On 25 February 2025, the Johannesburg tax court handed down judgment in Taxpayer D v CSARS (IT35476) from which taxpayers can learn three very important lessons in the context of tax dispute resolution:
Understand the concept of onus of proof and how to discharge that onus
In this case, one of the taxpayer’s companies showed an amount payable to the taxpayer of R42million. SARS asked the taxpayer to explain where he got the R42million to advance to the company and why it ought not to be taxed by SARS. When the taxpayer failed to satisfy SARS, SARS raised an additional assessment to include the amount in gross income. The taxpayer, aggrieved by that assessment, launched a dispute.
In terms of section 102 of the Tax Administration Act, taxpayers carry the burden of proving that an amount is exempt or otherwise not taxable.
In an attempt to discharge the onus of proving the R42million is exempt or otherwise not taxable, the taxpayer’s legal team argued (or at least this was one of four different versions of the taxpayer’s defence – see below) that the financials are wrong and the loan is only R3m. The taxpayer blamed his previous accountants for the incorrect R42 million balance and called his new accountant to testify that the loan was only R3m. The logic presumably being that if SARS wants to tax something then they can tax R3m not R42m. The taxpayer did not, as far as can be discerned from the judgment, continue to argue/try to prove that the R3m is exempt or otherwise not taxable.
The new accountant (i.e the one who said the loan was only R3m) was the only person who testified in the taxpayer’s defence. She explained that her firm had reconstructed the financial statements for the company for the year in question in an attempt to show that the previous financial statements were wrong and show what the correct position is.
The new accounts were drawn up mainly from bank statements. The new accountant did not have access to any of the records on which the previous accountants relied. She also had no first-hand knowledge about the transactions as reflected in the bank statements and indeed, some of her accounting was based on guesswork, having access to very little information other than the bank statements.
SARS called a chartered accountant, auditor and professor with 40 years’ experience to “punch holes” into the approach adopted by the new accountant in compiling the new financial statements. Indeed, the professor tore into the new accountant’s accounts so much so that court concluded that the new accounts could not be relied on at all.
Given the accountant was the only person called to testify in the taxpayer’s defence and her testimony was now useless, the taxpayer’s case crumbled to pieces.
The court, correctly in my view, goes on to illustrate how the taxpayer may possibly have avoided his fate, including :
- The previous accountants who prepared the accounts to show the loan at R42million should have testified as to the accuracy of their version of the accounts;
- The taxpayer himself could have come to testify to illustrate why he signed the previous accounts if they were wrong and to explain the source of the funds and the transactions in the bank statements but he did not testify despite being present at proceedings.
This is yet another example of where the taxpayer did not understand how to discharge the onus of proof (or perhaps he did but knew he couldn’t but tried anyway).
In my experience, taxpayers’ cases against SARS often falls short exactly because of this issue. They have a case but because nobody asked them the right questions and pushed and guided them to get the right evidence during the preparation of their case, their case fails.
In addition, understanding what the right evidence is requires an understanding of tax law because the law dictates the facts that have be proved. If you don’t understand tax law, then any attempt to discharge the onus of proof in a tax dispute will be an entirely hit or miss exercise. Tax, as a profession, has for many years now been a speciality area and now indeed, tax dispute resolution has become a sub-speciality, which is exactly what we do at Unicus Tax Specialists SA.
Get your story straight – from the start
In this case, the taxpayer changed the facts on which he relied in defence 4 times as highlighted by SARS. The four versions:
- Version one: The loans is indeed R42million and the money came from four other companies which the taxpayer owns and he in turn borrowed it to the company in question.
- Version two: The loan is indeed R42million, the money came from four other companies which the taxpayer owned but rather than on lending it to the company in question (as in version one), it was now alleged that the loan arose by virtue of expenses which the taxpayer incurred on behalf of the company in question.
- Version three: The loan is indeed R42million, but the money only came from two other companies (as opposed to the previously stated four).
- Version four: The loan is only R3million and the previous accounts are wrong.
The difference in the version of events is highly indicative of SARS’ assessment being correct – i.e. that the R42million represents undeclared income. It does not boast well for your defence if you’re changing your case all the time and indeed, in my experience, SARS’ representatives in tax matters (especially when the case reaches litigation) are quick to point out any variance taxpayers’ cases.
In my experience, the reason taxpayers often change their cases is because the taxpayer changes advisors midway through the dispute with SARS (as appears to have happened here) or because dispute resolution experts such as my firm are roped in to assist late in the dispute resolution process. It is often then when it is pointed out that the case is not correctly “pitched” and if corrections are made, it will be seen as a change in the version of the taxpayer. While my firm has managed to get over this “changing versions” hurdle many times before, it requires a detailed explanation as to why the previous version was put forward, why the new version is put forward and why a negative inference should not be drawn from the change of versions. This is not always an easy task, and even if successful, it just unnecessarily adds to the cost of the dispute for the taxpayer.
Another reason why there is often a change in the taxpayer’s version is because the people representing the taxpayer in the early stages of the dispute often do not properly engage with the taxpayer about the facts surrounding the dispute and tend to effectively presume what the facts are based on the accounting records and perhaps a quick conversation with the taxpayer. The unfortunate reality is that a tax dispute is factually and legally intense exercise and no longer simply just part of the compliance process (see another article of mine highlighting this issue here) . It requires detailed discussions and consultations with the taxpayer and understanding the taxpayer’s facts.
To be fair, it is also true that, in my experience, some taxpayers take a supine attitude in relation to their dispute with SARS (especially in the early stages of the dispute) and just expect their accountant to “deal with it” and not to “bother them with SARS issues”. This leaves the representative/accountant with no other choice but to work with what they have and what they have may not turn out to be the full version of the facts. This should be avoided.
Changing versions can be avoided by engaging the right professionals, such as those at Unicus Tax Specialists SA, from the earliest possible point of a dispute – ideally at the time SARS issues its letter of audit findings.
Understand SARS burden of proof in relation to USP
In the case under consideration, SARS argued for an increase in the understatement penalty from 25% (reasonable care not taken in completing a return) to 100% (gross negligence). SARS’ grounds: the taxpayer changed his version of events.
The court made swift work of rejecting this argument on the basis that SARS did not rely on gross negligence when raising the assessments. What this means is that SARS cannot rely on events post the raising of an assessment to warrant some form of adjustment to the penalty.
Indeed, in my experience, SARS often seek to raise facts when the matter reaches litigation in support of their case on understatement penalties when either no facts have been previously advanced or difference facts were previously advanced.
This is typically indicative of (a) the fact that SARS did not, as required, have proper grounds for raising the assessment to understatement penalties (b) SARS did not actually establish the facts for the behaviour classification when they raised the assessment and at best, guessed (c) may in any event constitute an impressible new ground for their assessment if new facts are raised in their pleadings and (d) is likely to highlight serious breaches by SARS of sections 42 and 96 of the Tax Administration Act, 28 of 2011.
In my view and experience, most of SARS’ assessments to understatement penalties fall well short of having any chance of being upheld by a court. That does not mean they won’t impose it, and it doesn’t mean they won’t try to collect it. In fact, it takes the launching of objections and appeals, and often proceeding with the case all the way to litigation, before you see concessions or agreement by SARS about understatement penalties. Every time my office is engaged on a case involving an understatement penalty I wonder, how many taxpayers don’t know that they actually have a strong case on understatement penalties but just end up paying it just to avoid a fight with SARS because, after all “SARS is SARS and SARS must be right”. Suffice it to say they are not always right. My office’s 100% success rate in winning cases against SARS is testament to that fact.
Conclusion
These are important lessons that taxpayer D paid for. Don’t make the same mistakes. Get proper representation from tax dispute resolutions experts such as those at Unicus Tax Specialists SA.
