means any information, document or thing that in the opinion of
SARS is foreseeably relevant for the administration of a tax Act as
referred to in section 3.” (emphasis added)
This amendment should be read in conjunction with
the expanded definition of "return”
(section 1 of the TAA) which now incorporates "…relevant material requested by SARS”.
Failure to submit a "return” to SARS is a criminal office under section 234(1)(c) of
the TAA. Effectively, failure by a taxpayer to provide SARS with "relevant material” as requested by SARS
has been criminalised.
The above might also, in future, impact a taxpayer’s
ability to obtain a tax clearance certificate. In the Memorandum on the Objects
of the Tax Administration Laws Amendment Bill, 2014 (the Memorandum) it is
stated (at paragraph 2.64.1) that "the
requirement of no outstanding requests for information is removed as a requirement
for TCS [i.e. Tax Compliance Status], but further review on the inclusion of
such non-compliance will be conducted during the 2015 legislative cycle”.
When the TAA became law on 1 October 2012, there was
already a sense that SARS had become exasperated due to taxpayers contesting SARS’s
In the Short Guide to the TAA SARS stated that the
TAA extended its information-gathering powers "…to address the problem that too many requests for information by SARS
resulted in protracted debates as to SARS’s entitlement to information.”
Apparently the original TAA did not go far enough -
hence the above-mentioned amendments.
The Memorandum explains (at paragraph 2.37) that the
proposed amendment to the definition of "relevant
material” was aimed at clarifying "… that
the statutory duty to determine the relevance of any information, document or
thing for purposes of e.g. a verification or audit, is that of SARS and the
term foreseeable relevance does not imply that taxpayers may unilaterally
decide relevance and refuse to provide access thereto, which is what is
happening in practice.”
the intention is to introduce a purely subjective determination (by SARS) of
what constitutes "relevant material”. Whether
this solves SARS’s problem is debatable.
What does "foreseeably relevant” mean?
to the Memorandum (at paragraph 220.127.116.11), the test of what is foreseeably relevant
for domestic tax application would have a low threshold.
application of what qualifies as being ‘‘foreseeably relevant’’ is to be
determined (by SARS) applying the following criteria:
- whether (at the time of the request) there is a
reasonable possibility that the material is relevant to the purpose sought;
- whether the required material, once provided,
actually proves to be relevant is immaterial;
- an information request may not be declined in
cases where a definite determination of relevance of the material to an ongoing
audit or investigation can only be made subsequent to receipt of the material;
- there need not be a clear and certain
connection between the material and the purpose, but a rational possibility
that the material would be relevant to the purpose; and
- the approach is to order production first and
allow a definite determination to occur later.
in the information-gathering space this means: "Provide now, argue later.”
What are the taxpayer’s remedies?
Memorandum states (at paragraph 18.104.22.168) that taxpayers have the protection
that taxpayer information held by SARS is secret and may only be disclosed
under narrowly defined circumstances.
response to the comment (with regard to the amendment of the "relevant material” definition), namely
that SARS should give reasons why the requested material is considered relevant,
SARS points to:
- "… the
sheer impracticality of auditing in this manner”; and
- the fact that such an approach had been
rejected in international case law (for example in Australia and New Zealand
Banking Group Limited v Konza ( FCA 196.)
to the Memorandum, the fact that SARS will henceforth determine what constitutes
"relevant material”, does not,
however, leave the taxpayer without remedies.
the audit process the taxpayer could, for example:
- Request SARS to withdraw / amend its decision
to request the disputed material (under sec 9 of the TAA);
- Pursue SARS’s internal administrative
complaints resolution process;
- Approach the Tax Ombud;
- Approach the Public Protector.
Taxpayers should accept that "… information is the lifeblood of a revenue
authority’s taxpayer audit activity”
Memorandum implores taxpayers (at paragraph 22.214.171.124) to understand that information
is "… the lifeblood of a revenue
authority’s taxpayer audit activity.”
- The whole rationale of taxation would break
down and the burden of taxation would fall solely on the diligent and honest
taxpayers if a revenue authority had no effective powers to obtain confidential
information about taxpayers who may be negligent or dishonest;
- Inadequate investigation of tax evaders, or taxpayers
who through aggressive tax planning only purport to comply with tax laws, is
unfair to taxpayers who complied with the law;
- If such problems were allowed to persist, they would
undermine public confidence in the tax system, and would reduce voluntary
compliance by the majority of taxpayers, such compliance being an integral
feature of an effective tax system.
But, where exactly is SARS heading with
its information-gathering exercises?
pivotal role that information plays in SARS’s compliance strategy is evident
from the following passages contained in SARS’s latest Strategic Plan ("2014/15
– 2018/19 Strategic Plan, South African Revenue Service”, at p 21):
"The automation of our systems has enabled us to receive, review
and process large volumes of taxpayer and trader data and/or information. We
have an opportunity to improve our analytical capability to manage compliance
risks more intelligently by predicting for example taxpayers/ traders’
propensity to file their returns on time or to declare and pay what they owe
fully. This will give us the ability to intervene much earlier if required and
with the right kind of compliance intervention.
We receive, process and hold large quantities of taxpayer and
trader data in our data warehouse from multiple sources. This presents us with
an opportunity to improve our analytical capability to manage compliance risks
more intelligently and use our resources more efficiently.
By increasing and integrating data from multiple sources, we
will be able to gain a complete economic understanding of taxpayers and traders
across all tax types and in all areas of economic activity … Over the next five
years we will ensure that the design and development of our new systems and
processes take into account our intentions to have a complete and dynamic
economic view of taxpayers and traders at all times, and not just when they
submit a return or clear an import transaction.”
Are there any counter-weights?
the amendments to the definitions of "relevant
material” and "return” mean that SARS’s
information-gathering process has become a one-way street? Certainly not.
have, and should actively use, the following safe-guards, among others:
SARS remains a creature of statute
AM Moolla Group Ltd v Commissioner, SARS
& others  JOL 15456 (T) Roux J held:
"Being a creature of
statute the first respondent [SARS] must perform his task as laid down in the
Act and not by will.”
the straining at the "creature of statute” straightjacket, it still applies.
Procedurally fair administration under PAJA
Section 3 of the Promotion
of Administrative Justice Act, 2000 ("PAJA”) provides:
Procedurally fair administrative action affecting any person.—
(1) Administrative action
which materially and adversely affects the rights or legitimate expectations of
any person must be procedurally fair.
(2) (a) A fair administrative procedure depends
on the circumstances of each case.
order to give effect to the right to procedurally fair administrative action,
subject to subsection (4) must give a person referred to in
subsection (1) —
(i) adequate notice of the nature and
purpose of the proposed administrative action;
(ii) a reasonable opportunity to make
(iii) a clear statement of the administrative
(iv) adequate notice of any right of review or
internal appeal, where applicable; and
(v) adequate notice of the right to request
reasons in terms of section 5.
Short Guide to the TAA (at p 10) states that "It is, therefore, not necessary for the Act itself [the TAA] to spell
out all the relevant aspects of administrative justice. This is implicit given the
overriding application of PAJA, under which the unreasonable exercise of
power or performance of a function is a ground for review.” (emphasis added)
above means that the rules relating to administrative fairness and specifically
the principles of the PAJA have effectively been "embedded” in the TAA.
principles of statutory interpretation
39(2) of the Constitution provides that "when
interpreting any legislation, and when developing the common law or customary
law, every court, tribunal or forum must promote the spirit, purport and
objects of the Bill of Rights”.
has been interpreted by several Constitutional Court decisions to mean that a "purposive”
approach must be followed when interpreting legislation. (Refer e.g. Prof.
George Goldswain, Hanged by a comma,
Strict and literal to purposive, (2014) 28 Tax Planning 25.)
it comes to the interpretation of fiscal provisions (including the ambit of
SARS’s information-gathering powers under the TAA), taxpayers should bear in
mind the following case law:
ITC 1384 (1983) 46 SATC 95, Steyn J
held that the provisions of a fiscal statute "…have to be construed subject to the presumption of a fair, just and
reasonable lawgiver’s intention…”
First National Bank of SA Ltd t/a
Westbank v Commissioner, SARS & Another: First National Bank of SA Ltd t/a
Wesbank v Minister of Finance  JOL 9760 (CC), the Constitutional
Court held that "…even fiscal statutory provisions, no matter how indispensable they
may be for the economic well-being of the country - a legitimate governmental objective of undisputed high priority
– are not immune to the discipline of the Constitution and must conform to its
normative standards” (emphasis added).
Natal Joint Municipal Pension Fund v
Endumeni Municipality  JOL 28621 (SCA), the Supreme Court of Appeal
held that when interpreting legislation, the apparent purpose of the provisions
as well as the context in which it occurs will be important guides: "An interpretation will not be given that
leads to impractical, unbusinesslike or oppressive consequences or that will
stultify the broader operation of the legislation or contract under
the above, it is clear that the TAA provisions relating to SARS’s
information-gathering powers (including the amended definitions of "relevant material” and "return”) should be interpreted on the
assumption that the lawmaker’s intention is "fair,
just and reasonable” (taking into account the particular circumstances) and
that an interpretation that imposes "impractical,
unbusinesslike and oppressive consequences” would not be given.
place for ulterior purpose during information-gathering
GGB & Another v MEC for Economic
Development  ZASCA 67 Navsa JA held as follows:
jurisprudence, acting with an ulterior motive or purpose, is subsumed under the
principle of legality. Section 6(2)(e)(ii) of PAJA makes administrative action
taken for an ulterior purpose or motive subject to review.”
The judgment of the Canadian Federal Court of
Appeal's (FCA) in MNR v RBC Life Insurance Co,  FCA 50 is a case
in point where the Canadian Revenue Authority (CRA) was criticised for using
its information-gathering powers for an ulterior purpose. Reference was made to
Minister of National Revenue v Greater Montréal Real Estate Board,
 FC 1069, 303 FTR 29 which held:
"The language of the Act is clear. The
information and documents requested must be for the purpose of verifying
whether the persons being investigated have complied with some duties or
obligations set out in the Act. The courts have held that the information must
be 'relevant' to the inquiry."
The RBC Life case is important in the
context of SARS’s information-gathering powers under the TAA.
The question of ulterior purpose could arise, for
example, should SARS request voluminous information/documentation very close to
a prescription date – simultaneously setting an unreasonably tight deadline for
submission by the taxpayer. Often SARS would insist on a prescription extension
where the taxpayer cannot meet the deadline. Perhaps the taxpayer should
consider (and contest) whether the requested information was truly required for
audit purposes (especially where detailed information and documentation is
already with SARS). If the information request is rather to coerce the taxpayer
to submit to an extension of prescription, such information request could be
open to attack insofar as there might be an ulterior purpose?
objective vs subjective test?
the determination of relevance used to be an objective test, the amended
definition of "relevant material” seeks
to make the test a purely subjective one (refer to for example, Peter Dachs and
Bernard du Plessis, SARS gets tough on
transfer pricing practices, Business Law & Tax Review, supplement to Business Day, November 2014, at point
is clear from the Memorandum (at paragraph 2.37.2), SARS will no longer
tolerate that a taxpayer may "…unilaterally
relevance is SARS’s decision only ("in
the opinion of SARS”).
course, in forming the opinion that something falls within the ambit of "relevant material” SARS is probably
making some "decision”?
question arises whether, or not, SARS’ decision would be subject to
contestation under section 104(2(c) of the TAA, which provides for objection
and appeal in relation to "any other
decision that may be objected to or appealed against under a tax Act”.
have therefore stated that "…the
provision still requires a decision from SARS, and this decision [that
something constitutes ‘relevant material’] can be challenged and taken on
review” (refer above, SARS gets tough
on transfer pricing practices, Business Law & Tax Review).
to apply the above in practice?
case will depend on its specific facts.
is no magic bullet to deal with over-zealous, over-broad and unreasonable
information requests. The question remains, however, how does the taxpayer use
and apply the above in dealing with a SARS information request?
the SARS website SARS itself explains its six-phase "Taxpayer Audit Process” (only the parts relevant to this article are
"In addition to cases being selected for audit on the basis of risk,
taxpayers may also be selected for audit on a random or cyclical basis. At the
start of each tax year an LBC National Audit Plan (NAP) is prepared based
on compliance landscape and previous audit intervention required. The
risks identified for audit by risk profilers are normally vetted by the LBC
National Risk Committee, which comprises specialists across various tax and
business disciplines. Once a case has been included in the audit plan a lead
auditor is allocated to the case and the following 6-phase audit process is
This involves the auditor carrying out certain preliminary checks, often
in conjunction with the Risk Proﬁler. This is performed to ensure that the auditor
is fully appraised of the risks identiﬁed by the Risk Proﬁler as well as
allowing the auditor an opportunity to identify any additional risks. A plan
for the relevant audit will be prepared regarding the execution of the audit
including resourcing requirements. Where the audit will take the form of
a ﬁeld audit a pre audit planning
meeting, facilitated by the relevant Taxpayer Interface Specialist, will be
held with the taxpayer to explain the intended focus areas of the audit
including the years being audited, agree the timing of the audit, the intended
information gathering process and outline any facilities and assistance
that the audit team may require whilst present at the taxpayer’s premises. (emphasis added)
2. Gather information
During the information gathering process information is collected to
review and make a determination of the relevant identiﬁed risk. This is a key
phase of the audit where a cooperative approach by taxpayers will assist in
managing the audit timeframe. It is also during this phase that any adjustments
to the audit scope are likely to occur. To the extent that they do, these
will be explained to the taxpayer.”
[Note: It would be beneficial for taxpayers to also familiarise
themselves with the subsequent audit phases: 3) Determine our technical
position; 4) Advise the taxpayer of the outcome; 5) Issue an assessment as
required; and 6) Deal with objections and appeals as necessary. Said phases are
however not directly relevant to this article.]
description above makes it clear that, at the stage when SARS has completed its
risk-profiling of the target taxpayer, and once it decides to embark on an
audit, it would already have great clarity and certainty regarding the exact
tax risks it intends to pursue (the so-called "focus areas of the audit”.)
(Refer "Planning” above).
to the "Planning”, the gathering of information phase will follow.
indicates that "during the information
gathering process information is collected to review and make a
determination of the relevant identified risk” (See under "Gather
its own version SARS’s efforts at information-gathering are therefore aimed at
gathering "…all of the information
required in respect of the identified risks”.
any information to be collected should have a direct nexus to the tax risk detected during risk-profiling, which tax risk
should then have been captured in the "audit
plan” as an "intended focus area”.
the above-mentioned detail should then also be the information that SARS should
set out in its "notice” informing the taxpayer that a "field audit” would be
undertaken in terms of section 48(1) of the TAA.
follows that SARS should have no difficulty to comply with section 48(2)(b) of
the TAA which requires SARS to indicate in the notice "the initial basis and scope of the audit…”.
light of the above there should be no fuzziness (both for SARS and the
taxpayer), once the field audit commences. Both parties should have a firm grasp
- The tax risks that SARS
intends scrutinizing; and
- The exact information and / or
documentation (in other words, "relevant
material”) required by SARS in relation to those tax risks.
above is important insofar as subsections 49(1)(b) and (c) of the TAA oblige
the taxpayer to "answering questions
relating to the audit…” and "submitting
relevant material as required”. Unless the taxpayer knows what the "scope and basis” of the field audit are
as well as its "intended focus areas”,
it would be difficult (if not impossible for the taxpayer) to comply with said
obligations under section 49 of the TAA.
stands to reason that, following the preparatory risk-profiling work undertaken
by SARS there should be upfront clarity regarding the exact tax risks that form
the subject matter of any SARS audit, as well as the exact information and/or
documentation (in other words, the "relevant
material”) that SARS would need to address the risk-profiled tax risks.
taxpayer being audited should therefore insist that any SARS request for "relevant material” complies with the above
and that such an information request is, furthermore, "…referred to with reasonable specificity” (see section 46(6) of
addition, SARS’s total information-gathering exercise and audit process should
comply with the doctrines of creature of statute; procedurally fair
administration, legality (no ulterior purpose), specificity, and etcetera. Taxpayers
should be vigilant to protect their rights on this score.
ambit of SARS’s information-gathering powers under Part B of Chapter 5 (and
specifically in terms of section 46) of the TAA is crucial to SARS (who sees
information as its "lifeblood”) as
well as to taxpayers who are rightly opposed to "information fishing” and "trawling for information by SARS” (refer
David Clegg, Information fishing, in
(2014) 28 Tax Planning 103.)
revenue authorities and taxpayers have gone down this rocky road. Locally the
debates have only started. In time, case law should bring some clarity. In the
meantime taxpayers should fasten their seatbelts.
close, another quote from George Orwell’s 1984:
is a beautiful thing, the destruction of words.”
This article first appeared on the January/February edition on Tax Talk.