The Tax Administration Act, No 28 of 2011 (TAA), together with the new rules for dispute resolution promulgated under the TAA on 11 July 2014 (Rules), govern the resolution of disputes between taxpayers and the South African Revenue Service (SARS).
Generally, and in terms of s104 of the TAA, a taxpayer who is aggrieved by an assessment may object to that assessment.
However, in terms of rule 6(1), the taxpayer may, before lodging an objection, "request SARS to provide reasons for the assessment required to enable the taxpayer to formulate an objection…".
In terms of rule 9(1), after considering the objection, SARS must notify the taxpayer of the allowance or disallowance of the objection "and the basis thereof". Rule 9(1) overlaps to an extent with s106(4) of the TAA which provides that SARS must, by notice, inform the taxpayer of its decision to disallow or allow the objection in whole or in part. S106(5) states, in part, that SARS's notice "must state the basis for the decision".
If SARS decides to disallow an objection, a taxpayer may appeal against the decision.
In ITC 1811 68 SATC 193 the court considered the provisions of rule (3)(1)(a) of the repealed rules dealing with procedures promulgated under s107 of the Income Tax Act, No 58 of 1962. Those rules entitled a taxpayer aggrieved by an assessment to ask for reasons for the assessment. The rules implied that SARS had to provide "adequate reasons".
The court endorsed the findings of a previous judgment which held that, in respect of the phrase "adequate reasons", the act in question:
"…requires the decision maker to 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'.
This requires that the decision-maker should set out his understanding of the relevant law, any findings of fact on which his conclusions depend (especially if those facts have been in dispute) and the reasoning process which led him to those conclusions. He should do so in clear and unambiguous language, not in vague generalities or the formal language of legislation. The appropriate length of the statement covering such matters will depend upon considerations such as the nature and importance of the decision, its complexity and the time available to formulate the statement. Often those factors may suggest a brief statement of one or two pages only.
The court accordingly directed the Commissioner for SARS "to structure his reasons so as to motivate his assessment clearly dealing with the exercise of each statutory power and setting out..." -
- “…the relevant statutory provisions…”;
- “… the findings of fact on which his conclusions depend…”; and
- “…the reasoning process which led him to those conclusions…"
The words "adequate reasons" are not used in the TAA or the Rules.
Instead, rule 6(1) states that SARS must provide reasons for the assessment "required to enable the taxpayer to formulate an objection".
However, it is submitted that the guidelines provided in ITC 1811 should still be helpful when determining whether the reasons provided by SARS are sufficient for purposes of the Rules.
As to the reasons why an objection has been disallowed, s106(4) of the TAA as read with rule 9(1) states that SARS must notify the taxpayer of its "decision" as well as "the basis thereof".
It would have been better if the words "required to enable the taxpayer to formulate an appeal" had been used in s106(4) of the TAA as read with rule 9(1) as this would have provided guidance as to what the decision should state. However, despite the terminology used, it is submitted that the notice of SARS's decision to disallow an objection should also comply with the principles set out in ITC 1811.
Practically, this means that SARS cannot, for example, simply refer a taxpayer to previous correspondence or to the legislative provision in terms of which it is acting (see L Olivier "SARS has to provide adequate reasons for its decisions – ITC 1811 68 SATC 193" Tydskrif vir die Hedendaagse Romeins-Hollandse Reg 72 at p507).
As Olivier points out, when providing reasons for its decision, SARS must act in accordance with the principles of just administrative action laid down in the Constitution and the Promotion of Administrative Justice Act, No 3 of 2000.
In this context, it is also appropriate to consider the judgment in Commissioner For The South African Revenue Services v Pretoria East Motors (Pty) Ltd (291/12)  ZASCA 91 (previously discussed in our Tax Alert of 20 June 2014).
In that judgment the court held as follows in respect of an additional assessment -
"The raising of an additional assessment must be based on proper grounds for believing that, in the case of VAT, there has been an under declaration of supplies and hence of output tax, or an unjustified deduction of input tax. In the case of income tax it must be based on proper grounds for believing that there is undeclared income or a claim for a deduction or allowance that is unjustified. It is only in this way that SARS can engage the taxpayer in an administratively fair manner, as it is obliged to do. It is also the only basis upon which it can, as it must, provide grounds for raising the assessment to which the taxpayer must then respond by demonstrating that the assessment is wrong."
In other words, where an additional assessment is raised, even at the time the assessment is raised (before SARS is asked for reasons for the assessment) SARS must have properly formulated the grounds for the additional assessment – if only internally.