Administrative justice – the concept that government interacts fairly and justly with citizens – concerns the rights of the individual.
But when it costs the Fiscus millions in uncollected taxes, it concerns us all.
A recent case before the Tax Court in Port Elizabeth, in which tax attorneys Dr Daniel N Erasmus and Schalk Pieterse (one of the authors of this article) acted on behalf of a taxpayer, has exposed how the South African Revenue Service ignored its own legal responsibilities as laid out in the Tax Administration Act, leading to its assessment of the taxpayer’s tax bill being invalidated – in other words, thrown out. SARS initially appealed, then withdrew the appeal, and the judgment stands.
Accountants throughout the country have confirmed to us that this situation happens all the time, but taxpayers generally do not have the resources and wherewithal to take SARS to court: disputing an audit is a time-consuming, expensive matter.
Apart from the fact that SARS is now unable to collect the taxes for which it alleged this taxpayer was liable, it also ran up substantial legal bills pursuing this matter, including a costs order against it in the original judgment: it was instructed to pay the costs incurred by the taxpayer.
In this particular case, the taxpayer – who by law cannot be publicly named – had in his 2012 tax return claimed a deduction of nearly R1.8 million in expenses in terms of the Income Tax Act, in respect of his farming operation in the Eastern Cape.
In the same tax return, he also contended that a payment of more than R7 million he had received from his erstwhile employer constituted a retrenchment benefit and that he should be taxed accordingly.
The commissioner disagreed on both counts and disallowed the claims.
In April 2013 the taxpayer lodged objections to these assessments, and in October 2013 and November 2014 he filed appeals against the assessments in the Tax Court in Port Elizabeth.
It was, however, only in August 2015 that he discovered that SARS had conducted an audit on him in January 2013, resulting in an additional assessment being issued.
And this is the crux of this case: in terms of section 42 of the Tax Administration Act, the commissioner had been obliged to provide the taxpayer with progress reports about the audit, as well as provide him with a letter of findings.
Failure to do so had denied him the opportunity to respond in writing to the findings – in the process contravening tax legislation and the Constitution, and denying him administrative justice.
In plain language, this meant that the taxpayer was unfairly treated by SARS and he was unable to defend himself initially before additional assessments were raised.
In her judgment in the Tax Court in February 2018, Judge Elna Revelas found that the commissioner had failed to comply with the Tax Administration Act, and the decision to raise an additional assessment had been unlawful.
She set aside the entire assessment and ordered that interest calculated in respect of the assessment be remitted, and that the commissioner pays the costs of the taxpayer’s appeal.
In March, the Commissioner filed a notice of intention to appeal this judgment, in terms of the Tax Administration Act.
However, in this notice, the commissioner again failed to heed the prescripts of the Act, and the notice also incorrectly described the judgment.
The taxpayer then threatened to have the notice of intention to appeal declared invalid, at which point the commissioner abandoned his right of appeal.
The question is if this taxpayer was denied administrative justice because procedures were not followed, how many others find themselves in the same boat – and how many other assessments currently stand to be invalidated?
And how many millions of rands’ worth of unpaid taxes are being written off, not because SARS calculations were incorrect, but because it failed to follow the prescripts of the law?
We will likely never know, mainly because information around taxpayers is confidential and may not be disclosed.
But SARS is unlikely to want to say anything publicly anyway; it has the enormous responsibility of collecting the money government needs to carry out its mandate, and failure to do so is a serious public issue.
In addition, admitting that it is guilty of administrative injustice towards taxpayers who – such as in this case – actually strive to cooperate with the tax regime, would undermine its standing as a well-functioning organ of state, and the expectation that its dealings with taxpayers should be consistent, legally sound and fair.
SARS will not hesitate to go after taxpayers if it believes they have not stuck to the letter of the law. Most of us accept that, on the unstated condition that SARS itself always obeys the principle of administrative justice.
To not do so carries implications for individual taxpayers and for South Africa as a whole.
Taxpayers who have been denied administrative justice by SARS need to fight back – both for themselves and also for South Africans who rely on efficient tax collection for infrastructure development, social grants, health and education.
It’s only fair.
- Schalk Pieterse, who specialises in tax matters, is a co-founder and director of Port Elizabeth-based Strömbeck Pieterse Attorneys. Willem Lombaard is the managing director of Tax Risk Underwriting Managers, which offers low-cost tax risk insurance products, underwritten by The Hollard Insurance Company, to fund taxpayers’ representation in disputes with SARS.