Test case provision
The earlier update "SARS's investigative powers – backstage pass to pending court matters?" raised concerns regarding whether it is procedurally fair for a taxpayer that is engaged in a dispute before the Tax Court to also be subjected to an audit or information request under Chapter 5 of the Tax Administration Act (28/2011) concerning essentially the same dispute.
Taxpayers involved in the dispute resolution procedures in Chapter 9 of the Tax Administration Act can face a similar situation, whereby they must defend themselves before court in respect of one tax period while simultaneously objecting to and appealing the same legal issues in respect of earlier or later years of assessment. As with Chapter 5 investigations, there is often an overlap of facts, law and witnesses resulting in:
- a duplication of efforts;
- the potential breach of a taxpayer's right to litigation privilege; and
- a waste of resources on the part of both the South African Revenue Service (SARS) and the taxpayer.
Taxpayers may not be forced to deal with each of the matters separately, since Section 106(6) of the Tax Administration Act provides a mechanism from which they may benefit. Section 106(6) (ie, the test case provision) was first introduced with the promulgation of the Tax Administration Act in order to resolve the disputes of multiple taxpayers involving substantially similar issues. Essentially, the provision allows a senior SARS official to designate a particular dispute as a test case that will inform the handling of other similar disputes.
The mechanism is invoked at the discretion of a senior SARS official, as defined in the Tax Administration Act. Importantly, the act does not expressly exclude the taxpayer from making submissions to the relevant senior SARS official directly requesting that the discretion conferred by the commissioner be exercised in favour of the taxpayer. If the senior SARS official denies a reasonable request, the taxpayer can challenge SARS to a review under the Promotion of Administrative Justice Act (3/2000).
A taxpayer seeking to make use of the test case provision must set out clear and persuasive reasons for the request. Rule 12 of the rules promulgated under Section 103 of the Tax Administration Act sets out the process to be followed regarding the test case. Rule 12(2) stipulates that a senior SARS official who designates the appeal or objection as a test case must provide the taxpayer with a notice, specifying:
- the number of common issues involved in the objections or appeals that the test case is likely to determine; and
- the questions of law and/or fact.
The requirements of the Rule 12(2) notice would serve as a checklist for a taxpayer wishing to submit a request to SARS.
A potential difficulty with making a request for a test case lies in the fact that the tax acts are amended annually and thus the tax provisions in one year of assessment may be different to those in earlier or later years. However, where questions regarding the facts of a particular matter are common for all years of assessment in issue, the test case mechanism will go a long way in streamlining disputes. All that will remain to be resolved will be those questions regarding the application of tax laws.
There is an additional and unintentional benefit of requesting a test case: a determination by the Tax Court in favour of the taxpayer may cause SARS to reassess its position on a particular matter, which may in turn curb its appetite for further audits and information requests regarding the same or similar issues.
To the extent that there is a clear benefit to staying proceedings pending the outcome of an appeal before the Tax Court, it would be unreasonable for SARS not to consider a taxpayer's request for a test case.
For further information on this topic please contact Yashika Govind at Cliffe Dekker Hofmeyr by telephone (+27 11 562 1000) or email ([email protected]). The Cliffe Dekker Hofmeyr website can be accessed at www.cliffedekkerhofmeyr.com.