Based on the latest report released by STATS SA, the South African economy has moved into recession with a reported decrease of 0.7% in GDP during the first quarter of 2017. The bad economic climate impacts SARS’ revenue collection and is without a doubt a contributor to the recent increase in tax audits and additional assessments experienced by taxpayers. The bad news for taxpayers is, the worse the economy gets, the more aggressive SARS is likely to be to ensure revenue targets are achieved.
While taxpayers should respect SARS’ right to collect revenue, SARS at the same time should comply with its obligations to ensure additional assessments are raised following due process and in line with the empowering provisions in tax law. Whilst there are of course numerous factors to be considered such as exceptions to rules and exclusions, we briefly set out below some of SARS’ obligations during a tax audit as well as when SARS can raise an additional assessment.
SARS’ obligation during an audit
- In terms of section 42 of the Tax Administration Act, No. 28 of 2011 (“the TAA”), SARS is compelled to provide a taxpayer with a progress report of an audit under certain circumstances. Further, such notice must comply with requirements published by the Commissioner for SARS in a public notice.
- Further, also in terms of section 42 of the TAA, upon conclusion of the audit, SARS is compelled to provide the taxpayer “with a document containing the outcome of the audit, including the grounds for the proposed assessment…”. SARS must also allow the taxpayer at least 21 business days to respond to such document before SARS proceeds to raise the assessment.
- A decision to audit a taxpayer further constitutes ‘administrative action’ as defined in section 1 of the Promotion of Administrative Justice Act, No. 3 of 2000 (“PAJA”). Accordingly, the audit and process followed during a SARS audit must be lawful, reasonable and procedurally fair. Section 3 of PAJA provides a list of elements that must be present for administrative action to be procedurally fair and which includes, “adequate notice of the right to request reasons in terms of section 5” of PAJA.
When can SARS raise an additional assessment?
- In terms of section 92 of the Tax Administration Act, No. 28 of 2011, SARS may raise an additional assessment if SARS is satisfied “that an assessment does not correctly reflect the correct application of a tax Act to the prejudice of SARS or the fiscus …”. There must accordingly be prejudice to SARS or the fiscus before SARS can raise an additional assessment. Whether a prejudice exists will depend on the facts of each case but in the absence of such prejudice, it will not be competent for SARS to raise an additional assessment.
- According to the Supreme Court of Appeal (SARS v Pretoria East Motors (Pty) Ltd (291/12) [20140 ZASCA 91 (12 June 2014):
The raising of an additional assessment must be based on proper grounds for believing that, in the case of VAT, there has been an under declaration of supplies and hence of output tax, or an unjustified deduction of input tax. In the case of income tax it must be based on proper grounds for believing that there is undeclared income or a claim for a deduction or allowance that is unjustified. It is only in this way that SARS can engage the taxpayer in an administratively fair manner, as it is obliged to do.” (our emphasis)
Failure by SARS to comply with its obligations and duties may cause a taxpayer to show sufficient grounds to have an additional assessment set aside or withdrawn by way of, a review application to the High Court, an application for an internal SARS review or through the dispute resolution processes under section 103 of the TAA. Taxpayers would however be well advised to seek expert advice on how and when to exercise their rights to ensure the balance between SARS’ rights and those of taxpayers are correctly kept in check and not abused by either party.
Author: N Theron