Requests by SARS for relevant material
28 June 2016
Posted by: Author: PwC South Africa
Author: PwC South Africa
A recent dispute that was heard in the High Court in the Eastern Cape has shed light on the powers conferred on SARS under the Tax Administration Act to require persons to submit relevant material.
Section 46(1) of the Tax Administration Act, No. 28 of 2011, as amended (‘the TAA’) contains provisions giving SARS the power to require persons to submit relevant material that SARS requires.
The term ‘relevant material’ is defined in section 1 of the TAA and means:
… any information, document or thing that in the opinion of SARS is foreseeably relevant for the administration of a tax Act …
For clarity, the term ‘information’ is also defined, in the following terms:
‘information’ includes information generated, recorded, sent, received, stored or displayed by any means.
In the matter of Commissioner for the South African Revenue Services v Brown  ZAECPEHC 17 (5 May 2016), it was common cause that the respondent (Mr Brown) had not registered for income tax and had not submitted returns of income for the 2011 to 2015 years of assessment. SARS had issued a request to the respondent to submit relevant information by way of completion of a ‘lifestyle questionnaire’ and gave notice that it intended to launch an investigation into his affairs.
Acting through his attorneys, the respondent had sought to dodge the bullet by calling into question SARS’ right to require the information that had been requested or to commence an investigation. To this end, a list of requests was submitted to SARS under the Promotion of Access to Information Act (‘PAIA’) calling for information largely relating to internal processes within SARS by which the respondent had been identified as a person to whom such a request might be submitted.
Only one of the requests made by the respondent was granted by SARS, but it refused to concede to the majority of the requests on the basis that to do so would ‘jeopardise the effectiveness of SARS auditing procedures and methods used to identify taxpayers’. An internal appeal against this decision was instituted and dismissed.
The respondent did not respond to the request for information and asserted that a constitutional and statutory right to comply with the request could only be enforced by SARS once the information requested under PAIA had been supplied.
SARS therefore brought an application before the High Court for an order compelling the respondent to comply with its request for relevant information.
SARS contended that the terms of section 46(1) of the TAA are mandatory. If a request for relevant material is received, a person ‘must submit the relevant material to SARS at the place and within the time specified by SARS in the request’, as required under section 46(4) ofthe TAA.
The material requested constituted relevant material and it was required for purposes of the administration of a tax Act (the Income Tax Act, in this case), in that it related to the compliance of the respondent with that legislation.
As regards the refusal by SARS to respond to the respondent’s request for information, the information requested was within ‘SARS confidential information’ as specified in section 68 of the TAA, and the circumstances specified in section 68(3), which permit the disclosure of such information, did not apply in this instance. Further, without admitting that the issue of the questionnaire was administrative action, SARS submitted that its decision to do so was rational and justifiable in light of failures on the part of the respondent to comply with the requirements of the Income Tax Act.
The respondent’s case
The respondent argued that he was entitled to expect administrative conduct on the part of SARS that was fair and reasonable as prescribed in the Promotion of Administrative Justice Act (‘PAJA’). Furthermore, he sought protection under the Constitution from harassment or invasive conduct on the part of SARS.
He classified the lifestyle questionnaire as a ‘fishing expedition’, alleging that SARS had failed to justify its deviation from the constitutional provisions upon which he relied. He contended that he was entitled to understand the nature of the information that SARS had relied upon in coming to its decision to issue the questionnaire, and was justified in refusing to comply until the information was supplied or the dispute over his right to receive such information was finally determined.
In relation to the TAA, he asserted that the general nature of the questionnaire rendered it arbitrary and capricious, with the result that the information sought did not constitute ‘relevant material’ as envisaged under section 46 of the TAA.
Finally, he asserted that the questionnaire related not to his business but to his personal information and that it infringed his constitutional right to privacy.
In delivering judgment, Smith J examined the requirement that a taxpayer must submit the relevant material to SARS at the place, in the format and within the time specified by SARS, as provided in section 46(4). Having regard to the language used and to the context in which the provision appears and its purpose, the Court found that the provisions are peremptory.
Moving then to the issue that SARS was engaged in a 'fishing expedition', Smith J examined the powers that SARS has to require the submission of ‘relevant material’ under section 46, and set out the findings in paragraphs  to :
 It is in my view similarly manifest that the information sought in the questionnaire constitutes 'relevant material' since it pertains to the respondent’s assets, liabilities and expenses. Furthermore, the questionnaire could hardly have been more specific regarding the information which the respondent is required to provide, and I am accordingly satisfied that adequate specificity has been provided as required by the Act.
 There can also be little doubt that the issuing of the questionnaire was done in the course of the ‘administration of a tax Act’ since the information sought therein manifestly relate[s] to ‘the liability of a person or persons for tax in respect of a previous, current or future tax year’ (section 3(a)(i)).
 I am accordingly of the view that the applicant has established all the requisite jurisdictional facts mentioned in section 46. The respondent’s contention that the issuing of the questionnaire was a ‘fishing expedition’ is thus untenable. The questionnaire was issued against the background of information to the effect that there may have been non-disclosure of relevant information by the respondent, coupled with the fact that he did not register as a taxpayer or submit tax returns. In my view these factors constituted a sound basis for the issuing of the questionnaire and cannot by any stretch of the imagination be regarded as ‘a fishing expedition’.
The respondent’s counsel challenged the procedure adopted by SARS in seeking an order to enforce compliance, asserting that it was not a competent procedure under the TAA. This was rejected, with the Court concluding (at paragraph ):
The right to institute civil action to enforce compliance with a request for relevant material, on the other hand, is ancillary to the powers bestowed on SARS in relation to the administration of a tax Act, including the power to request relevant material in terms of section 46 of the [TAA]. That remedy is accordingly available to SARS in terms of the common law and does not require specific statutory sanction. There is nothing in the [TAA] that suggests the contrary; neither has [counsel for the respondent] been able to refer me to any authority in support of his contention.
This left the question of whether the respondent was entitled to seek protection under PAJA. The respondent contended that the issuing of the questionnaire under section 46 constituted ‘administrative action’, and it followed that if he was aggrieved thereby he could seek relief on the ground that it was unreasonable administrative action.
Smith J first set out the definition of ‘administrative action’ at paragraph :
 Administrative action is defined by the PAJA as: ‘any decision or failure to take a decision by an organ of state (i) exercising a power in terms of the Constitution or a Provincial Constitution; or (ii) exercising a public power or performing a public function in terms of any legislation which adversely affects the rights of any person and which has a direct, external legal effect.’
The judgment then cited the test whether an action constitutes administrative action, as laid down in the matter ofTransnet Ltd v Goodman Brothers (Pty) Ltd 2001 (1) SA 853 (SCA).
(a) Administrative Law is an incident of the separation of powers under which courts regulate and control the exercise of public power by other branches of government;
(b) the question relevant to section 33 of the Constitution is not whether the action is performed by a member of the executive arm of government, but whether the task itself is administrative or not, and the answer to this is to be found by an analysis of the nature of the power being exercised; and
(c) what fall to be considered in this regard are, inter alia, the source of the power exercised, the nature of such power, the subject matter, whether it involves the exercise of a public duty, and how closely it is related, on the one hand, to policy matters which are not administrative, and on the [other] hand, to the implementation of legislation …
Smith J supported the contention of counsel for SARS that:
… [The] request for information in terms of section 46 is a preliminary investigation by SARS which may or may not lead to a more formal audit or inquiry under the [TAA]. It is only when SARS has been placed in possession of the requested information that it will be able to determine whether or not there are indeed grounds for a further inquiry or an audit. It is at that stage that the principles of administrative justice must be observed.
There is clear authority that a request for information does not constitute administrative action, said Smith J, at paragraph :
In Competition Commission v Yara (SA) (Pty) Ltd and Others 2013 (6) SA 404 (SCA) the Supreme Court of Appeal (per Brand JA) held that the initiation of a complaint by the Competition Commission or a private person in terms of the Competition Act, 89 of 1998 is a preliminary step that does not affect a person’s rights …
The respondent’s last desperate defense that the questionnaire infringed his right to privacy under the Constitution also got short shrift (at paragraphs  and ):
 Insofar as the respondent’s right to privacy,guaranteed in terms of section 14 of the Constitution, may have been infringed by the issuing of the questionnaire, I am satisfied that the provisions of section 46 of the [TAA] constitute a justifiable limitation to that right as envisaged in section 36 of the Constitution. In the event, there has not been any challenge to the constitutionality of that section.
 [Counsel for the respondent] also argued that the information sought by SARS does not relate to his business affairs, but is personal information which is protected in terms of his constitutional right to privacy. This argument is also untenable. All that SARS is required to show is that the information sought is 'relevant material' necessary for the administration of a tax Act. For the reasons mentioned above, the information sought by virtue of the questionnaire is manifestly relevant for that purpose.
The upshot was that an order was issued requiring the respondent to submit his response to the lifestyle questionnaire within two weeks of the date of the order.
The court order further stipulated that if the respondent fails to submit the questionnaire within the two weeks or at all, the applicant may apply on the same papers for an order in the following terms:
2.1 that the respondent be held in contempt of court;
2.2 committing the respondent to imprisonment until such time as he complies with the court order.
In addition, the respondent was ordered to pay the applicant’s tax costs of suit on the party-and-party scale, including the costs of two members of council.
In the circumstances giving rise to the decision, namely that the respondent had never registered as a taxpayer and had never filed a return of income, there is little doubt that SARS was justified in seeking information to enable it to assess a liability to tax.
However, there may be concern in some quarters over the court’s finding that a request for information is not administrative action as contemplated in PAJA.
Section 46 of the TAA is a wide-ranging and powerful tool in the SARS enforcement arsenal, and it is difficult to identify the extent to which SARS may justifiably demand information. Taxpayers have valid questions about its enforceability.
However, the ruling that such a request for information is not subject to review under PAJA does not mean that taxpayers are without remedies. As addressed in the judgment, the information requested must constitute relevant material as defined in the TAA. It must therefore be foreseeably relevant for purposes of SARS administering a tax Act. SARS therefore does not have carte blanche to request any information from a taxpayer.
Similarly, the request for information must comply with the principle of legality. It must be based on a rational decision and SARS may not simply use this power as part of a 'fishing expedition'.
Furthermore, the mere fact that such a request for information does not constitute administrative action as defined in PAJA does not necessarily mean that it is not administrative action as contemplated in section 33 of the Constitution. Administrative action is not defined in the Constitution and, arguably, would have a wider meaning than the one defined in PAJA, with the implication that an aggrieved taxpayer may still have a remedy against a request for information under section 33 of the Constitution in appropriate circumstances.
The harshness of the court order in this instance serves as a warning to taxpayers not to abuse their rights in challenging SARS on fragile procedural grounds.
It is evident that the decision in this matter will not be the last word on the issue, and that further disputes are likely to arise in relation to the powers conferred on SARS under section 46 of the TAA.
This article first appeared on pwc.co.za.