Rule 3(1)(a) of the Rules promulgated under section 107A of the Income Tax Act No. 58 of 1962 ("the Act"), provides that a taxpayer who is aggrieved by any assessment may by written notice, request the Commissioner for the South African Revenue Service ("the Commissioner or SARS") to furnish reasons for the assessment.

When are the reasons furnished by the Commissioner adequate? This was one of the issues considered by the Supreme Court Appeal of South Africa ("SCA") in the matter of the Commissioner for the South African Revenue Service v Sprigg Investment 117 CC t/a Global Investment [2010] JOL 26547 (SCA).

The facts were that after a tax audit conducted by SARS in 2004 into the affairs of Sprigg Investment 117 CC ("the Taxpayer") SARS issued a letter of audit findings against the Taxpayer, in 2006. The letter of audit findings set out SARS' findings, which findings related to employees' tax and Value-Added Tax ("VAT"), the evidence in support of its findings and legal conclusions.

In response to SARS' letter of audit findings, the Taxpayer submitted a lengthy and detailed response in which it denied the main conclusions reached by SARS. SARS proceeded to issue a letter of assessment against the Taxpayer followed by formal assessments.

The Taxpayer did not accept the assessment and requested the Commissioner to furnish reasons for the assessment under Rule 3(1)(a) of the rules prescribing the procedures to be observed in lodging objections and noting appeals, promulgated under section 107A of the Act. The request for reasons was set out in two letters, which contained 97 detailed questions targeting 3 items of the assessment. SARS did not respond to each and every question but rather gave brief explanations in respect of each tax item assessed and referred the Taxpayer to its letter of assessment which incorporated the reasoning set out in the letter of audit findings. SARS' view was that the request by the Taxpayer required a response of such an extraordinary nature that any response would be akin to responding to questions usually asked in a court of law.

The Taxpayer took issue with the reasons furnished by SARS and approached the Tax Court for that court to compel the Commissioner to furnish adequate reasons. The Tax Court found in favour of the Taxpayer and ordered the remittal of the letters of assessment to the Commissioner for reconsideration. It is against the finding of the Tax Court that the Commissioner appealed to the SCA.

In adjudicating the question of the adequacy of the Commissioner's reasons, Maya JA, expressed agreement with the standard of what constitutes "adequate reasons" as laid down by the Federal Court of Australia in Ansett Transport Industries (Operations) Pty Ltd and Another v Wraith and Others (1983) 48 ALR 500 at 507:

"[T]he decision-maker [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." 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 processes which led him to those conclusions." (Own emphasis)

This standard was accepted and endorsed by the SCA in Minister of Environmental Affairs & Tourism v Phambili Fisheries (Pty) Ltd 2003 (6) SA 407 (SCA).

The Taxpayer contended that the Commissioner's reasons did not meet the Phambili test because the Commissioner had failed to disclose the reasoning process which led to his conclusion.

The Court found that the letter of assessment, which the Taxpayer was urged to read in conjunction with the letter of findings, stated in plain terms which taxes the Taxpayer was being assessed for, namely employees' tax and VAT. This letter also explained the reasons for the imposition of the taxes, penalties and interest. The evidential basis for SARS' main factual findings, those findings and the legal consequences that flowed from them were clearly set out in the letter.

The Court held that there was absolutely no reason why the Taxpayer was unable to formulate its objection and upheld SARS' appeal, finding that the Commissioner's reasons were adequate for the purpose for which they were sought.

From the comments made by the Court, it understood its role as being to consider whether the Taxpayer had been adequately furnished with the Commissioner's actual reasons for the assessments to enable it to formulate its objection thereto. The Court stated that its role was not to adjudicate on the cogency or rationality of the Commissioner's reasons.

One of the noteworthy issues to come from the judgment is the importance the Court seems to have attached to the Taxpayer's response to the letter of audit findings. In this regard, Maya JA, stated the following:

Notably, the respondent did not, at that stage, complain about the quality of SARS' factual findings or that it did not understand why they had been made. What it did instead, as Fyfe properly acknowledged, was reply in fine detail as to why it disagreed with the reasoning and findings and clearly had no difficulty responding to them.

As a result of the Taxpayer submitting a detailed response to the letter of audit findings, it seems that the Court inferred from this that the Taxpayer understood or was aware of the Commissioner's reasons.

Besides providing an important an indication of how our courts will apply the Phambili test when testing the adequacy of the reasons furnished, this case also serves as a caution to taxpayers to be circumspect in their submissions to SARS, particularly the level of detail contained in those submissions.