Section 98 on withdrawal of assessments may provide relief to the taxpayer in Medox Ltd v CSARS
13 July 2015
Posted by: Authors: Nina Keyser and Joon Chong
Authors: Nina Keyser and Joon Chong (Webber Wentzel)
In Medox Limited v CSARS (20059/2014)  ZASCA 74 (27 May 2015), Medox Ltd (Medox) had appealed the decision of the High Court dismissing an application for a declaratory order that its income tax assessments for the 1998 tax year and onwards are null and void.
Medox's assessment for the 1996 tax year reflected an assessed loss of ZAR46 622 063. Medox submitted its tax returns for the 1998 tax year and onwards before it submitted its return for the 1997 tax year. In each of the 1998 tax year and onwards, Medox did not seek to carry forward the assessed losses incurred in the 1996 and 1997 tax years and to set them off against its income in the later years. The Commissioner thus, on submission of those returns, assessed Medox for the 1998 tax year and onwards without reflecting the assessed losses (and reducing Medox's income).
Medox discovered in 2009 that it had not submitted a return for the 1997 tax year and that assessments issued for the 1998 tax year and onwards (1998 assessment and onwards) had failed to set off the assessed losses derived in the 1996 and 1997 tax years.
Medox took the view that the 1998 assessment and onwards were void as the Commissioner had acted ultra vires by issuing the assessments without setting off the balance of assessed losses against the income in the years after 1997. Medox argued that section 20(1)(a) of the Income Tax Act (Act) was a mandatory provision requiring the Commissioner to set off income against any balance of assessed losses where applicable.
Section 81(5) of the Act provides that an assessment would be final and conclusive where no objection is made to the assessment. Medox argued that this section applies only to "valid" assessments and not to "invalid" assessments. The 1998 assessment and onwards were invalid as they were issued without taking into account the set-off of assessed losses against income which is required in section 20(1)(a) of the Act.
The SCA observed that Medox's arguments on section 81(5) would make any assessment in which the Commissioner erroneously refuses to allow a deduction, rebate or exemption provided for in the Act to be regarded as invalid and therefore not be subject to sections 81 to 83 of the Act.
The SCA held that there was no merit in the application for a declaratory order and dismissed the appeal.
The Tax Administration Act 28 of 2011 (TAA) came into force on 1 October 2012. Section 98 of the TAA on the withdrawal of assessments was amended by the Tax Administration Laws Amendment Act 39 of 2012 (TALAA). The amendment inserted subsection (d) to section 98 with effect from 1 October 2012.
The purpose of the amendment was to provide relief to taxpayers in Medox's circumstances. The Explanatory Memorandum to the TALAA provides as follows:
"In practice, erroneous assessments are often only discovered after all prescription periods and remedies have expired and it becomes apparent that it would be unreasonable and inequitable to recover the tax due under such assessments."
Section 98 provides that SARS may, despite the fact that no objection has been lodged or appeal noted, withdraw an assessment which, in respect of which the Commissioner is satisfied that -
(i) it was based on
(aa) an undisputed factual error by the taxpayer in a return; or
(bb) a processing error by SARS; or
(cc) a return fraudulently submitted by a person not authorised by the taxpayer;
(ii) it imposes an unintended tax debt in respect of an amount that the taxpayer should not have been taxed on;
(iii) the recovery of the tax debt under the assessment would produce an anomalous or inequitable result;
(iv) there is no other remedy available to the taxpayer; and
(v) it is in the interest of the good management of the tax system.
We submit that section 98 could be used to provide relief to Medox:
- the late submission of the 1997 tax return resulting in the 1998 assessment and onwards not taking into account the balance of assessed losses is "an undisputed factual error by the taxpayer in a return";
- as a result of the error by Medox, it has an unintended tax debt in the 1998 assessment and onwards which it should not have if the balance of assessed losses from the 1996 and 1997 tax years were taken into account;
- the imposition and collection of the tax debt in the 1998 assessment and onwards results in an anomalous or inequitable result;
- Medox should not have any tax due in the 1998 assessment and onwards to the extent that it could set off the balance of assessed losses in the 1996 and 1997 years against any income in those years;
- there is no other remedy available to Medox in light of the SCA decision and the three year time limit in section 81 of the Act and section 104(5)(c) of the TAA; and
- it is in the interest of good management of the tax system for SARS to withdraw the 1998 assessment and onwards to avoid further litigation with Medox. The purpose of the tax system is to impose and collect tax on economic gain by taxpayers. There was an economic loss by Medox and the specific circumstances of Medox fall within the ambit of section 98(d).
Therefore, Medox could submit a request to SARS for the withdrawal of the 1998 assessment and onwards in terms of section 98 of the TAA. If the Commissioner does not withdraw these assessments, then Medox could submit an application reviewing the Commissioner's decision in terms of the Promotion of Administrative Justice Act 3 of 2000.
Notably, there is no time bar to the Commissioner withdrawing the 1998 assessment and onwards in terms of section 98 and issuing them anew.
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This article first appeared on webberwentzel.com.