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PART 1 OF 4: SETTING THE SCENE

The niches of tax procedural law require careful consideration before launching any form of challenge against SARS. Get the procedure wrong and the taxpayer’s case is likely to suffer catastrophic and perhaps even fatal consequences, let alone spilled cost and time. In this 4-part series, we will explore the case of L’Avenir Wine Estate (Pty) Ltd v C:SARS ((16112/2021) [2022] ZAWCHC 28 (11 March 2022) and the legion of unsuccessful procedures followed over a roughly 10 year period in an attempt to resolve what is quite frankly, an extremely simple issue.

In this part we will set the scene by providing the background and the procedures adopted by the taxpayer. In parts 2, 3 and 4, we will perform a biopsy of the procedures followed and conclude with an analysis of the judgment of the High Court.

Background

The taxpayer had a financial year end ending on the last day of March every year. During March 2010, however, the taxpayer had the year end changed from March to December. The taxpayer took the view that its financial year end was changed retrospectively so that its financial year end changed for the first time from March 2009 to December 2009.

In the result, the taxpayer prepared financial statements for two periods, both ending in the 2009 calendar year. The first was for the 12-month period April 2008 to March 2009 (“the first 2009 AFS”). The second set of financial statements was prepared for the 9-month period April 2009 to December 2009 (“the second 2009 AFS”).

The taxpayer, using the first 2009 AFS, filed the tax return for 2009. The first 2009 AFS indicated a loss of, say, R1m. The second 2009 AFS, showed a further loss of say, R2m. However, because the tax return was filed using only the first 2009 AFS, SARS only issued an assessment indicating the R1m loss.

The taxpayer was unable to file a tax return based on the second 2009 AFS which resulted in the R2m loss for the period 1 April 2009 to 31 December not being assessed by SARS.

The fact that the additional R2m loss was never assessed by SARS resulted in the taxpayer being exposed to income tax in its 2018 year of assessment. If the extra R2m loss for the period 1 April 2009 to 31 December 2009 had been assessed by SARS, that additional R2m loss would have carried forward to the 2018 year of assessment together with the R1m for the period April 2008 to March 2009 to shield, so to speak, the 2018 tax bill. This fact appears to have been the ultimate grievance by the taxpayer in this matter.

What follows below is a high overview of the steps followed by the taxpayer to address its grievance.

The steps followed:

  1. On 30 November 2012, just shy of three years after SARS had issued the assessment for the period April 2008 to March 2009 and about one year after the assessment for 2010, the taxpayer lodged an objection against both assessments in terms of section 104 of the Tax Administration Act, 28 of 2011 (“the TAA”). The aim of these objections was to have SARS include the additional R2m loss for the period April 2009 to December 2009 in the assessment issued for the period ended March 2009 or in the assessment for 2010. On 3 December 2012, following the taxpayer’s failure to respond to a request for information in response to these objections, SARS declared the objections invalid. When an objection is declared invalid by SARS, it simply means the objection will not be considered. We will analyse this step in part 2 of this series.
  • The taxpayer only became aware of SARS having declared the objection invalid in 2020 (roughly 7 years later) when it realised the extra R2m loss is not carrying forward to 2018. The taxpayer accordingly tried to secure a reduced assessment in relation to the period April 2008 to March 2009 by requesting that that assessment be reduced under section 93(1)(d) and section 93(1)(e) of the TAA. By this time, the assessment the taxpayer was seeking a reduction of had already become prescribed in terms of section 99 of the TAA and it is on this basis (amongst others) that SARS rejected that request. We analyse this step in part 2 of this series.
  • The taxpayer, not having been successful with its first few attempts as set out above, objected to the 2018 original assessment, seeking in that objection the set off of the extra R2m loss in that assessment, despite the fact that it has not previously been assessed by SARS in any assessment preceding the 2018 assessment. Whilst that objection was initially invalidated by SARS, it was later accepted but disallowed. An attempt to resolve the case on appeal through the alternative dispute resolution process was unsuccessful, and the taxpayer opted to proceed with the dispute to the Tax Court – seeking ultimately that the extra R2m loss be allowed to be set off in the 2018 assessment. We will analyse this step in detail in part 3 of this series.
  • During the ADR proceedings mentioned in step 3 above, SARS, it seems, indicated that the taxpayer should in fact be requesting a reduced assessment in relation to the assessment issued by SARS for 2010 to get the extra R2m loss assessed in that period, on the basis that the financial year end was changed after March 2009. The taxpayer accordingly proceeded with that approach whilst tax court proceedings on the 2018 year was in progress. We will analyse this step in part 3 of this series.
  • The taxpayer, having had no joy with any of the above procedures and pending an outcome of the 2010 reduced assessment request and 2018 dispute, approached the High Court, asking the court to, amongst other requests associated with the taxpayer’s tax clearance status and SARS’ collection efforts, to compel SARS to assess the taxpayer for the period 1 April 2009 to 31 December 2009. It turned out, however, the taxpayer had followed the incorrect approach and should in fact have brought a review application in terms of the Promotion of Administrative Justice Act, 3 of 2000. We will analyse this judgment in part 4 of this series.

Evidently then, over a period of roughly 10 years, the taxpayer has followed at least 5 procedures to get the extra R2m loss assessed by SARS – without success! Why? In parts 2, 3 and 4 we perform a “biopsy” of this unfortunate matter.

Authors – N Theron & W Swart (Unicus Tax Specialists SA)

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