Julius Malema’s tax battle with SARS could set a new precedent
18 May 2016
Posted by: Author: Amanda Visser
Author: Amanda Visser (BDlive)
Firebrand politician Julius Malema may still not have clarity about the status of his compromise agreement with the South African Revenue Service (SARS) but his case highlighted pertinent issues about the agency’s interpretation of tax legislation.
Malema asked the High Court in Pretoria for a declaratory order following SARS’s decision not to honour their agreement reached in May 2014. SARS argued that it was not bound by the agreement because of nondisclosure and misstatements by Malema.
If the courts agree with the SARS interpretation of the Tax Administration Act in the Malema case, it will give new meaning to what is considered material facts and information.
The Pretoria High Court did not make a final judgment in Malema’s case but referred the matter to trial.
In the judgment referring the matter for trial, the court said it was clear SARS had adopted the attitude that the compromise agreement had to be complied with "to the letter". The intention of the taxpayer did not form part of the inquiry.
SARS forwarded five grounds for the compromise agreement no longer being binding. The "high water mark" of SARS’s case seems to be the allegations that Malema did not make full and frank disclosure and failed to keep his tax affairs current.
Malema disputes these allegations. He also alleges that the attempt by SARS to set aside the compromise is the result of "political interference".
The court says that since one of the grounds put forward by SARS amounts to fraud, the case had to be referred to trial.
"Should the conduct of the applicant (Malema) have been fraudulent in all respects, then SARS will have no difficulty in persuading the court that it is not bound by the compromise agreement."
However, the court adds that it was never clear in which respects the nondisclosures and misstatements were material.
"It is left to the court to speculate or make deductions, which it is unable to do on the conflicting facts presented."
In its judgment the court says SARS cannot be allowed to enter into a compromise with a taxpayer only to deny its validity based on "unwarranted grounds".
In four of the five grounds SARS did not contend that Malema intentionally misled the agency. "What is apparent, though, is that SARS alleges that any misstatement or failure to make a disclosure is automatically material," the court says.
The court also raises questions about the consequences for a taxpayer who is unaware of certain facts, and ascertains them only after a compromise agreement has been reached.
These issues will be clarified at a trial where evidence will be led regarding the rationale for SARS entering into an agreement and then saying it is not bound by it.
The court says SARS’s approach could be compared to Malema scoring naught for an exam because some of his answers were incorrect or not furnished.
"However, this scenario does not even hold true in the case of a mathematics examination. Depending on the percentage of incorrect answers or answers not furnished, one can still pass or even receive a distinction," the court found.
KPMG’s head of tax controversy, Johan van der Walt, says the Malema judgment really deals with a dispute between contracting parties.
"The question is whether Malema, through material misstatements, had induced SARS to agree to a compromise agreement it would not otherwise have entertained."
The materiality of the contested "misstatements" will determine whether SARS could subsequently repudiate the Malema compromise, Van der Walt says.
Cliffe Dekker Hofmeyr senior associate Mareli Treurnicht says there are similar issues in terms of the provisions for the voluntary disclosure programme (VDP).
The requirements for a valid voluntary disclosure include that the disclosure must be voluntary, and be full and complete in all material respects.
"At what point can a taxpayer legitimately cease to furnish SARS with documents and information which in the taxpayer’s view is unnecessary?" she asks.
"If SARS’s argument succeeds that any nondisclosure or misstatement is automatically material, then it is unlikely that any of the VDP applications would comply with the disclosure requirements (of the act)."
Treurnicht says this would defeat the purpose for which the programme was introduced.
Van der Walt, who is also a committee member of the South African Institute of Tax Professionals (SAIT), says the "full disclosure" test also arises in other tax areas like prescription.
SARS can reopen an assessment where the taxpayer is guilty of "nondisclosure" of "material facts" leading to an incorrect tax assessment. Likewise, a voluntary disclosure application requires full and complete disclosure to SARS.
"The Malema judgment could therefore be precedent-setting to evaluate a taxpayer’s obligations when providing SARS with information and explanations, so as to meet the full disclosure benchmark," Van der Walt says.
This article first appeared on bdlive.co.za.