- The Income Tax Act 58 of 1962 (hereafter referred as the “ITA”) prescribes the tax treatment of various income related receipts or accruals within a year of assessment. The 4th Schedule of the ITA further prescribes the process by which provisional taxpayers are assessed.
- From the outset, provisional taxpayers are at a disadvantage as they need to estimate their anticipated revenue for the year and are then taxed on this amount. This estimated amount is then reconciled every 6 months by the taxpayer and the necessary adjustments are made. Naturally, this is to account for fluctuations within the ordinary business cycle in any given year of assessment.
- SARS is empowered through paragraph 19(3) of the 4th Schedule to raise what constitutes an estimated assessment in terms of section 95 of the TAA. This sub-paragraph states the following:
The Commissioner may call upon any provisional taxpayer to justify any estimate made by the provisional taxpayer in terms of subparagraph (1), or to furnish particulars of the provisional taxpayer’s income and expenditure or any other particulars that may be required, and, if the Commissioner is dissatisfied with the said estimate, he or she may increase the amount thereof to such amount as he or she considers reasonable, which increase of the estimate is not subject to objection and appeal.
- What becomes immediately apparent is that, in order for the estimated assessment to be raised, SARS must first, either request the taxpayer to justify their initial provisional returns or request further particulars from the taxpayer. If, after such requests, SARS is of the belief that an increase to the assessed taxable income is necessary, they can raise their estimated assessment.
- This estimated assessment so raised by SARS is still an assessment so defined within the Tax Administration Act 28 of 2011 (hereafter referred as the “TAA”). This becomes vitally important when read with the principles of administrative justice and the Audi Alterum Partem Rule (the “Audi Rule”). The TAA is subject to the principles and codifications of administrative justice. These laws found in the common law and in the Promotion of Administrative Justice Act (3 of 2000) (hereinafter referred to as “PAJA”) give effect to section 33 of the Constitution. Section 33 requires government officials to act in a manner that respects the right of South Africans to just administrative actions that are procedurally fair, reasonable, and lawful. This includes the right to be heard, to make personal representations when aggrieved, and the right to adequate reasons when a decision is taken that has a prejudicial effect. Section 42 of the TAA gives further effect to these administrative justice rights. It is common cause, however, that section 42 is not adhered to or followed when estimated assessments for provisional tax are issued.
- Although SARS issues an estimated assessment, the rules regulating the issuing and raising of an assessment as defined within the TAA still and must apply.
- It is accordingly suggested that when SARS issues an estimated assessment in terms of paragraph 19(3) of the 4th Schedule of the ITA, they must still comply with section 42 of the TAA, and the broader administrative justice principles stated in section 3 of the PAJA.
SECTION 42 OF THE TAA
- It is argued that when SARS wishes to audit an assessment, they are statutorily bound to comply with section 42 of the TAA. This section gives statutory force to the principle of Audi Alterum Partem. Simply put, this is a common law principle which states that when an administrative decision is being contemplated, the other side must be given adequate opportunity and notice to participate within the decision-making process. The nature of the representations may change given the factual matrix of the decision itself but within section 42, inter alia, once a Letter of Audit Finding is issued to the taxpayer, they have 21 business days in which to submit argument and documentation as to why they agree or disagree with the findings of the audit.
- Once this is done, an additional assessment is then issued. Thus, creating the tax liability and new tax debt.
- The case of A v Commissioner for the South African Revenue Service Case No.: IT13726 is important in this regard as it noted that the failure to comply with section 40 and 42 of the TAA renders that additional assessment void ab initio and without legal force or effect.
SECTION 3 OF THE PAJA
- Section 3 of the PAJA states the following:
In order to give effect to the right to procedurally fair administrative action, an administrator, subject to subsection (4), must give a person referred to in subsection (1) –
- adequate notice of the nature and purpose of the proposed administrative action;
- a reasonable opportunity to make representations;
- a clear statement of the administrative action;
- adequate notice of any right of review or internal appeal, where applicable; and
- adequate notice of the right to request reasons in terms of section 5.
(own emphasis added)
- Section 3 therefore prescribes a minimum threshold for administrative action to constitute procedurally fair, administrative action. Given that SARS exercises public power and meets the definition of “administrative action” within the PAJA, their decisions must comply with the substance of the PAJA.
APPLICATION OF SECTION 3 AND SECTION 42 TO PARAGRAPH 19(3)
- When SARS applies paragraph 19(3) of the 4th Schedule of the ITA, they are in essence, conducting an audit of the lodged provisional returns.
- As it amounts to an audit, there must be material compliance with section 42 of the TAA. The notification and 21 business day requirement must be complied with. Should SARS fail to do such, the result will be an unlawful estimated assessment and same stands to be reviewed and set aside.
- Furthermore, the current process whereby SARS issues the estimated assessment in terms of paragraph 19(3) of the 4th Schedule, is in material non-compliant with the minimum threshold established by section 3 of the PAJA.
- There is no opportunity to make representations to the findings of the paragraph 19(3) “audit”.
- It may be suggested that an increase to the taxable income and therefore tax debt would not have a long-term effect on the overall tax position of the provisional taxpayer, due to the reconciliation which happens at the end of each year of assessment. If SARS had increased the taxable amount but such did not eventuate through the substance of the year, the difference would be recouped as a refund.
- This approach, although sound in theory, loses sight of one of the biggest factors in business: cash flow security. Such is a force multiplier within business as a strained cashflow puts immense pressure on short term solvency and liquidity of the business.
- Should a taxpayer not be able to meet their short-term obligations, it could lead to the taxpayer having to be liquidated.
- If a taxpayer allows SARS to treat the application of paragraph 19(3) of the 4th Schedule as a sui generis process, divorced from the ordinary treatment of assessments and audits generally, then it could place severe pressure of short-term cash flow. Given the current harsh economic climate, the solvency of a taxpayer must be jealously protected.
- Paragraph 19(3) of the 4th Schedule therefore must be read within the framework of the TAA and administrative justice generally.
- SARS must comply with their section 42 requirements when raising the estimated assessment and invite comment and representation from the taxpayer before they issue the estimate assessment.
- Should SARS fail to do this, the estimate assessment itself will be unlawful and stands to be set aside.