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 –

5.7 PITFALLS IN BRINGING THE RULE 53 APPLICATION

Exercising SARS’ discretion in terms of ss 74A and 74B is final because the exercise of the discretion in ss 74A and 74B is of itself not of a tentative or intermediate nature. The decision stands on its own, although it is part of a more lengthy process, culminating in a possible later letter of findings and then finally a revised assessment. The decision determines rights or obligations on the part of taxpayers in that they must now furnish information, documents or things, which they may already have provided. Legal consequences flow from the action, in that jurisdictional facts must be complied with, both in terms of the provisions of ss 74A and 74B, and in terms of the Constitution.

When SARS makes demands under ss 74A and 74B, its decision to demand is final in nature. Has the complainant exhausted all administrative remedies? There is no objection and appeal process for ss 74A and 74B. There is no other internal remedy. The taxpayer may also have attempted to make contact with SARS to obtain answers as to the purpose of the inquiry and audit, and would probably have been met with rejection.

Is the matter ripe, in that it is sufficiently developed for judicial resolution? Here the fact pattern of the matter will determine whether or not a court will be convinced. However, the prejudice that will be suffered by the taxpayer immediately after the inquiry and audit, where SARS has acted unlawfully, unreasonably or unfairly, is severe enough to make the matter ripe for review prior to any revised assessment being raised. The ‘pay now argue later’ principle looms.

Apart from the issues of finality, exhausting all internal remedies, and ripeness of the matter, the case of Contract Support Services (Pty) Ltd and Others v CSARS135 is a good starting point in determining the requirements for bringing a successful review application against SARS in terms of PAJA or a Rule 53 application.

In this case, SARS had obtained a search and seizure warrant in terms of Section 57D of the Value Added Tax Act136 and Section 74D of the Income Tax Act to search the premises where Contract Support Services (Pty) Ltd137 conducted business.

Contract Support Services (Pty) Ltd conducted business as the agent for various contractors and collected moneys from clients on behalf of the contractors. After SARS had conducted the search and seizure operation and had seized documents, it caused notices in terms of Section 47 of the Value Added Tax Act to be served on the debtors of Contract Support Services (Pty) Ltd and others (the Applicants in the case).

This resulted in the Applicants making an application to the High Court for an interdict as a matter of urgency.138 The Applicants asked the Court for various orders, inter alia to direct that SARS and others to make available to the Applicants all documents (other than those protected by legal professional privilege) and other information in terms of Section 32 of the Constitution. The Applicants also requested the Court to declare the search and seizure warrant issued by the Fifth Respondent (Judge Snyders) on 4 November 1998 to be set aside. In addition, the Applicants requested the Court to declare that the Value Added Tax Assessment issued should be corrected or set aside in terms of Rule 53(1)(a) of the Uniform Rules of Court.

The Applicants obtained an order before Malan J. This order was, however, rescinded on the same day by application from SARS after the leading of viva voce evidence. Thereafter the matter was postponed to the urgent roll.

At the hearing of the matter before court, Brett AJ first considered whether the Court was competent to consider the interim relief requested by the Applicants. In this regard the Court referred to the matter of Safcor Forwarding (Pty) Ltd v VNTC139 where Corbett J A held that the rule nisi is available to applicants that can show prima facie that their rights have been infringed and that they will suffer real loss or disadvantage if compelled to rely on normal procedures to bring the dispute to the attention of the courts. He went on to state that: ‘The decisions of public bodies or officialdom sometimes bear hard on the individual. The impact thereof may be sudden and devastating. Therefore, as in the case of other types of litigation, applications for the review of such decisions may require urgent handling and in proper circumstances the grant of interim relief. In my opinion it would be unfortunate if our review procedures did not admit of this.’

Brett AJ held, after quoting extensively from the case of Safcor Forwarding (Pty) Ltd v NTC,140 that the court was competent to grant interim relief to the Applicants if they succeeded in proving a prima facie case.

The next issue to decide was whether the notice issued by SARS in terms of  Section 47 of the Value Added Tax Act should be set aside on review. More particularly, Brett AJ had to decide whether the Applicants were entitled to approach the court to review the decisions that SARS had taken to appoint agents in terms of Section 47 of the Value Added Tax Act, and secondly whether the Applicants had made a prima facie case on the merits of the matter.

Counsel for SARS contended that a notice under Section 47 of the Income Tax Act was not capable of review by the High Court. The basis for this argument was that the obligation on the taxpayer to pay (because of the self-assessment system of our Value Added Tax Act), exists notwithstanding any objection and appeal noted by the Applicants, by virtue of the operation of the various sections such as Section 28(1), 40, 48(6) and 49 of the Value Added Tax Act, and that the decision to use Section 47 of the Value Added Tax Act did not create any further obligation for a taxpayer and therefore did not constitute an administrative decision capable of review.

Brett AJ did not agree with this contention of the counsel for SARS. He referred to the unreported judgment of Yusuf Vahed and Others v The Commissioner of Inland Revenue,141 where Swart J decided that the ‘satisfaction’ of SARS was an administrative decision, separate and distinguishable from the merits of the rest of the case, in that instance the additional assessment. The relevant excerpt from the judgment of Yusuf Vahed and Others v The Commissioner of Inland Revenue142 is as follows:

I am accordingly of the view that the decision to issue notices in terms of Section 47 of the VAT Act constituted an administrative decision affecting the rights of the applicants to freely conduct their bank account held at the third Respondent and to receive payment from their debtors. For these reasons I consider the decision to issue the notices in terms of Section 47 capable of being reviewed and set aside.143 (Emphasis supplied)

The only issue left to decide was whether the Applicants had in fact made a prima facie case on the merits for the interim relief sought. In this regard the Applicants relied on Item 23(2)(b) of the Constitution144 prior to the promulgation of PAJA, where it is stated that every person has the right to:

(a) lawful administrative action where any of their rights or interests are
affected or threatened;
(b) procedurally fair administrative action where any of their rights or legitimate expectations are affected or threatened;
(c) be furnished with reasons in writing for administrative action which affects any of their rights or interests; and
(d) administrative action which is justifiable in relation to the reasons given for it where any of their rights are affected or threatened.

The Applicants relied specifically on the audi alteram partem rule. Brett AJ agreed with SARS’ submissions that the audi alteram partem rule did not apply145 under these circumstances:

I agree with the submission made … that not all administrative acts require the application of the audi alteram partem rule before they are given effect to. Indeed Section 47 itself requires no such prior hearing. I also agree … that to require a prior hearing would defeat the very purpose of the notice. It would alert the defaulting VAT payer to the intention to require payment from the latter’s debtors and so enable the defaulting taxpayer to receive payment of the funds due and to enable the taxpayer to spirit such funds away. Where prior notice and a hearing would render the proposed act nugatory, no such prior notice or hearing is required. I refer in this regard to the case of Gardener v East London Transitional Council and Others 1996(3) SA 99 (ECD) at 116 D-G. (Emphasis supplied)

Brett AJ then quoted from the Gardener v East London Transitional Council and Others146 where it is stated that fairness is a relative concept that must be viewed in the light of the relevant circumstances. The procedure must be fair not only to the holder of the right affected by the administrative act but also the executive or administration acting in the public interest. It was held that the audi alteram partem principle is not applicable to every administrative act. Such an interpretation would lead to the possible misuse of the Constitution.
Brett AJ then found specifically that the provision of Section 47 of the Income Tax Act excluded the audi alteram partem principle. He also found that the Applicants did not make out a prima facie case for interim relief and found in favour of SARS by not granting any interim relief to the taxpayers.

This case illustrates the technical difficulties facing a taxpayer who is seeking to bring a review application either in terms of PAJA (on the basis that the taxpayer’s rights have been adversely affected, which create a direct, external legal effect as set out in the definition of ‘administrative conduct’ in PAJA), or in terms of Rule 53. These technical difficulties can be summarised as follows:

(a) where taxpayers seek interim relief the provisions of Safcor Forwarding (Pty) Ltd v VNTC147 must be adhered to; the taxpayer must show prima facie that its rights have been infringed and that it will suffer real loss or disadvantage if compelled to rely solely on the normal procedures for bringing disputes to the tax court after revised assessments are issued. Metcash Trading Limited v C SARS and Another148and Yusuf Vahed and Others v The Commissioner of Inland Revenue149 is authority that the decision taken by SARS to conduct an audit is a separate decision, that in itself is subject to the inherent review jurisdiction of the High Court;

(b) the question will be asked whether the subject matter of the review is in fact reviewable by the High Court; in this regard the issue that may be raised by SARS will be the fact that it is not ‘administrative action’ as defined in PAJA. SARS may also contend that the matter is not final or ‘ripe’ for review, as the decision relates to conduct which forms part of a multi-staged decisionmaking process. SARS may also contend that the final decision will be made when the revised assessment is issued by SARS in the future. It is at this  stage that the taxpayer will be given the full opportunity to exercise its rights (through the objection and appeal process). In this regard the reference by Brett AJ to the fact that the word ‘satisfaction’ denotes an administrative decision which is separate and distinguishable from the merits of the rest of the case (in the matter of Contract Support Services (Pty) Ltd)150 will assist the taxpayer in arguing that the use of the word ‘may’ denotes a discretion being exercised by SARS, which is separate from any merits of the rest of the case, capable of review. Metcash Trading Limited v C SARS and Another151 and Yusuf Vahed and Others v The Commissioner of Inland Revenue152 is authority that the decision taken by SARS to commence an audit of a taxpayer is a separate reviewable decision. That decision may result in significant transgressions of taxpayers constitutional rights in the near future in line with various  authorities.153 In the alternative, if it is held that the decision to audit is not an administrative decision or action, the constitutional principle of legality will apply where lawfulness, reasonableness, fair procedure and reasons apply to the conduct of SARS;154

(c) in most instances, taxpayers will rely on the audi alteram partem rule. Arguments will have to be proffered why this rule would apply in the instance of ss 74A and 74B, as discussed in the Contract Support Services (Pty) Ltd155, and analysed in this thesis.156 The primary reason given by the taxpayer would be that, in accordance with s 3(1) and (2), read with s 5(1) and (2) of PAJA, and s 195(1)(f), SARS is to be held accountable and must adhere to just
administrative procedures in arriving at any decision it takes in terms of ss 74A and 74B. Such a decision would ultimately give rise to serious consequences for the taxpayer in the form of a revised assessment in the future, which could be prejudicial to the taxpayer and would adversely affect the rights of the taxpayer, with direct, external legal effect. Unlike the circumstances of the Contract Support Services case,157 the application of the audi principle would not be a misuse of the Constitution resulting in the ss 74A and 74B process being nugatory.158 The decision by SARS to access information, documents and things to base its findings on for a revised assessment, is final. Once the revised assessment is issued the ‘pay now argue later’ principle becomes immediately applicable, as any challenge against the findings of SARS does not suspend the payment of the revised assessment tax that is due. For the taxpayer to wait for the completion of the audit and the issuance of the revised assessment is too late if the taxpayer is to challenge any conduct of SARS that is constitutionally invalid, whilst SARS invokes its extensive powers. This is in accordance with the principles set out in various authorities, including Ferreira v Levin NO and Others; Vryenhoek and Others v Powell NO and Others.159 The Constitutional Court entertained an application from the applicant to determine a constitutional issue before the event actually took place. Had the event taken place first, the constitutional rights of the applicant would then have been transgressed – not to be compelled to give self-incriminating evidence.160 The taxpayer facing a SARS audit is in a similar position to the applicant in the Ferreira v Levin NO and Others; Vryenhoek and Others v Powell NO and Others161case, and the taxpayer is entitled to seek clarification from SARS as to the scope and purpose of the audit, and in the process to obtain certainty from SARS that it will comply with all of its constitutional obligations in favour of taxpayers.

Finally, in Kimberley Girls’ High School and another v Head of Department of Education, Northern Cape Province and others162 the court reiterated that ‘(t)he onus of establishing that there are grounds on which a court can review a functionary’s decision, rests on an applicant’. The taxpayer has the onus of establishing that there are grounds on which a court can review SARS’ conduct – as discussed throughout this thesis. This will be made by the taxpayer in the application for review in terms of Rule 53 of the SARS decision in terms of ss 74A and 74B.

Next:  6.1 INTRODUCTION

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Footnotes:

135 1999(3) SA 1133 (WLD), 61 SATC 338.
136 Act 89 of 1991.
137Contract Support Services (Pty) Ltd and Others v Commissioner of Receiver of Revenue and Others 1999 (3) SA
1133 (W).
138 For the principles to be applied in interim interdicts, see Cape Town Municipality v LF Boshoff Investments (Pty)
Ltd 1969 (2) SA 256 (C).
139 1982(3) SA 654AD at pages 674H-675D.
140 1982 (3) SA 654 (AD).
141 Case Number 28225/97.
142Ibid.
143 This is in line with Kriegler J’s judgment in Metcash Trading Limited v Commissioner, South African Revenue
Service 2001(1) SA 1109 (CC).
144 Schedule 6 of the Constitution.
145At page 350.
146 1996(3) SA 99 (ECD) at para’s 116 D-G.
147 1982(3) SA 654AD at pages 674H-675D.
148 2001(1) SA 1109 (CC).
149 Case Number 28225/97, Witwatersrand Local Division.
1501999 (3) SA 1133 (W).
151 2001(1) SA 1109 (CC).
152 Case Number 28225/97, Witwatersrand Local Division.
153Hoexter (2012) at page 229 footnote 438; Du Preez v Truth and Reconciliation Commission 1997(3) SA 204 (A) and
Director: Mineral Development, Gauteng Region v Save the Vaal Environment 1999(2) SA 709 (SCA); Ferreira v
Levin NO and Others; Vryenhoek and Others V Powell NO and Others1996 (1) BCLR 1 (CC) at para’s [165] – [166];
See also Croome B Taxpayers’ Rights in South Africa Juta 2010 at page 207; Wheelright K Taxpayer’ Rights in
Australia in Bentley D Taxpayers’ Rights: An International Perspective Revenue Law Journal Bond University:
Queensland 1998 at page 49; Park-Ross and Another v Director: Office for Serious Economic Offences 1995 (2) SA
148 (C) paras [1641-165A]; Nomala v Permanent Secretary, Department of Welfare and Another 2001 (8) BCLR 844
(E); Transvaal Coal Owners Association and Others v Board of Control 1921 TPD 447 at 452; Gool v Minister of
Justice 1995 (2) SA 682 (C); Afdelings-Raad van Swartland v Administrateur, Kaap 1983 (3) SA 469 (C).
154 Hoexter (2012) at pages 121-5.
155Contract Support Services (Pty) Ltd and Others v Commissioner for South African Revenue Service & Others 1999
(3) SA 1133 (W).
156 See sections 3.5: Procedural Fairness and 3.5.2: Audi Alteram Partem supra.
157Op. cit.
158 As envisaged in s 75(1)(b) of the Income Tax Act.
1591996 (1) BCLR 1 (CC) at para’s [165] – [166].
160 Sections 35(3)(h)-(j) of the Constitution; See also ITC 1818 69 SATC 98 and Seapoint Computer Bureau (Pty) Ltd v
McLoughlin and de Wet NNO 1997 (2) SA 636 (W).
161Supra footnote 162.
162 [2005] 1 All SA 360 (NC), in a case where s 195(1) of the Constitution was also considered as part of the grounds of
review under consideration; See also Chirwa v Transnet Limited and Others 2008 (4) SA 367 (CC) (28 November
2007) at para’s [74] – [76], [146] and [195]: ‘[76] Therefore although section 195 of the Constitution provides valuable
interpretive assistance it does not found a right to bring an action.’