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 5 – JUDICIAL REVIEW WITH REFERENCE TO SS 74A AND 74B –
18.104.22.168 Abuse of discretion
An abuse of discretion in the context of ss 74A and 74B would result by SARS’ failure to comply generally with the principles analysed in 3.3:Lawfulness above. This would include, by way of example, failure to comply with the specific statutory requirements of ‘the administration of this Act’ in terms of s 74 of the Income Tax Act, and failure to comply with its Code of Conduct read with its internal guidelines in the unpublished SARS Internal Audit Manual indicative that SARS are transgressing legitimate expectations and their constitutional obligations summarised and illustrated in these guidelines.
Another form of abuse of discretion occurs when SARS exercises its discretion with an improper or ulterior purpose or motive, such as conducting a criminal inquiry and audit107 simultaneously under the guise of an inquiry and audit merely for civil regulatory purposes, using the provisions of ss 74A and 74B, as opposed to the extensive legislated criminal procedure provisions and s 74D of the Income Tax Act.108
In order to ensure that it does not exercise a discretion in an abusive manner, SARS must be mindful of the guideline principles in Dawood’s109 case and the principles set out in the Stroud Riley110 case. The former supports a conservative approach by SARS in following its Code of Conduct and the guidelines in the unpublished SARS Internal Audit Manual.111 This ensures that an audit and inquiry by SARS into the tax affairs of a taxpayer will only be considered necessary after initial preparatory work has been done to justify the inquiry and audit. If SARS finds nothing in the preliminary audit that is materially wrong, these internal guidelines state that the audit must cease – unless the risk indicators for that industry suggest that a further investigation is necessary due to the external intelligence garnered from that industry as a whole. Stroud Riley112compels SARS to exercise a discretion in favour of the taxpayer where the facts warrant this. This means that if a preliminary review into the tax affairs of the taxpayer does not deliver anything materially wrong, and in the absence of another justification to proceed with the audit, the proposed audit must be ceased. Compliance with these lawfulness principles is peremptory for SARS.113
If the taxpayer can show that the issue being investigated by SARS has already been investigated by it in the past, SARS will most likely be obliged to exercise its discretion in favour of the taxpayer and terminate the inquiry and audit, unless new facts have come to light.
Next: 22.214.171.124 Reasonableness
107 Broadway Mansions (Pty) Ltd vs Pretoria City Council1955(1) S A 517 (A) at 522: ‘The question is simply, did respondent have power purported to be exercised. Where power is granted for a specific purpose it cannot be used for a purpose other than that for which it was intended. In rotation to such other purpose the power does not exist.’
108 See the discussion in this thesis on the Canadian Supreme Court case of R v Jarvis 2002 (3) SCR 757, at page 88.
109 Dawood and Another v Minister of Home Affairs and Others 2000 (3) SA 936 (CC).
110 Stroud Riley & Co Ltd v SIR 36 SATC 143.
111 See section 3.2: SARS Internal Audit Manual supra at pages 2-6.