F Taxpayer v CSARS ( IT 45842)

Facts

Following an audit, the South African Revenue Service (“SARS”) raised additional assessments on 17 March 2020 in respect of the taxpayer’s 2016 to 2018 years of assessment. In terms of rule 6 of the Rules promulgated under section 103 of the Tax Administration Act No 28 of 2011 (“the Rules”), the taxpayer can request SARS to provide reasons within 30 days from the date of the additional assessments, which the taxpayer did.  SARS had 45 days to deliver the request, but failed to do so, and requested an extension in terms of rule 6(7) of the Rules, 16 days after the initial 45 day period lapsed. The taxpayer then submitted its notice of objections within 30 days in accordance with rule 7(1)(a) of the Rules. SARS had 60 days to deliver its decision and again failed to meet the deadline. Only after the taxpayer put SARS to terms by delivery of a rule 56(1)(a) notice, did SARS transmit its decision, which partially disallowed the objection. The taxpayer submitted notice(s) of appeal within the 30 days as provided for in rule 10(1)(a) of the Rules, after the outcome of the objections were received. The taxpayer did not select the alternative dispute resolution and SARS was required to deliver its rule 31 statement within 45 days. SARS did not deliver the rule 31 statement, and one day after it expired, SARS notified the taxpayer that the appeal in respect of the year of assessment 2016 to 2018 had been transferred to the Tax Court Litigation Unit. No request was made for condonation for the late filing of the rule 31 statement. Again, the taxpayer was forced to deliver a notice in terms of section 56(1)(a) of the Rules, putting SARS to terms to remedy its default within the prescribed 15 day period. On 21 June 2021, the taxpayer communicated to SARS that it was willing to grant an extension till 30 July 2021 after SARS provide some reasons for the delay. SARS missed the deadline again and on 31 July 2021 advised that the case was allocated to another SARS official and requested another extension. At this stage, the taxpayer finally had enough and informed SARS that it would have to bring an application for condonation in terms of rule 52(6) of the Rules. On 21 September 2021 SARS served the rule 31 statement, which was 36 days after the agreed extended deadline and 15 days after the deadline SARS itself had requested. To summarise, SARS has displayed a persistent disregard for the time limits prescribed in the Rules. While the dispute was in process, the taxpayer’s tax compliant status was reflected as non-compliant, and SARS proceeded with collection steps even though a suspension of payment under section 164(2) of the Tax Administration Act No 28 of 2011 (“TA Act”) was requested on 11 June 2020. The suspension of payment was formally approved by SARS on 3 September 2020, however, SARS did not rectify the taxpayer’s compliance status. It was only after the taxpayer notified SARS that it would be approaching the High Court for an order to compel SARS to reflect its status as tax compliant, did SARS finally correct the status on e-filing. However, after the partial disallowance of the objection on 22 February 2021, the taxpayer was informed by SARS that the suspension of payment had been revoked and the tax status again showed as non-compliant. The taxpayer was again forced to point out to SARS that the dispute was far from over in order to reinstate the suspension of payment. The taxpayer also had to approach SARS again to alter the non-compliance status to compliant on e-filing. The taxpayer was severely prejudiced by this since it was undisputed that the taxpayer’s business relied on a compliant tax status on e-filing. 

Issues

Issue 1:  Whether SARS’ delay is so egregious that it should not be countenanced;

Issue 2: Whether the taxpayer is entitled to the substantive relief which it seeks, namely the upholding of its appeal in relation to its 2016 to the 2018 year of assessment.

Finding

Regarding the first issue, the court found that SARS has displayed a persistent disregard for the time limits prescribed in the Rules. SARS also failed to seek extensions when required to do so. Also of significance is that SARS mislead the taxpayer that one SARS official had been allocated the appeal for all three additional assessments when that same SARS official denied it. SARS also misrepresent to the taxpayer the date of the extensions to which SARS agreed to; and also misrepresent to the taxpayer the reasons why the appeal had been reallocated to another SARS official, and that counsel had been briefed. The court also found that, even though SARS submitted otherwise, it seems that all the information to prepare the rule 31 statement was available to SARS since the additional assessments were raised by SARS as a result of its own audit. SARS also provided reasons for the additional assessments. The fact that SARS disallowed the taxpayer’s notice of objection suggests that at some stage a SARS official had to apply his or her mind to all the information. The court referred to section 195(2) of the Constitution, which deals with the basic values and principles governing public administration, and read with section 33 of the Constitution, found that those principles must apply to SARS as well. The court stated that SARS had opportunities to take the court into its confidence and did not do so. The court concluded that the facts set out above demonstrate that the delay was egregious and that no reasonable explanations were provided for the delays, and as a consequence, the taxpayer was prejudiced.  SARS, therefore, failed to fulfill its obligations under section 195 of the Constitution as well as the TA Act.   

When the court had to decide on the second issue, the court turned to the pre-trial conference minute where the parties agreed that the sole issue to be determined is whether payment of insurance premiums to the insurance houses qualified as an “expense” as contemplated in IFRS for SME’S.  SARS refused a deduction of insurance premiums paid by the taxpayer to RMB Structured Insurance Limited and based this refusal on the application of section 23L(2) of the Income Tax Act No 58 of 1962 (“the Act”). SARS argued that section 23L of the Act was introduced to curb avoidance in the case of disguised investments in the wrapper of short-term insurance policies, and that section 23L of the Act targets short-term insurance policies where the insurer fails to accept significant risk from the policyholder. Such policies will be viewed as investment policies and taxpayers may not deduct premiums in respect of such policies.  Both parties agreed that IFRS 4 does not apply, but the taxpayer did obtain an opinion from an IFRS expert which stated that if no specific standard applies to a particular transaction, the International Accounting Standards Board has developed the Conceptual Framework for Financial Reporting (“CFFR”) to assist preparers fo financial statements. The CFFR defines an expense as a “decrease in assets” or an “increase in liabilities” which results in a “decrease in equity” other than those relating to distributions to holders of equity claims. The question is, therefore, whether the payment of the premium to RMB by the taxpayer constitutes an “asset” and, if not, whether such payment results in a decrease of the taxpayer’s equity. The CFFR further defines an asset as a “present economic resource” that is “controlled” by an entity as a result of past events. The taxpayer successfully argued that it has no access to the funds accumulated and has no control over the credit risk, and therefore, the payment of insurance premiums decreases the asset base and constitutes an expense. The court believed that the taxpayer’s case had sufficient merit to enable it to grant the final relief sought.

SARS’s counter-application for condonation was dismissed, and the taxpayer’s appeal in relation to its 2016 to the 2018 year of assessment was upheld. The court also ordered that SARS shall pay the taxpayer’s cost in both the main and the counter-application on the scale as between party and party as taxed or agreed.

Find a copy of the court case here.

04/03/2022