New grounds not included in an objection may not be included in the appeal
10 June 2015
Posted by: Author: Webber Wentzel
Author: Webber Wentzel
An audit or verification by SARS can be an unpleasant experience even for the most compliant of taxpayers. Taxpayers should obtain legal advice on their interactions with SARS at the earliest opportunity to ensure that their rights are protected and a proper procedure is followed by SARS.
During an audit, if it becomes apparent that additional assessments will be issued by SARS, taxpayers should obtain legal advice on the best way to respond to the audit findings. An appropriate response could result in a lesser amount of tax or penalties imposed in the additional assessment. If the additional assessment is unclear as to the reasons for the assessment, taxpayers should request reasons in order to formulate their objections comprehensively to cover all aspects in the assessments.
Most importantly, taxpayers must obtain legal advice when lodging the objections on the additional assessments as issues not raised in an objection cannot be raised in the appeal if the objection is disallowed.
The new tax dispute resolution rules published on 11 July 2014 (rules) provide that an objection to an assessment must specify the grounds of the objection in detail including
- the part or specific amount of the disputed assessment objected to; and
- the grounds of assessment which are disputed.
Further, the objection must include supporting documents to the grounds of objection which have not previously been delivered to SARS in relation to the disputed assessment.
It is important to ensure that the objection deals with all amounts being objected to and all possible grounds of objection. This is because any ground not included in the objection may not be raised in the appeal stage and a potential strong ground for disputing an amount may be lost, because a taxpayer did not include such ground in its objection.
The rules on appeals against the assessment provides that the appeal against the disallowance of the objection must specify in detail
- the grounds of objection that the taxpayer is appealing;
- the grounds for disputing the basis of the decision to disallow the objection; and
- any new ground on which the taxpayer is appealing
Notably, taxpayers may not appeal on a ground that constitutes a new objection against a part or specific amount of the disputed assessment which was not in the objection. For example, a taxpayer may not appeal the understatement penalty, underestimation penalty or interest amounts in the assessment if these were not included in the objection. However, if a taxpayer had objected to the disallowed expenditure on the basis that it was in the production of income, the taxpayer may specify a new factual or legal ground why the expenditure was so incurred. This is not a new objection. A taxpayer may also supplement, augment or refine factual or legal grounds which had been included in the objection in the appeal.
If the dispute proceeds to the Tax Court, the pre-hearing stage will see SARS issuing a statement of grounds of assessment to the taxpayer (rule 31 statement) and in response, the taxpayer will issue a statement of grounds of appeal to SARS (rule 32 statement).
SARS may include new grounds in the rule 31 statement, provided such new grounds do not constitute a novation of the whole of the factual or legal basis of the disputed assessment or require the issue of a revised assessment. The new ground should not require a recalculation of the tax liability in the disputed assessment. For example, if the additional assessment had been issued disallowing expenditure on the basis that it was not in the production of income, SARS may also add that the expenditure is also disallowed on the basis that it was capital in nature. This is not a novation or substitution of the whole basis of the assessment.
Taxpayers must seek legal advice as early as possible in a pending dispute, preferably no later than the objection stage, in order to canvass and use all possible arguments in strengthening their positions. A delay in doing so may appear to result in cost saving initially, but may ultimately be more costly if potential grounds disputing the assessment cannot be included in the appeal as they have not been included in the objection. The later the involvement of legal advisers in tax disputes, the more common these situations occur to the disadvantage of taxpayers.
This article first appeared on webberwentzel.com.