Tax court upholds SARS’ invalid objection notice due to non-compliance

Background

SARS initiated audit proceedings on Dr X. While gathering information from the taxpayer as part of the audit, SARS also initiated audit proceedings on Dr X Inc..

As part of the audit proceedings SARS requested direct access to the electronic accounting records of the taxpayers, to be accessed by an appointed SARS Electronic Forensic Services Department (“EFS”) specialist as part of their audit process. For purposes of the audit proceedings SARS would not accept printouts or downloads of records not directly accessed by their appointed EFS specialist who needed to be present at the taxpayers’ offices to download the material directly, retaining the authenticity of the data to be analysed.

There was lengthy communication between the taxpayers, the company appointed to assist with the audit and SARS to gather information for the audit. During this process, the taxpayers were not forthcoming with providing SARS with the specific documentation requested in the manner it was requested. This included access to the electronic data. SARS, therefore, relied on copies of the taxpayers’ bank statements, that SARS obtained directly from the bank.

As a result of the above, SARS raised additional assessments in terms of section 92 of the Tax Administration Act (“TAA”). Where SARS received no explanation from the taxpayers regarding deposits made into the taxpayers’ bank accounts, SARS issued estimated assessments in terms of section 95 of the TAA. 

Detailed letters of audit findings were presented to Dr X and Dr X Inc setting out the amounts SARS included in the additional assessments, based on the information available to SARS as part of the audit.

The procedures to be followed in lodging an objection and appeal

When following the Rules governing  the Alternative Dispute Resolution process, a taxpayer needs to follow the rules promulgated under section 103 of the TAA (“the Rules”).

In terms of Rule 7(2)(b), the grounds of the objection submitted to SARS must include the following detail:

(i) Specify the part or specific amount of the disputed assessment objected to,

(ii) Specify which of the grounds of assessment are disputed; and

(iii) Submitting the documents required to substantiate the grounds of objection that the taxpayer has not previously delivered to SARS for purposes of the disputed assessment.

In terms of Rule 7(4), where a taxpayer delivers an objection that does not comply with the above, SARS may regard the objection as invalid and issue a notice to the taxpayer of the grounds of invalidity.

The taxpayer then has the right to resubmit the objection to SARS within the timeframe set out by SARS, effectively giving the taxpayer another opportunity to provide SARS with adequate grounds to support the taxpayer’s grounds of objection.

The procedure followed by the taxpayer:

In this case, following the submission of their first objection to SARS, SARS issued a formal notice to the taxpayers stating that their objections were invalid as they did not comply with Rule 7(2)(b).

The taxpayers lodged a second objection, only slightly amending the grounds of the first objection, without providing any additional supporting documentation or making reference to the SARS audit findings. Due to the level of detail required by Rule 7(2)(b) not being evident, these objections were also rejected by SARS as being invalid.

Detailed reasons were provided to the taxpayers by SARS as to why the objections were regarded as invalid.

The court’s analysis

The court examined whether the applicants’ second objection met the requirements stipulated in Rule 7(2)(b) and found that the objections lacked the sufficient details needed to be valid.

Some of the reasons in support of the invalid notice were as follows:

• SARS were not given access to the electronic accounting records after numerous attempts as part of the audit process and thereafter, resulting in the information required by SARS to make a final assessment being incomplete.
• The taxpayers did not make reference to any specific amounts referred to in SARS letters of audit findings, to which the taxpayers were objecting and did not support their grounds with the necessary supporting documentation.
• The taxpayers adopted a general argument as to why they disagree with the additional assessments issued by SARS without being able to back up these statements with supporting evidence.
• Although SARS tried to access the electronic information requested as part of the audit again, the taxpayers were found to be obstructive and showed no co-operation to share this information.

The courts highlighted that SARS had acted reasonably in both instances by informing the applicants of their procedural deficiencies and granting them an opportunity to address these issues that were repeatedly not complied with by the taxpayer.

The court also observed that the second objection mirrored the deficiencies of the first, reflecting a continued disregard for procedural requirements. This non-compliance further compounded the applicants’ position and undermined their argument for procedural fairness.

The court dismissed the application, concluding that the applicants’ second objection did not comply with the validity requirements of Rule 7(2)(b). It held that SARS had acted within the confines of the law by invalidating both objections. The applicants were ordered to pay SARS’ costs, including the costs of two counsel that where employed.

Although not directly related to the outcome of the case, not being co-operative with SARS as part of an audit process, and purposely not providing SARS with the documentation requested as part of an audit, resulted in SARS levying an understatement penalty of 200% on the additional taxes due to SARS.

The takeaway:

When lodging an objection with SARS, a taxpayer must ensure that the grounds of objection are detailed and can be supported with all necessary substantiating documents. Failure to comply with these requirements can result in an invalid objection.

Furthermore, the judgment inferred the duty of taxpayers to cooperate fully with SARS during audits, as the lack of co-operation could have adverse consequences, resulting in additional tax and penalties being imposed by SARS, based on the information available to SARS. It is essential for taxpayers to approach audits and objections with diligence and professionalism to safeguard their interests effectively.

Authors:

Jessica Brown, Tax Consultant

Sharon MacHutchon, Manager