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In recent case[1], the taxpayer launched a default judgment application in terms of rule 56 of the tax court rules in consequence of SARS’ apparent failure to request documents in terms of rule 8 of the rules that govern tax objections and appeals (for a detailed exposition of these rules, see: Practical Guide to Handling Tax Disputes). The taxpayer lost and costs were awarded in favour of SARS.

We set out briefly below the background to the case followed by why, in our view, the taxpayer lost and why a different application may have yielded a different result.

Background

The taxpayer objected to various assessments by SARS. The issue in dispute being SARS’ failure to allow a deduction for business travel against a travel allowance. The objections were filed just before the three-year cut-off period for objections and were accordingly late. SARS nevertheless condoned the late objections only to subsequently (and within the prescribed time period for doing so) regard the objections as invalid on the basis that the taxpayer failed to provide documents to substantiate his objection.

A few months shy of a year later, the taxpayer brought his application for default judgment. As far as can be discerned from the judgment, the basis for the application was SARS’ failure to request substantiating documents under rule 8 of the tax court rules. Importantly, the taxpayer sought final relief in his application. However, during proceedings, counsel for the taxpayer conceded that final relief could not be granted and instead requested an order from the court to compel SARS to request the required documents under rule 8. If granted, so the argument went, the taxpayer would be able to proceed with the objection and get SARS’ decision on same.

Following a brief analysis of the correct interpretation of rule 8 of the rules, in particular, whether the words “SARS may require of a taxpayer to produce … additional … documents” (our emphasis) should be interpreted as SARS  “must” request additional documents, the court concludes that SARS was not under any obligation to request documents under rule 8. Rather, rule 8 gives SARS the discretion to request further documents in respect of an objection. As such, SARS was not under any obligation to request any documents. Once this has been established, it is enough to conclude that SARS is not in default with any obligation or time period, and in the result, SARS cannot be ordered to request the relevant documents from the taxpayer. Stated differently, absent any default by SARS with the rules, default judgment cannot be granted and indeed, that was the unfortunate fate of the taxpayer in this matter.

Why the taxpayer failed

He arguably launched the wrong application! The relief ultimately sought by the taxpayer, in this case, was an order from the court to compel SARS to request further documents (despite the Notice of Motion asking for final relief). The reason for this seems to be that failing such an order, the taxpayer’s objections would not be considered, the objections having been declared invalid. If SARS were ordered to request the necessary documents, then, so the argument went, new life is (miraculously) breathed into the dispute and it can proceed.  The fact is though that an order to compel, when sought under rule 56 of the Tax court rules, can only be granted by the tax court if, amongst others, there is a failure by SARS to comply with certain obligations or time periods. Rule 8 is clear. There is indeed nothing in rule 8 to suggest that SARS must ask for additional supporting documents following an objection.

A different application?

What about an application to have the objection declared valid instead? Rule 52(2)(b) specifically provides for such applications. In short, taxpayers would rely on this remedy if SARS incorrectly declared an objection invalid. If successful, new life is indeed breathed into the dispute by operation of law and it must proceed to the next steps in the objection and appeal process.  If the taxpayer in the case under consideration had applied for this relief, instead of an order to compel, he would have, if successful with that application, gotten the same result he was looking for under the default judgment application. So then would the prospects have looked any better for the taxpayer if he applied under rule 52(2)(b) instead of rule 56?

To establish that, it is necessary first to establish if the objection was correctly declared invalid by SARS. This necessitates a quick review of rule 7.

Rule 7 provides that SARS may declare an objection invalid if the objection was not submitted in compliance with the rules that govern the submission of objections.  The rules governing submission of an objection clearly state that a taxpayer must, when submitting an objection, amongst other things, submit the prescribed form (see Get the Basics right: a failed default judgment application in the tax court on this topic) and provide documents that substantiate the grounds for objection if not already provided to SARS previously.

Therefore, if a taxpayer does not provide documents to substantiate the grounds for objection, SARS can indeed invalidate an objection. Therefore, one would think that if the taxpayer in question launched an application to have the objections declared valid instead of an application for default judgment he would almost certainly have failed in any event because SARS declared the objection invalid exactly because the taxpayer did not provide any substantiating documents. Or would he?

The taxpayer’s grounds for objection in this case was that SARS had made “a capturing or processing error where the business kilometres travelled where not correctly captured per the taxpayer’s tax return”.

In the words of Olsen J who delivered judgement in the default judgement application “No documents were needed in order to deal with that objection[2].  Indeed, where there are no documents that substantiate an objection, for example in this case where the taxpayer is complaining about a processing error, there are no documents that substantiate that ground (apart perhaps from the actual tax return which would, in any event, have been previously delivered to SARS), then SARS cannot invalidate the objection.

As such, SARS arguably invalidly regarded the objection as invalid in this case. So then, an application to have the objections declared valid instead of a default judgment application would perhaps have had better prospects of success. If successful, the taxpayer may have been able to have his objection decided and may then even have been able to go on appeal if SARS disallowed it. But alas, the taxpayer proceeded with a default judgment application. The result for the taxpayer being less than favourable. [3]

 

[1] 059/2019 (30 November 2021)

[2] At paragraph 24.

[3] It is worth noting that the default judgment application was brought just shy of a year after SARS declared the objections invalid. If the taxpayer had brought an application to have the objections declared valid just shy of a year after the objections had been declared invalid, he would have been late with that application as these should be brought within 20 business days from the date on which notice of an invalid objection is delivered. This may be the reason why that approach was not followed but then also, taxpayers can request condonation from the tax court for late applications.

 

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