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

CHAPTER 3 – LIMITATIONS TO INVOKING SECTIONS 74A AND 74B OF THE INCOME TAX ACT

3.4.2 Proportionality

Apart from the necessity for a rational connection to be present justifying SARS’ decision to audit a taxpayer, the decision must also be proportional to the facts and circumstances of the case. Proportionality can best be described in the famous sentence of Lord Diplock in the English case of R v Goldstein:122 ‘You must not use a steam hammer to crack a nut, if a nutcracker would do.’

Sachs J in Minister of Health v New Clicks South Africa (Pty) Ltd123 states:
‘[p]roportionality will always be a significant element of reasonableness’. However, Hoexter states that this ground of review remains controversial.124 Section 6(2)(h) of PAJA, the ground dealing with unreasonable effects, does not specifically refer to proportionality. The section reads: ‘the exercise of the power or the performance of the function authorised by the empowering provision, in pursuance of which administrative action was purportedly taken, is so unreasonable that no person could have so exercised the power or performed the function.’ However, the wording is similar to the well-known test in the English case of Associated Provincial Picture Houses Ltd v Wednesbury Corporation,125 also known as the Wednesbury rule. In applying the test for proportionality, based on the Wednesbury rule, English courts will ask the following questions:

(a) Whether the action pursued a legitimate aim;
(b) Whether the means adopted to achieve the aim were appropriate;
(c) Whether less restrictive means were adopted to achieve that aim;
(d) Whether the interference in the individual’s rights is justified in the interest of a democratic society.126

In supporting the contention that proportionality is part of the reasonableness enquiry by the courts in South Africa, it is submitted that the Wednesbury rule will have persuasive value before South African courts, particularly in light of the provisions of s 39 of the Constitution, encouraging courts to review foreign applicable jurisprudence.127

In the context of ss 74A and 74B, it is difficult to establish a set of circumstances where these questions would not be answered in favour of SARS. There are, however, a few examples.

Where SARS asks for information not relevant to determining a tax liability of the taxpayer (for instance, a survey to obtain certain industry facts which in turn may be used in the audit of other taxpayers); where SARS as a matter of course audits all refunds where in a given case it is clear that the taxpayer merely mistakenly overpaid provisional tax which is due and payable to the taxpayer; where SARS has already conducted an audit into the affairs of the taxpayer and unjustifiably recommences an inquiry and audit into the same tax affairs of a taxpayer; where SARS had less restrictive means to gather information, documents of things – such as where the information is already in the possession of SARS, albeit in a different department within SARS.128

In many tax risk management processes conducted for multi-national corporations,129 it has become clear that these corporations interact with many different SARS offices and that the same tax issues are investigated by different tax offices time and time again, without any co-operation between them. It often happens that a particular tax issue is resolved by one tax office, only for it to be raised again by another. Under such circumstances the taxpayer would aver that the decision by SARS to conduct an inquiry and investigation is not pursuant of a legitimate aim; the means adopted to achieve the aim are not appropriate; a less restrictive means could be adopted to achieve the aim; and, the interference with the taxpayer’s rights is not justified. The simple fact is that one SARS office could have obtained all the relevant information from the other SARS offices that had already conducted an inquiry and investigation. SARS is, vis-a-viz taxpayers, one organisation.

In order to ensure that SARS are compliant with its constitutional duties and  act proportionately in line with these duties, it is submitted that taxpayers are entitled to question SARS at the commencement of an inquiry and audit. These taxpayers would be entitled to adequate reasons at the commencement as discussed in section 2.5: Adequate Reasons above.

Should SARS fail to properly justify its intrusion into the affairs of a taxpayer by giving adequate reasons, the initial appropriate defence would be the ‘just cause’ defence discussed in section 3.8 below. The conduct by SARS would also be reviewable as ‘otherwise unconstitutional or unlawful’ in terms of the codified ground of review in s 6(2)(i) of PAJA; alternatively, as being contrary to the principle of legality, in that the basic requirement for rational and proportional conduct by SARS would be absent.

Next:  3.5 PROCEDURAL FAIRNESS – 3.5.1 Bias

In accordance with Circular 230 Disclosure

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Footnotes:

122 [1983] 1 WLR 151.
123 2006 (2) SA 311 (CC) at para [637]; Prophet v National Director of Public Prosecutions 2007 (6) SA 169 (CC).
124 Hoexter (2012) at pages 344-5.
125 [1947] 2 All ER 680 (CA) at pages 683E and 685C.
126 Routledge Cavendish Constitutional Law 5ed. (2006) at page 143; R v Goldstein[1983] 1 WLR 151.
127 First National Bank of SA Ltd t/a Wesbank v C: SARS 2002 (4) SA 768 (CC) at para [94] et seq.
128 Haynes v Commissioner for Inland Revenue 2000 (6) BCLR 596 (T).
129 Generally on tax risk management: Erasmus et al Tax Risk Management: From Risk to Opportunity IBFD (2012); Erasmus D N Tax Intelligence: The 7 Habitual Tax Mistakes made by Companies Xlibris (2010); and, by the writer
over the past two decades, including corporations such as SAB Ltd, Tsogo Sun Ltd, Accenture (South Africa) Ltd, Edcon Group, Peermont Group Ltd, AECI Ltd, Mr Price Ltd, Altron Group, Zico Group, Nampak Products Ltd and MTN Group Ltd.