Most auditors and accountants know that SARS can open up assessments after they have prescribed, under certain circumstances – fraud, misrepresentation or non-disclosure of material fact. It is our experience, as tax dispute resolution experts, that when it comes to misrepresentation, SARS seem to believe a taxpayer misrepresented something when they can make an audit finding. For example, if SARS believes the taxpayer was not entitled to an expense that was claimed by the taxpayer, the taxpayer, according to SARS, automatically also misrepresented. Suffice it here to state that this is quite simply not correct.
Of course, if SARS then raises its assessment to disallow the expense, in my example, SARS will have to impose an understatement penalty. The penalty amount depends on how “naughty”/culpable SARS believes the taxpayer is for claiming an expense to which the taxpayer is not, according to SARS, entitled. These range from 10% for something called a “substantial understatement” to 200% for “intentional tax evasion”.
In practice, when one carefully reads SARS’ finalisation letters (as you must), you often find something along the lines of (and I am just sticking with my “expense example” above):
- The expense has been claimed, but the expense is not in the production of income and is not deductible;
- Claiming an expense that is not deductible is misrepresentation, so SARS will lift the veil of prescription;
- By claiming an expense which is not deductible, the taxpayer did not take reasonable care in completing their return, so a 25% understatement penalty is imposed.
If you read the above without noticing a major problem in SARS’s case, then this is one example where SARS has given your client a defense on a silver platter, but you are not seeing it. Allow us to explain.
To lift the veil of prescription, SARS, must, in this example, be able to prove (yes, SARS must prove it), that the taxpayer is guilty of misrepresentation and that the misrepresentation caused SARS not to assess the taxpayer correctly. That is a requirement in terms of section 99 of the Tax Administration Act, 28 of 2011 (“the TAA”) in order for SARS to lift the veil of prescription.
For them to raise an additional assessment to disallow the expense, they have to be satisfied that (but they don’t have to prove it), in this example, the expense claimed by the taxpayer is not allowable. That is a requirement in terms of section 92 of the TAA.
For them to impose an understatement penalty, they must prove that the taxpayer’s claiming of the expense was the result of the taxpayer not taking reasonable care when completing the return.
So then, SARS has to jump through four hoops, so to speak, for their additional assessment to “stick”. Hoop 1: they must believe the expense is not deductible. Hoop 2: they must prove that taxpayer’s claiming of the expense was caused by misrepresentation. Hoop 3: they must prove that misrepresentation caused SARS to assess the taxpayer incorrectly. Hoop 4: they must prove that the taxpayer did not take reasonable care in completing the return.
SARS, however raises the same basis for jumping through all four hoops: the expense is not deductible. That’s enough to jump through hoop 1, but what about 2, 3 and 4? By raising the same ground to jump through hoops 2, 3 and 4 SARS is effectively saying that because the expense is not deductible, the taxpayer automatically deceived SARS (misrepresented) and because the expense is not deductible the taxpayer automatically also did not take reasonable care in completing a return.
A person who deceitfully claims something they ought not to claim (i.e. the person misrepresents) also knew full well that the expense is in fact not deductible. They knew the expense is not claimable but claimed it anyway. They did not claim the deduction by mistake. Therefore, to argue misrepresentation and “reasonable care not taken in completing a return” on the same set of facts makes no sense.
In our view, the penalty classification made by SARS on post-prescription assessments often (but not always) betrays them on prescription. The relevance of that: the assessment can’t stick.
Keen-minded readers might point out that SARS can increase the penalty. Sure, but only in certain limited instances. If the dispute were to proceed to tax court, they would have to specifically argue in their pleadings for an increase in the penalty (Purlish case) and further still, doing so may find them wanting the principle that they must have proper grounds for raising an assessment and that SARS must be satisfied of misrepresentation at time of raising their assessment – not years later when we start exchanging pleadings. SARS could then, to avoid the above, allow the objection, reduce the assessment and raise a new additional assessment. Sure. Your defense will then just include section 99(1)(e) – an assessment made to give effect to a dispute resolved prescribes on issue.
Unicus Tax Specialists SA is a niche, tax exclusive advisory firm, meaning we don’t do accounting, auditing or offer any other service (in fact we don’t even do any tax compliance work).
Our specialty practice area is tax dispute resolution. Our team is headed by Nico Theron (Chartered Tax Advisor (SA)), author of Lexis Nexis’ Practical Guide to Handling Tax Disputes, Chairman of the South African Institute of Tax Professionals Tax Administration Work Group, guest lecturer on tax dispute resolution at post grad level at UP and WITS, head lecturer on The Tax Faculty’s dispute resolution course and founder of Unicus Tax Academy.
Unicus Tax Specialists SA, has, at the time of writing, always been able to secure a satisfactory outcome for our clients in their disputes with SARS, thereby saving our clients hundreds of millions of rands in taxes, penalties and interest.
Identifying issues such as those explained herein is part of what gives our clients a much needed edge in a fight with SARS. Partnering with us means your clients can also benefit from our unique set of skills.
