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Do revised prescription rules bear serious consequences for the taxpayer?

Friday, 03 June 2016   (0 Comments)
Posted by: Author: Zweli Mabhoza
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Author: Zweli Mabhoza (Priority Tax)

Amendments to Section 99 now allows SARS to extend prescription. But does this also mean extending uncertainty regarding a businesses’ tax position?

The tax authority now has more powers to decide on the prescription of an assessment, following recent amendments to the Tax Administration Act (TAA), No 28 of 2011.  Prior to the amendment of Section 99, an assessment prescribed after three years in respect of returns assessed by SARS and after five years in respect of self-assessment taxes. 

However, it has become common practice for SARS to negotiate the extension of the prescription period with taxpayers. It has not always been clear why SARS required this extension, given the amount of time they had to perform the audit, ask for information and make enquiries after the assessment date.

SARS will normally advise taxpayers during the negotiations that it is in their best interest to allow the authority to do what has not yet been completed during the initial three year prescription period. 

In some instances, a SARS official would promise (if not threaten) that if SARS is not afforded an extension, the authority would be left with no option but to revise the assessment to the detriment of the taxpayer. 

In these circumstances taxpayers agreed, often reluctantly, to the extension of the prescription period. Tax professionals have, upon previous occasions of this occuring, expressed their dissatisfaction with this practice.

In order to legitimise the above practice, paragraph 3 and paragraph 4 have now been added to section 99.  These paragraphs read as follows:

(3) The Commissioner may, by prior notice of at least 30 days to the taxpayer, extend a period under subsection (1) or an extended period under this section, before the expiry thereof, by a period approximate to a delay arising from: 

(a) failure by a taxpayer to provide all the relevant material requested within the period under section 46(1) or the extended period under section 46(5); or 

(b) resolving an information entitlement dispute, including legal proceedings. 

 (4) The Commissioner may, by prior notice of at least 60 days to the taxpayer, extend a period under subsection (1), before the expiry thereof, by three years in the case of an assessment by SARS or two years in the case of self-assessment, where an audit or investigation under Chapter 5 relates to— 

(i) the application of the doctrine of substance over form;

(ii) the application of Part IIA of Chapter III of the Income Tax Act, section 73 of the Value-Added Tax Act or any other general anti-avoidance provision under a tax Act; 

(iii) the taxation of hybrid entities or hybrid instruments; or (iv) section 31 of the Income Tax Act.

The introduction of these changes into the act raised some cynical questions and views.  Previously taxpayers relied on case law to argue against the extension of prescription period by SARS.  

In Brummeria Renaissance (Pty) Ltd vs the Commissioner of the South African Revenue Service, Cloete JA said that it was also in the public interest that disputes should come to an end ─ interest reipublicae ut sit finis litium (in the interest of society as a whole, litigation must come to an end); and it would be unfair to an honest taxpayer if the Commissioner were allowed to continue to change the basis upon which the taxpayer was assessed until the Commissioner got it right ─ memories fade; witnesses become unavailable; documents are lost.  

It is clear that the amendments to section 99 favour the tax authorities.  Perhaps Corbett JA had this in mind when he observed in CIR v Nemojim (Pty) Ltd 1983 (4) SA 953, 45 SATC 241, that "there is no equity about tax”.  The new amendments does not seem to address the concern from taxpayers that tax authorities wait until the prescription period is about to expire before asking for the so-called "relevant information”. People who have prepared the returns may have left the organisation, memories can fade and documents may have been lost.  

Interestingly this legislation refers to an audit or investigation relating to the application of substance over form.  The amendment comes after SARS lost a case involving substance over form in CSARS v Bosch M, which was decided by the Supreme Court of Appeal.  

Clearly it is possible that taxpayers could have the prescription period of their assessments extended, incur the costs to defend their tax position and go through all this without any consequences for tax authorities who may have caused the taxpayer to incur those costs.  

Some taxpayers have a policy of raising accounting provisions in respect of matters that are under SARS audit or investigation.  The recent amendments could mean that these accounting provisions will have to be maintained for longer given the lack of certainty on the final tax position.

This could affect future funding needs, as the taxpayer’s financial position could be affected by these provisions.  The challenges associated with these amendments must be considered together with the existing provisions of section 164 of the TAA. Any audit or investigation is likely to be followed by a revised assessment. Section 164 states that the obligation to pay will not be suspended by an objection or appeal or pending a decision of a court, unless a senior SARS official directs otherwise.  This clearly demonstrates the potential effect on cash flows.  

It should also be noted that the discretion of the Commissioner is not subject to any objection or appeal.

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This article first appeared on the May/June 2016 edition on Tax Talk.




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