SACS (Louis Trichardt) v Commissioner for the South African Revenue Service (40420/2020; 17064/2021)

Facts

On 4 May 2007, the South African Revenue Service (“SARS”) issued revised assessments for SACS (Louis Trichardt) (“the Applicant”) in respect of its 2001 to 2004 years of assessment.  In those returns, the Applicant claimed an exemption in terms of section 10(1)(zl) of the Income Tax Act No 58 of 1962 (“the IT Act”).  SARS allowed the exemption in the revised assessments but disallowed a deduction in terms of section 11(bA) of the IT Act.  After various litigation actions taken by SARS and the Applicant, the matter was finalised in favour of the Applicant in the Tax Court.  Importantly, SARS did not appeal the decision, and it seems that the years of assessment for 2002 to 2004 were finalised on 20 March 2014.  While all this was going on, the tax computations for the 2005 to 2012 years of assessment were placed on hold.  The Applicant wished that SARS would accept the treatment of sections 8(4)(a), 10(1)(zl) and 11 of the IT Act, in the same manner as it did in the 2002 to 2004 years of assessment.  SARS had no intention to apply sections 8(4)(a), 10(1)(zl) or 11 of the IT Act in the same manner in the 2005 to 2012 years assessment as it did in the 2002 to 2004 years of assessment, and the parties started an extensive litigation process.  The litigation process took several years, and the 2013 to 2016 years of assessments were added at certain points during the proces.  Clearly, the parties’ understandings of the interpretations and applications of sections 10(1)(zl), 11(g) and 8(4)(a) of the IT Act were not the same, and they agreed that the only way to resolve their differences was for the court to make a determination of these issues.  Unfortunately, during the whole dispute process, relating to the 2005 to 2012 years of assessment, SARS did not comply with the dispute rules, and the Applicant delivered a notice in terms of Rule 56 of the Tax Court Rules, and as a result of SARS’s further non-compliance to the rules, the appeals for the 2005 to 2012 years of assessment were upheld.  This meant that in theory, the 2002 to 2012 assessments reflected the Applicant’s interpretation of sections 8(4)(a), 10(1)(zl) and 11(g) of the IT Act. What is important is that the parties entered into an Anti-prescription Agreement (“APA”) on 14 October 2016, stating that the parties will accept that the decision of the court will indicate how the tax computations for further years should be treated.  The Applicant was therefore of the view, that the default judgement relating to the 2005 to 2012 years should be seen as a final decision as defined in section 100 of the Tax Administration Act No 28 of 2011 (“the TA Act”), and the years of assessment from 2013 onward should be treated the same as how it was treated from 2002 to 2012.  SARS disagreed, and on 19 August 2020 issued notification of audit letters from the 2013 to 2017 years of assessment.  On 14 September 2020, SARS issued audit findings letters for the 2013 and 2014 years of assessment.

Issues

Issue 1: Whether SARS is entitled to “audit and/or assess” the tax liabilities for the 2013 to 2016 years of assessment; and

Issue 2: Whether SARS is entitled to raise additional assessments in respect of the 2013 to 2016 years of assessment.

Finding

The Applicant relied on the APA.  The APA stated that the parties will accept the final decision of the court on the correct tax treatment in terms of sections 10(1)(zl), 11(g) and 8(4)(a) of the IT Act.  According to the Applicant the default judgement issued in respect of the 2005 to 2012 years of assessment, should be seen as a final decision as defined in section 100 of the TA Act.  SARS disagreed, and argued that the default judgement did not decide on how sections 10(1)(zl), 11(g) and 8(4)(a) of the IT Act should be interpreted, and therefore, SARS is not bound by the APA.  The court agreed with SARS and explained that the purpose of the APA was to obtain clarity on the correct tax treatment of the disputed sections, that the default judgement did not provide such clarity, and that the merits of SARS’s stance still remained alive.  The Applicant also relied on the fact that SARS allowed the exemptions in the 2001 to 2004 years of assessment.  However, the court found that nothing prevents SARS from re-examining its understanding of section 10(1)(zl) of the IT Act, and taking a different view in order to adjust future assessments. 

The Applicant relied on section 99(1)(a) of the TA Act in respect of the second issue. A new Anti-prescription Agreement (“APA2”) had to be signed before 16 October 2020.  The APA2 was only signed by SARS on 11 November 2020.  However, SARS maintained that it verbally agreed to the terms of the APA2 on 14 October 2020.  The court found that section 99(1)(c) of the TA Act, which allows for the extension, does not prescribe any method by which the extension should be agreed upon.  It, therefore, did not exclude an oral agreement, and SARS’s contention that the signing of the APA2 on 11 November 2020 was merely a formality cannot be seen as far-fetched.

Even though both applications were dismissed with costs, the court found it necessary that the registrar of the court should bring a copy of the judgement to the attention of the Commissioner of SARS.  The litigation process started in 2007.  The litigation process engaged the attention of at least 10 judges, and yet none of the judges attended to the core issue relating to sections 11(1)(zl), 11(g) or 8(4)(a) of the IT Act.  According to the court, the actions of SARS were woefully short of what was required of it in terms of section 195 of the 1996 Constitution of the Republic of South Africa. 

Find a copy of the court case here.

16/08/2022