Posted in sections, this is my Doctoral Thesis on taxpayers rights when audited by the tax authorities in South Africa – equally applicable to many English-based law systems in Africa and abroad (eg. India). This will be of particular use to any tax practitioners doing work in Africa and in other English-based legal systems around the world.

Analysis Of Challenging The Commissioner’s Discretionary Powers In Auditing Taxpayers under The Constitution Of The Republic of South Africa

INTRODUCTION – 2.1 ADVENT OF THE CONSTITUTION

Prior to the advent of the Constitution1 and the start of a new democracy in South Africa, judicial reviews, and the grounds for judicial review, in respect of discretionary decisions, and the exercise of power generally, were governed solely by the common law. The grounds for judicial review in terms of the common law could broadly be categorized as excess of power, use of powers for ulterior purpose2, bad faith3 or dishonesty, gross unreasonableness4, and breach of the audi alteram partem rule.5 To this can be added vagueness6 and the fettering by rigidity7 of discretion.

Since then the development of administrative law has advanced significantly with the promulgation of the Constitution, such as in the leading constitutional case of Pharmaceutical Manufacturers Association of South Africa and another: In Re: Ex Parte President of the Republic of South Africa and Others8 and as commented on by some academic writers.9 In the Pharmaceutical Manufacturers case10 the Constitutional Court held that the common law was not a body of law separate and distinct from the Constitution. The court held that there was only one system of law shaped by the Constitution, which was the supreme law. All law, including the common law, derived its force from the Constitution and was subject to constitutional  control. Therefore, courts nolonger had to claim space and push boundaries to find means of controlling public power. What would have been ultra vires under the common law by reason of a functionary exceeding a statutory power was invalid under the Constitution according to the doctrine or principle of legality. In this respect, at least, constitutional law and common law were intertwined with there being no real difference between them. The same was held to be true of constitutional law and common law in respect of the validity of administrative decisions. The Constitutional Court held that what is ‘lawful administrative action’, and
‘procedurally fair administrative action’ justifiable in relation to the reasons given for it, ‘cannot mean one thing under the Constitution, and another thing under the common law’.

Furthermore, just administrative action referred to in s 33 of the Constitution, requires all administrative action to be lawful, reasonable and procedurally fair,11 and in cases where rights (and legitimate expectations)have been materially and adversely affected by administrative action, those taxpayers affected are entitled to be given written reasons.12

In LAWSA13 the authors describe just administrative action in the following terms as emanating from the non-judicial branch of government, such as organs of state. It implies a system of public administration which upholds principles of fairness, reasonableness, equality, propriety and proportionality. These principles accountability and control, review and supervision, openness and consultation are promoted, with both procedural and substantive elements. Procedurally just administrative action requires compliance with the rules of procedural fairness. Substantively just administrative action requires compliance with the requirements of reasonableness, proportionality and rationality.

The explanation of just administrative action in LAWSA emanates from the provisions of ss 1(c) and 195(1) of the Constitution, read with s 33 in the Bill of Rights of the Constitution. Section 237 of the Constitution compels the an organ of state such as SARS and the Commissioner to diligently carry out all its obligations imposed upon it by the terms of the Constitution. Just ‘administrative action’ is analysed in this thesis in the context of ss 74A and 74B.

Sections 74A and 74B provide:

74A. Obtaining information, documents and things. – The Commissioner or any officer may, for the purposes of the administration of this Act in relation to any taxpayer, require such taxpayer or any other person to furnish such information (whether orally or in writing), documents or things as the Commissioner or such officer may require.

74B. Obtaining of information, documents or things at certain premises.—

(1) The Commissioner, or an officer named in an authorisation letter, may, for the purposes of the administration of this Act in relation to any taxpayer, require such taxpayer or any other person, with reasonable prior notice, to furnish, produce or make available any such information, documents or things as the Commissioner or such officer may require to inspect, audit, examine or obtain.

(2) For the purposes of the inspection, audit, examination or obtaining of any such information, documents or things, the Commissioner or an officer contemplated in subs (1), may call on any person—

(a) at any premises; and

(b) at any time during such person’s normal business hours.

(3) For the purposes of sub-section (2), the Commissioner or any officer contemplated in sub-section (1), shall not enter any dwelling-house or domestic premises (except any part thereof as may be occupied or used for the purposes of trade) without the consent of the occupant.

(4) Any officer exercising any power under this section, shall on demand produce the authorisation letter issued to him.

The conduct by SARS in exercising its public power in deciding to apply the provisions of ss 74A and 74B to taxpayers, must comply with procedural just administrative action.

This requires procedural fairness, including the audi alteram partem principle14 (the taxpayers right to be heard as part of procedural fairness), and impartial equitable conduct without bias. It also requires substantive just administrative action, namely, lawfulness (proper authority, compliance with jurisdictional facts and exercising discretion without abuse) and reasonableness (rationality and proportionality). These principles also form part of the constitutional principle of legality as discussed in section 2.4 below, and are analysed in Chapter 3.

Subsequent to the advent of the Constitution, the Promotion of Administrative  Justice Act15 with its codified twenty separate grounds for judicial review of administrative action16 was promulgated. However, the concept of administrative action is open to interpretation, even though the term ‘administrative action’ is now defined in PAJA. A broader meaning was given to ‘administrative action’ in the Supreme Court of Appeal case of Grey’s Marine Hout Bay (Pty) Ltd and Others v Minister of Public Works and Others17 where the court, in referring to the ‘cumbersome’ definition, came to the conclusion that at the core of the definition was the idea of action (namely conduct, which includes exercising a discretion) often administered by public bodies undertaking their functions. In the Constitutional Court case of Mazibuko and Others v City of Johannesburg and Others18 the court held that the clear purpose of PAJA was to give effect to s 33 of the Constitution, and that the meaning of administrative action be identified primarily with reference to PAJA’s definition thereof. As will become more apparent during the discourse of this thesis, that the conduct of SARS in making a decision to exercise its powers in terms of ss 74A and 74B is administrative action.

An analysis of the term ‘administrative action’ is therefore relevant to the core conclusion reached in this thesis. This entails the right of taxpayers to challenge a decision based on the powers of SARS invoking the inquiry and audit provisions in terms of ss 74A and 74B of the Income Tax Act.19 The Income Tax Act makes provision for original, additional and estimated assessments and certain decisions20 by the Commissioner or by any officer or person engaged in carrying out the said provisions under the control, direction or supervision of the Commissioner and SARS to be subject to objection and appeal.21 A decision taken by SARS for the request of information, documents or things, to inquire into and audit the tax affairs of a taxpayer in terms of ss 74A and 74B is not subject to objection and appeal. However, there is the process of judicial review22 for challenging those decisions of the SARS that are not subject to objection and appeal, where SARS’ conduct is unlawful, unreasonable or procedurally unfair.

In the first tax-related case dealing with administrative law and the Constitution, Metcash Trading Limited v C SARS and Another23 (but before the promulgation of PAJA), Kriegler J, in a landmark judgment (dealing with the ‘pay-now-argue-later’ principle) provided insight into the influence of the Constitution on administrative law, and the exercise by the Commissioner24 of his discretion in tax legislation.25

In Metcash26 Kriegler J made it clear that the High Court had the inherent power and jurisdiction to review decisions made by SARS. The question was: What is meant by a decision? In the judgment of Metcash, the ‘decision’ under consideration by the Constitutional Court related to a ‘discretion’ to be exercised by SARS. It is submitted that a similar discretion exists in ss 74A and 74B, in that the provisions of ss 74A and 74B are permissive in nature, as the word ‘may’ is used to allow SARS to exercise its powers.27It follows that a decision must be taken by SARS to enable it to invoke these discretionary powers.

Consequently, if taxpayers can demonstrate that the decision of SARS is ‘administrative action’ as defined in PAJA,28 a judicial review process is available to these taxpayers, despite ss 74A and 74B not being subject to objection and appeal. In addition, taxpayers may raise the appropriate ‘just cause’ defence in terms of s 75(1)(b) of the Income Tax Act for failing to comply with SARS’ request for information, documents or things, or refusing to participate in a tax audit, invoked in terms of ss 74A and 74B, where taxpayers can show ‘just cause’ in not meeting SARS’ demands. The ‘just cause’ defence
is analysed in section 3.8 below.29 If a decision taken by SARS is administrative action’ in terms of PAJA, taxpayers are entitled to access the provisions of PAJA where SARS must follow the procedurally fair process in terms of s 3(2) of PAJA. In terms of this section SARS must comply with five elements before ‘administrative action’ is taken against the taxpayer to ensure the process is procedurally fair:

(a) Adequate notice of the nature and purpose of the proposed administrative action must be given to the taxpayer;

(b) A reasonable opportunity to make representations must be given to the taxpayer;

(c) A clear statement of the administrative action must be made;

(d) Where applicable, adequate notice of any right of review or internal appeal must be given;

(e) Adequate notice of the taxpayer’s right to request reasons in terms of s 5 of PAJA must be given.

SARS must then comply with the provisions of ss 5(1) and (2) of PAJA and provide adequate reasons with reference to the principles set out in the decision of the Supreme Court of Appeal case of CSARS v Sprigg Investments 117CC t/a Global Investment.30 What are ‘adequate reasons’? This is analysed in section 2.5 below.

Any transgression of these fair administrative procedural provisions would entitle the taxpayer to launch the appropriate judicial review application to the High Court in terms of ss 6, 7 and 8 of PAJA, citing one or more of the codified grounds of review in s 6(2) of PAJA. If that were simply the case, it would have been the end of this thesis, and nothing further would need to be analysed. However, a potential fundamental problem exists as to whether or not ‘administrative action’ in PAJA includes a decision of SARS31 to exercise the powers of ss 74A and 74B. Hence, the necessity for the analysis in this thesis in arguing that a decision of SARS in terms of ss 74A and 74B is ‘administrative action’ as defined in PAJA. If not, the constitutional principle of legality will apply to such a decision anyway. In both instances, entitling the taxpayer to review SARS’ powers exercised in terms of ss 74A and 74B.

Next:  Chapter 2 – 2.2 THE RELEVANT CONSTITUTIONAL PROVISIONS
2.2.1 Foundational values

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Footnotes

1Constitution of the Republic of South Africa 108 of 1996, hereinafter abbreviated as ‘the Constitution’ in this thesis.
2 See section 3.3.3.1: Improper or ulterior purpose or motive infra.
3 See section 3.3.3.2: Mala Fides or Bad Faith infra.
4 See section 3.4: Reasonableness infra.
5 See section 3.5.2: Audi Alteram Partem infra.
6R v Jopp 1949 (4) SA 11 (N); R v Shapiro 1935 NPD 155; S v Meer 1981 (1) SA 739 (N); and Dawood v Minister of Home Affairs 2000 (3) SA 936 (CC).
7Britten v Pope 1916 AD 150; Johannesburg Town Council v Norman Anstey & Co 1928 AD 335; and Moreletasentrum (Edms) Bpk v Die Drankraad 1987 (3) SA 407 (T).
8Pharmaceutical Manufacturers Association of South Africa and another: In Re: Ex Parte President of the Republic of South Africa and Others 2000 (2) SA 674 (CC), hereinafter referred to in this chapter as the Pharmaceutical Manufacturers case.
9See also Currie I & Klaaren J The Promotion of Administrative Justice Act Benchbook (2001) SiberInk; and Constitutional Cases Commentary De Rebus (September 2003) Lexis Nexis (last accessed 11 January 2013); See also
the analysis in section 1.3: A Constitutional Balance of SARS’ Powers and the ‘Administrative Action’ Debate of this thesis.
10Supra footnote 8 at para’s [41], [45] and [50].
11See section 3.3: Lawfulness, 3.4: Reasonableness and 3.5: Procedural Fairness infra.
12‘Written reasons’ referred to in s 33 of the Constitution are expanded in ss 3 and 5 of the Promotion of Administrative Justice Act 3 of 2000; See also section 2.5: Adequate Reasons infra.
13 LAWSA Volume 1 Administrative Law 2nd ed Lexis Nexis at para 74 footnote 3 (last accessed 11 March 2013).
14 See section 3.5.2: Audi Alteram Partem infra.
15 Promotion of Administrative Justice Act 3 of 2000, hereinafter abbreviated as ‘PAJA’ in this thesis.
16 Section 6 (1) of PAJA.
17 2005 (6) SA 313 (SCA), hereinafter referred to in this chapter as the ‘Grey’s Marine case’.
18Mazibuko and Others v City of Johannesburg and Others 2010 (4) SA 1 (CC).
19Income Tax Act 58 of 1962, hereinafter referred to as ‘the Income Tax Act’ in this thesis, and ss74A and 74B of the Income Tax Act 58 of 1962, hereinafter referred to as ‘ss 74A and 74B’ in this thesis.
20Ibid. sections 3, 77, 78 and 79.
21Ibid. sections 81 and 83.
22 Refer to the analysis in Chapter 5 on Judicial Review with reference to ss 74A and 74B infra.
23 2001(1) SA 1109 (CC).
24 And his officials, hereinafter referred to as ‘SARS’ in this thesis, where appropriate.
25Carlson Investments Share Block (Pty) Ltd v C:SARS 2001 (3) SA 210 (W) where a s 79(1) of the Income Tax Act challenge that the provision was contrary to procedural fairness and finality of tax assessments, using the principle of functus officio, failed. Section 79 specifically terms overrides the functus officio principle; See also the discussion at section 4.2.7: Limitations to s 195(1).
26Metcash Trading Limited v C SARS and Another 2001(1) SA 1109 (CC).
27Commissioner of Taxes v Ferera 1976 (2) SA 653 (R): ‘… the Commissioner is obliged to exercise his powers under the section if … he is of the “opinion” that the requisite [jurisdictional facts are] present …’.
28In that their rights or legitimate expectations are adversely affected, with a direct, external legal effect; or that the decision of SARS is the exercise of public power, so that taxpayers may invoke the constitutional principle of legality. What is the constitutional principle of legality? See section 2.4: The Relevance of PAJA and the Principle of Legality infra; See also Hoexter C Administrative Law in South Africa 2ed Juta (2012) at pages 121-5, hereinafter referred to in this thesis as ‘Hoexter (2012).
29See section 3.8: ‘Just Cause’ Defence infra; See also Chetty v Law Society of Transvaal 1985(2) SA 756 (AD);
Attorney-General, Tvl v Abdul Aziz Kader 1991(4) SA 727 (A); Shidiack v Union Government (Minister of the Interior) 1912 AD 642; Britten v Pope 1916 AD 150.
30CSARS v Sprigg Investments 117CC t/a Global Investment 73 SATC 114 (SCA) at para’s [12] and [13] and a quote from Ansett Transport Industries (Operations) Pty Ltd and Another v Wraith and Others (1983) 48 ALR 500 at para [12]; See also Van Dorsten J L The Right to reasons for Decisions in Taxation Matters The Taxpayer October (2005) at 186 -190 before CSARS v Sprigg Investments 117CC t/a Global Investment 73 SATC 114 (SCA).
31 This submission emanates from the writer acting for and on behalf of various taxpayers in unreported cases such as that of Drs Du Buisson, Bruinette and Kramer Inc. v C:SARS Case No. 4594/02 in the High Court of the Transvaal Provincial Division..

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