PART 2 OF 4: THE 2009 OBJECTION AND REDUCED ASSESSMENT REQUESTS
As evident from part 1 of this series of articles, the history of the dispute between the taxpayer and SARS in the case of L’Avenir Wine Estate (Pty) Ltd v C:SARS (16112/2021)  ZAWCHC 28 (11 March 2022) shows that several procedures were unsuccessfully followed by the taxpayer in an attempt to resolve a simple dispute between the taxpayer and SARS.
In this, the second of four instalments, we explore the first and second step taken by the taxpayer:
- The objections lodged against the assessment raised by SARS for the period 1 April 2008 to 31 March 2009 (“the first 2009 period”) and 2010 in an attempt to have a loss arising from the period 1 April 2009 to 31 December 2009 (“the second 2009 period”) included in the assessments for either the first 2009 period or 2010; and
- The request for reduced assessment in terms of section 93(1)(d) and (e) in an attempt to have the loss for the second 2009 period included in the assessment for the first 2009 period.
Section 104 of the Tax Administration Act, 28 of 2011 (“the TAA”) regulates objections (it is worth noting that the objection was submitted on 30 November 2012, after the coming into force of the TAA on 1 October 2012).
Section 104 states that a taxpayer who is aggrieved by an assessment may object to that assessment. A taxpayer is aggrieved by an assessment if that assessment does not correctly reflect the application of a tax Act, irrespective of the reason for the assessment not being in line with the provisions of a tax Act (see GB Mining and Exploration SA (Pty) Ltd v CSARS  ZASCA 29, 2015 (4) SA 605 (SCA)).
An assessment is defined in section 1 of the TAA as: “…the determination of the amount of a tax liability or refund …”. Whilst the term “tax liability” is not defined in the TAA, the word ‘tax’ is. The word ‘tax’ is defined as including: “…a tax imposed under a tax Act;”. The Income Tax Act, 58 of 1962 (“the ITA”) is a tax Act as defined in section 1 of the TAA.
It is trite that income tax is imposed on taxable income (section 5 of the ITA). Taxable income is calculated with reference to income and deductions for a particular year of assessment. It follows then that SARS can only issue an assessment for a year of assessment (section 94 of the TAA being a notable exception).
A “year of assessment”, was defined in section one of the ITA at the time, in the case of a company as: “…any financial year of that company ending during the calendar year in question.”
The term “financial year”, was, in turn, defined in section 1 of the ITA as meaning a period ending on the last day of February unless the Commissioner approves a different date.
So then, in the case of a company, an assessment contains a determination for a period ending on the last day of February or such other date as the commissioner approves. In effect then, the commissioner’s approval of a date other than the last day of February determines the year of assessment of a company and therefore the period for which an assessment must be issued.
In the L’avenir Wine Estate (Pty) Ltd case, it appears the commissioner previously approved a March year end. The change from March to December was approved by SARS on 29 March 2010.
The taxpayer took the view that the change in year-end happened retrospectively so that it had a year of assessment ending on the last day of March 2009 and another financial year/year of assessment for the period April 2009 to December 2009. SARS disagreed.
What was the correct year of assessment?
The change in the financial year was approved by SARS on 29 March 2010. Now, if SARS’ approval happened on the 29 March 2010, what does that mean in terms of what the year of assessment is? Firstly, it certainly means that the year of assessment of the taxpayer cannot be said to have changed retrospectively. It is SARS’ approval of a day other than the last day of February that sets the year of assessment and SARS’ approval, as far we can tell, was not retrospective.
But does that then mean that year of assessment was 1 April 2009 to 31 December 2010? That is a period of 20 months! In terms of section 27 of the Companies Act, 71 of 2008, a company’s financial year may not exceed 15 months.
An extension of the year of assessment from April 2009 to December 2010 would be in conflict with section 27 of the Companies’ Act. However, the commissioner’s discretion under the definition of “financial year” in section 1 of the Act is not at all constrained by the provisions of the Companies Act (see in this regard a similar view expressed by SARS in their Interpretation Note 90). In the result, on plain reading of the definitions of “year of assessment” and “financial year”, the taxpayer had a year of assessment for the 12-month period ending March 2009 and the next year of assessment was for the 20 month period 1 April 2009 to 31 December 2010.
The prospects of the objections
The 2009 year of assessment ended March 2009. In light hereof it is easy to conclude that there is nothing wrong with the assessment for March 2009 year of assessment (i.e. the first 2009 period). The loss for the second 2009 period simply does not stand to be included in the first 2009 period. In the result, the prospects of the objection against the assessment issued by SARS for the first 2009 period were never good.
The loss for the second 2009 period does, however, stand to be included in the taxpayers’ 2010 year of assessment, spanning the period 1 April 2009 to 31 December 2010. The prospect of that objection looks much better.
SARS, however, declared both objections invalid on the basis that the taxpayer failed to provide financial statements for the 2008 year of assessment as requested by SARS in response to both objections submitted by the taxpayer. The notice issued by SARS to inform the taxpayer of the objections having been declared invalid was issued on 8 January 2013. Bear in mind, an invalidated objection will not be considered by SARS.
Given the good prospects of the objection against the 2010 assessment, it is worth exploring whether SARS acted within the empowering provisions of the law (as they should) when they declared the objection invalid.
The circumstances under which SARS may declare an objection invalid are set out in rule 7(4) of the Rules promulgated under section 103 of the TAA (“the rules”). It states that SARS may declare an objection invalid within 30 days from the date of the notice of objection and only in the event that there was non-compliance by the taxpayer with rule 7(2) when filing the objection. Rule 7(2), in turn, provides, insofar relevant here, that when a taxpayer files an objection, the taxpayer must:
- Complete the prescribed form in full;
- Provide the grounds for objection specifying the amount objected to, the grounds for assessment the taxpayer is disputing; and
- Add the documents required to substantiate the grounds for objection.
As far as can established, it appears the taxpayer complied with these requirements in full. It is worth noting though that the requirement to add documents that substantiate the objection cannot, by any stretch of the imagination, be interpreted to mean that the taxpayer must add specific documents requested by SARS. If that were the case, objections will always either be allowed by SARS or declared invalid, rendering the entire appeal process redundant and effectively giving SARS the power to deny taxpayers access to the Tax Court. That is completely untenable.
In any event, SARS declared the objection invalid on the basis of the taxpayer’s failure to provide financial statements for the 2008 year of assessment, which is completely irrelevant to the objection in relation to 2010 given what the taxpayer was requesting. Further still, we understand that SARS invalidated the objection before the deadline set by SARS for the provision of the 2008 AFS. On these facts, SARS’ decision then to invalidate the 2010 objection (and the 2009 objection but that is largely academic) appears to have been completely baseless.
In the circumstances, the taxpayer could have lodged a further objection in terms of rule 7(5) and could even have brought an application to the Tax Court to have the objection against 2010 declared valid in terms of rule 52(2)(b) of the Tax Court rules. The taxpayer, however, did neither of those things and instead, filed a request for a reduced assessment.
The reduced assessment requests
By the time the taxpayer realised that its objection had been declared invalid (which was about 7 years later), the period within which a further objection could be lodged in terms of rule 7(5) of the rules and within which the taxpayer could have launched a Tax Court application under rule 52(2)(b) of the rules had lapsed (see rules 7(5) read with section 104 of the TAA as well as rule 52(2)(b) read with rule 57(2) of the rules).
Enter section 93(1)(d) and (e) of the TAA. These two provisions allow SARS to make a reduced assessment despite the fact that no objection has been submitted under certain limited circumstances. Further still, section 93(1)(e) allows SARS to reduce an assessment despite the fact that the assessment has already prescribed (see section 99(2)(e) of the TAA). So too does section 93(1)(d) but only if SARS became aware of an error before the assessment prescribes (see Section 99(2)(d)(iii) of the TAA).
So then, the taxpayer asked SARS to reduce the assessment for 2009 by including the loss for the second 2009 period in the assessment for the first 2009 period and did so in terms of section 93(1)(d) and (e) of the TAA.
Whilst one could probably debate whether, in the circumstances, SARS could have operated post prescription under either 93(1)(d) and/or section 93(1)(e), the fact is that even if that were the case, it is submitted that on the merits, those requests could arguably not have been allowed for reasons set out below.
The section 93(1)(d) request
Section 93(1)(d) allows SARS to issue a reduced assessment if there is “readily apparent undisputed error” in the assessment. Whatever the meaning of those words are (See Practical Guide to Handling Tax Disputes by N Theron on this as well as a different view expressed by SARS in a draft Interpretation Note on the meaning of these words), if one accepts that the second 2009 period falls in the 2010 year of assessment, then there is no error whatsoever in the assessment for the first 2009 period and hence SARS would not have been able to operate under section 93(1)(d) to issue a reduced assessment in relation to the first 2009 period.
The section 93(1)(e)
Section 93(1)(e) allows SARS to make a reduced assessment if SARS is satisfied that the assessment was based on:
- an incorrect third party return or employer recon (like an incorrect IT3(b) or an incorrect IRP5 for example);
- A processing error by SARS; or
- A return fraudulently submitted by a person not authorised to do so.
Suffice it to say that under all three scenarios provided for in section 93(1)(e) of the TAA, the assessment a taxpayer is seeking a reduction of must contain an error. As already indicated above, the assessment for the first 2009 period contained no error in the sense that the loss for the second period simply does not stand to be assessed in the first 2009 period. The second 2009 period falls in the 2010 year of assessment.
Indeed, the taxpayer’s request for a reduced assessment was disallowed by SARS. It was disallowed on a couple of bases, amongst others the basis that the assessment for the first 2009 period prescribed. Whilst perhaps incorrect, as already stated, even if the taxpayer could get around the prescription issue (which it arguably could in light of the objection having been submitted before the assessment prescribed, bringing into operation section 93(1)(d)(iii) of the TAA), those requests arguably had no prospect of succeeding.
In the part 3, we will consider the taxpayer’s further attempt to resolve the problem: objecting against the 2018 assessment in an attempt to get the extra loss for the second 2009 period to be set off against the taxable income for 2018 and the reduced assessment request on 2010.
Authors – N Theron & W Swart (Unicus Tax Specialists SA)