In Nondabula v Commissioner: SARS ((4062/2016)  ZAECMHC 21), heard by the Mthatha High Court, Nondabula ('the taxpayer') brought an application to interdict the South African Revenue Service (SARS) from invoking the provisions of Section 179 of the Tax Administration Act (28/2011) pending the final determination of the taxpayer's objection to an additional assessment of his income tax. Further, the taxpayer sought an order that SARS withdraw its third-party notice, in terms of which SARS instructed Absa to withhold and pay over monies held in the taxpayer's bank account.
The taxpayer was a businessman and the sole proprietor of a fuel service station, Umzimkhulu Shell Garage. In respect of this business, he was liable to pay taxes to SARS. The matter at hand arose after SARS issued an additional assessment in terms of which the taxpayer was ordered to pay an amount of R1,422,637.83 within 10 days, in a letter dated September 29 2016. The letter was preceded by a statement of account issued by SARS which reflected a balance brought forward in the sum of R1,404,517.97. Apart from the information in the statement of account, SARS did not explain how it arrived at these figures. The taxpayer objected to the additional assessment on April 4 2016, but SARS rejected the objection on May 5 2016. The taxpayer wrote another letter to SARS on June 3 2016, requesting that SARS reconsider the objection. The taxpayer submitted further documentation with this letter and raised a further objection, but SARS responded to neither the letter nor the objection. It simply raised technical objections against the taxpayer's objections.
The court considered the provisions of Sections 92, 95, 96 and 179 of the Tax Administration Act and the interaction between those provisions. Among other things, the provisions deal with:
- the rules pertaining to the issuing of additional assessments based on estimates; and
- the issuing of a third-party notice, in terms of which an institution is ordered to pay monies to SARS that would have been due to a person, in order to settle a person's tax debt.
The court explained that according to Section 92 of the Tax Administration Act, SARS must issue an additional assessment if it is satisfied that an assessment reflects an incorrect application of a tax act to the prejudice of SARS or the fiscus, in order to correct that prejudice. However, before SARS can act in terms of Section 92, it must comply with Section 95, which provides – among other things – that SARS may raise an additional assessment based on an estimate drawn from information readily available to it. The court found that SARS had complied with Section 95, as SARS explained in its answering affidavit that the additional assessment was raised because the taxpayer had declared interest income of R0, which did not match the interest income amount of R32,734 for the taxpayer's account held at Absa.
The court went on to state that once SARS had decided to act in terms of Section 92 and had complied with Section 95, it was then required to comply with Section 96 of the act. Section 96 contains the formal requirements regarding the information that must be contained in a notice of assessment, and states that in addition to these formal requirements:
"SARS must give the person assessed in the case of an assessment described in section 95 of an assessment that is not fully based on a return by the taxpayer, a statement of the grounds for the assessment."
SARS therefore had an obligation to explain the grounds for the additional assessment by providing a statement of these. SARS failed to do this in the circumstances because the statement of account issued to the taxpayer did not provide such grounds.
The court explained that although SARS was correct in arguing that the application of Section 92 and Section 95 did not require SARS to interact with the taxpayer,
"once the stage provided for in section 92 is reached the first respondent is required to comply with… section 96 by issuing a notice of assessment with all the information required and provided for in section 96."
The court also found that Section 96 was a peremptory provision, meaning that application of the provision was not at SARS's discretion. Having failed to comply with Section 96, SARS then advanced to Section 179 of the Tax Administration Act and issued the impugned third-party notice, which would have had the effect of closing down the taxpayer's business. The court held that SARS's conduct "was not only unlawful but a complete disregard of the doctrine of legality which is a requirement of the rule of law in a constitutional democracy".
The court held that SARS had dealt with the taxpayer in an arbitrary manner, contrary to the Tax Administration Act and the values of the Constitution. It added that the applicant was a businessman who employed considerable number of people in South Africa, where the unemployment rate is high, and that SARS's conduct had had the potential to close down the taxpayer's business. This would have had catastrophic consequences for the taxpayer, his family and all of his employees. The court held that SARS should at the very least comply with its own legislation and must promote the values of the Constitution in the exercise of its public power, which it had failed to do by not complying with its obligations under Section 96 of the Tax Administration Act.
The court found in favour of the taxpayer and ordered SARS to pay the taxpayer's costs.
This case reaffirms the fact that just as taxpayers have a duty to pay tax, SARS has duties that it must fulfil in order to be entitled to collect this tax. If faced with a situation where an assessment raised by SARS does not meet the formal requirements of Section 96 of the Tax Administration Act and does not provide the grounds for raising the assessment, taxpayers should be aware that SARS is not entitled to enforce payment based on such an assessment, as this is unlawful.
For further information on this topic please contact Louis Botha at Cliffe Dekker Hofmeyr by telephone (+27 115 621 000) or email ([email protected]). The Cliffe Dekker Hofmeyr website can be accessed at www.cliffedekkerhofmeyr.com.