The Constitution of the Republic of South Africa provides that ‘[e]veryone whose rights have been adversely affected by administrative action has the right to be given written reasons’.
Assessments issued by and decisions taken by the South African Revenue Service which adversely affect a taxpayer qualify as administrative action and a taxpayer is therefore entitled to reasons for an assessment or a decision taken by SARS. The right to reasons is given practical effect in a tax context by rule 6 of the Tax Court Rules. Rule 6 provides that a taxpayer may request reasons for an assessment or decision by SARS if that taxpayer is aggrieved by such assessment or decision. SARS is mandated to provide the reasons to the taxpayer, who requires the reasons in order to prepare its objection.
Taxpayers often make the crucial mistake of objecting before requesting reasons simply because they are not aware of their right to request reasons when they have received an assessment.
The standard for what constitutes adequate reasons for an assessment or decision was described in CSARS v Sprigg Investment 117 CC t/a Global Investment[1], where the court quoted with approval the following dictum from the Supreme Court of Appeal in Minister of Environmental Affairs & Tourism & others v Phambili Fisheries (Pty) Ltd & another[2]:
[T]he decisionmaker [must] explain his decision in a way which will enable a person aggrieved to say, in effect:
‘Even though I may not agree with it, I now understand why the decision went against me. I am now in a position to decide whether that decision has involved an unwarranted finding of fact, or an error of law, which is worth challenging.’
The right to adequate reasons is a fundamental right of a taxpayer and plays a critical role in the successful finalisation of any dispute with SARS. The courts have interpreted this right widely and have on occasion required SARS to provide sufficient reasons to a taxpayer to enable that taxpayer to object to an assessment or decision.
In practice, however, SARS does not always fulfill its obligations in this regard, leaving the taxpayer in a difficult position when deciding whether or how to dispute such assessment. This came to a head in the recent judgment of Unterhalter J in ITC 1929[3] where the Tax Court was tasked with deciding whether SARS had provided adequate reasons for an additional assessment issued in respect of a taxpayer.
The taxpayer had requested reasons from SARS for an additional assessment which was made 5 years after the return was submitted by the taxpayer. As the prescription period for SARS to issue an additional assessment under normal circumstances had lapsed, SARS could only issue the additional assessment if, in terms of section 99(2) of the Tax Administration Act, the full amount of tax chargeable under the additional assessment was not assessed due to fraud, misrepresentation or non-disclosure of material facts by the taxpayer. SARS declined the taxpayer’s request for reasons based on its view that adequate reasons had been provided in the finalisation of audit letter issued to the taxpayer.
The reasons SARS had provided in its finalisation of audit letter explained the full amount of tax which for which the taxpayer is liable and that there was non-disclosure by the taxpayer, and the basis of that non-disclosure.
What SARS had failed to deal with was how the non-disclosure of material facts by the taxpayer had caused the full amount of tax chargeable not to be assessed as required by section 99(2) of the Tax Administration Act.
The court in assessing the facts, confirmed that SARS failure to expressly traverse the question of causation, meant that the reasons provided were inadequate. The court opined:
… in order to make an objection, applicant should not be left with uncertainty as to what SARS has given as its reasons substantiating causation. What is to be implied from reasons expressed may be ambiguous and subject to later dispute. Hence SARS should have made express in its correspondence stating its reasons what it has clarified and rendered express in the passages of its answering affidavit in these proceedings to which I have referred.
The court therefore found that, regardless of the fact that SARS had provided reasons for the additional assessment, these reasons were inadequate.
The important take away from this judgment is the reaffirmation of the standard of the reasons which SARS must provide a taxpayer on request. It is insufficient for SARS to merely state the amount of the tax payable and the relevant section. SARS is obliged to explain, in no uncertain terms: (1) their understanding of the relevant law; (2) any findings of fact on which their conclusions depend (especially if those facts have been in dispute); and (3) the reasoning processes which led SARS to those conclusions.
Taxpayers should accordingly ensure that they fully utilise their right to reasons and ensure that before they proceed with any objection they have the reasons necessary to formulate their claim against SARS.
