Does SARS’ information gathering powers trump prescription?
01 September 2015
Posted by: Author: Roula Hadjipaschalis
Author: Roula Hadjipaschalis (KPMG)
Roula Hadjipaschalis looks at the extent to which SARS can issue requests for further information
With high fiscal deficits worldwide, tax authorities worldwide are on the hunt for revenue. It is no different in South Africa, where a number of taxpayers have recently been surprised by the South African Revenue Service (SARS) issuing letters indicating their intention to audit years that the taxpayers considered as having been prescribed, as more than three years had passed since the date of the original assessment having expired. Many of these taxpayers have also, within the three year period, been subject to information requests and audits by SARS.
Even though Section 99 of the Tax Administration Act of 2011 ("TAA”) has effectively replaced Section 79 of the Income Tax Act, 1962 (the Income Tax Act) to the extent that taxpayers are being queried for years assessed prior to 1 October 2012 (the date of promulgation of the TAA), it is submitted that SARS can only raise additional assessment in terms of the provisions of Section 79 of the Income Tax Act for those years.
There are subtle - but important - differences between the provisions of Section 79 of the Income Tax Act and Section 99 of the TAA Act. This could have a significant impact in the manner in which taxpayers respond to SARS on requests for information and upon being notified of audit for years that the taxpayers consider prescribed.
In terms of Section 79 of the Income Tax Act, an assessment prescribes three years after the date of the original assessment, unless the Commissioner is satisfied that there was fraud, misrepresentation of material facts or non-disclosure of material facts which resulted in SARS not assessing certain amounts (there must be a direct nexus between the non-disclosure, misrepresentation or fraud and the assessment1).
In the Natal Estates2 case, the court held as follows in relation to the requirement that the Commissioner must be satisfied:
"Once is it recognised that there should be some evidence of the Secretary’s satisfaction, the taxpayer should be informed of it plainly and of the particular conduct of which he is satisfied, e.g. fraud, or material non-disclosure. The taxpayer should not have to grope inferentially for the Secretarial satisfaction, or the particular form of dereliction of duty to which it relates. In particular, he should not be left to infer from the mere receipt of an additional assessment, after the expiration of three years from the date of the original assessment, that the Secretary, after applying his mind to the matter, is satisfied that the taxpayer’s fraud or misrepresentation or material non-disclosure caused a non-assessment. For one thing, (and it was common cause in the appeal that the material non-disclosure could be innocent), the taxpayer is entitled to know whether fraudulent conduct – a grave and ugly imputation – is being held against him.”
It follows that if an additional assessment is issued by SARS under the provisions of Section 79 of the Income Tax Act, SARS has the onus of explaining to the taxpayer what evidence it is relying on to "be satisfied” that there has been non-disclosure of material facts, misrepresentation or fraud and there must be a nexus between the fraud, misrepresentation or non-disclosure and SARS’s failure to assess the tax.
Section 99 of the TAA does not require the Commissioner to be satisfied, it simply requires that, as a matter of fact, the requirements that would effectively nullify prescription have been met.
This omission, coupled with the information gathering powers of SARS under the TAA, have created a very different landscape for taxpayers who claim prescription, even where SARS requests relevant information going back many years.
In terms of Section 46 of the TAA, SARS may require a taxpayer or another person to "submit relevant material, whether orally or in writing”.
The term "relevant material” is widely defined (in Section 1 of TAA) to mean "any information documents or thing that in the opinion of SARS is foreseeably relevant for the administration of a tax Act.
The term "administration of a tax Act” is also widely defined3 and it refers to a number of activities which include:
- To obtain full information in relation to anything that may affect a person’s tax liability (in respect of a previous, current or future tax period), a taxable event or a person’s obligation to comply with a tax Act;4
- To ascertain whether a person has filed or submitted correct returns, information or documents in compliance with a tax Act;5
- To determine a person’s liability for tax and;6
To investigate whether a tax offence has been committed and, if so, to lay criminal charges and provide assistance reasonably required for the investigation and prosecution7.
Taxpayers should be mindful that even though SARS’s powers are considerable in terms of the TAA, the information gathering provisions are themselves quite specific and limited in their application. However, subject to acting within these limitations, SARS is entitled to request information/ documentation in respect of prescribed years of assessment, which may have even been audited previously by SARS.
That about the taxpayer’s right to finality? In the Brummeria8 case the court held:
"…it is obviously in the public interest that the Commissioner should collect tax that is payable by a taxpayer. But it is also in the public interest that disputes should come to an end – interest reipublicae ut sit finis litium; and it would be unfair to an honest taxpayer if the Commissioner were to be allowed to continue to change the basis upon which the taxpayer were assessed until the Commissioner got it right – memories fade; witnesses become unavailable, documents are lost….”
It follows that a taxpayer may well resist SARS attempts to issue an additional assessment (both under Section 79 of the Income Tax Act and Section 99 of the TAA) where he is "honest”. This would be the case where the taxpayer:
- Has made full disclosure of material facts at the date of the original assessment;
- Has not misrepresented any material fact;
- Has not been fraudulent.
In the new era of the TAA, it becomes imperative that taxpayers implement a tax management policy which should incorporate a tax documentation governance regime, and a rigorous tax compliance processes (which includes the all important completion of the tax return). Full and honest disclosure in the tax return is the only defence taxpayers have in resisting an attempt by SARS to issue additional assessments after the prescription period of three years from the date of the original assessment. Failing to do so can have serious financial and commercial implications for taxpayers.
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1 SIR v Trow 1981 (4) SA 821 (A)
2 1975 (4) SA 177 (A)
3 In Section 1 of the TAA
4 Paragraph (a) of section 3(2)
5 Paragraph (b) of section 3(2)
6 Paragraph (d) of section 3(2)
7 Paragraph (f) of section 3(2)
8 2007 (6) SA 601 SCA
This article first appeared on the July/August 2015 edition on Tax Talk.