In a case heard by the High Court recently, one of the issues considered was the meaning of the term “grounds for assessment” for the purposes of section 42(2)(b) of the Tax Administration Act, 28 of 2011 (“the TAA”).
The background to this issue is briefly that SARS issued a notice to the taxpayer in terms of section 80J of the Income Tax Act, 58 of 1962 (“the ITA”) informing the taxpayer of the reasons for its proposal to invoke the GAAR and proceeded, after the taxpayer’s response thereto, to raise their assessment.
The taxpayer complained that SARS denied the taxpayer the right to be heard before the assessment was raised because SARS did not issue a document referred to in section 42(2)(b) of the TAA before the assessment was raised. As a reminder, section 42(2)(b) of the TAA states that SARS must, following an audit, give the taxpayer a document if SARS wants to make material adjustment and that document must set out the grounds for SARS’ proposed assessment. SARS must then give the taxpayer an opportunity to respond to the proposed assessment before SARS issues the assessment.
SARS effectively argued that the notice issued in terms of section 80J of the ITA was also the notice contemplated in section 42(2)(b) of the TAA and therefore there was no breach of the taxpayer’s right to be heard before the assessment was raised.
The taxpayer’s response thereto was, amongst others, that the section 80J notice did not contain the amounts of any proposed assessment and that section 42(2)(b) requires of SARS to include the amounts. Therefore, so the argument went, the section 80J ITA notice cannot serve as the section 42(2)(b) TAA notice.
The question then being: does section 42(2)(b) require of SARS to give the amounts for their proposed assessment?
Ther court says it does not. The reason for this conclusion, the court held, is that if the legislature wanted SARS to include amounts in their section 42(2)(b) TAA notice as part of the “grounds for assessment”, the legislature would have explicitly said so. That this is the case is especially true because in section 96(1) of the TAA, the legislature refers to “amounts” specifically and in 96(2) to “grounds for assessment” specifically.
This conclusion has sparked some initial mixed reaction, at least in our office.
Initial argument against:
Section 42(2)(b) refers to “grounds for the proposed assessment”. Indeed, as was held by the court, “grounds” here refer to the facts and the law for the proposed assessment. However, tax law, insofar as it leads to determination of a tax liability (or “assessment” as defined in section 1 of the TAA) manifests itself in amounts. Without amounts, there is no determination of a tax liability and therefore no proposed assessment. Without a proposed assessment, what “grounds” can SARS possibly give in a section 42(2)(b) TAA notice?
If SARS, for example, informs a taxpayer in a section 80J ITA notice that SARS intends to invoke the GAAR because the taxpayer impermissibly avoided tax because of this and that fact without giving the numbers that results from the application of the GAAR, the grounds given are not grounds for any determination of a tax liability (i.e. ‘assessment’ as defined in section of the TAA). Rather, they are grounds for the decision to invoke the GAAR.
A decision to invoke the GAAR is not in and of itself a determination of a tax liability until such time as the GAAR is applied and it manifests itself in numbers that determine a tax liability. When considered in this vein, grounds without numbers are not grounds for an assessment. Rather, they are grounds for something else that may lead to the determination of a tax liability, or ‘assessment’.
Initial arguments for:
The argument for is that section 42(2)(b) requires only of SARS to inform the taxpayer of the basis for what may possibly lead to an assessment, hence the word “proposed” in “proposed assessment”. On this interpretation, section 42(2)(b) does not require of SARS to inform the taxpayer of the proposed liability, only of the facts and the law for what may lead to a liability. To argue that SARS must always give the numbers because “assessments” are always numbers effectively means one must interpret section 42(2)(b) of the TAA as meaning SARS must not only provide the grounds for the proposed assessment but also the actual proposed assessment. If that is what the legislature intended, the legislature would have said that SARS must provide the grounds for the proposed assessment and the proposed assessment. But alas, it refers only to the grounds for the proposed assessment and not also the proposed assessment.
The final position
Section 42(2)(b) of the TAA must be interpreted in context and for purpose.
In ITC 1921, the Tax Court held that: “Sections 40 and 42 of the Tax Administration Act No. 28 of 2011 … clearly give effect to and echo the administrative justice provisions set out in section 33 of the Constitution”. Enough said then on purpose, for now.
As to context: section 40 of the TAA entitles SARS to conduct an audit. Section 92 of the TAA gives SARS the right to raise additional assessments. As a reminder, section 92 provides that SARS can issue an assessment to correct prejudice which result from SARS’ satisfaction that an assessment does not correctly reflect the application of an underlying tax Act. In short, that means SARS can change the numbers from what was previously assessed to what they believe should be assessed. SARS typically establishes the required satisfaction during an audit.
In Brits and Others v CSARS, the court held that once the assessment is done, the [SARS] may insist on payment of the assessed amount.” It is the raising of the assessment (the amounts or the determination) and notice thereof to the taxpayer that adversely affects the taxpayer.
Section 42 of the TAA clearly applies before the assessment is raised. Why? Obviously, to give the taxpayer a chance to be heard before the assessment is raised so that the taxpayer can explain why the proposed determination is wrong or not entirely correct, before SARS may insist on payment and therefore before SARS takes actions that will adversely affect the taxpayer (i.e. raising the assessment).
It is submitted that the facts of each case will dictate whether the inclusion of numbers or amounts in a section 42(2)(b) document is required in order to give effect to the taxpayer’s right to be heard before the assessment is raised.
If SARS, for example, in a section 80J ITA notice (or a 42(2)(b) TAA notice for that matter) indicates that SARS intends to treat the capital loss claimed on the sale of X shares as a capital loss on the write off of a Y loan and apply paragraph 56 of the 8th Schedule to disregard the loss on the Y loan write off , the taxpayer can clearly see what the grounds for the proposed assessment are and can even deduce what the determined tax liability is going to be despite the fact that no numbers/amounts are provided. The taxpayer has a clear position of what it is SARS intends on doing and why. The taxpayer is in a position to illustrate, in response to such a section 42(2)(b) TAA notice, why, for example, paragraph 56 should not apply or why, for example, SARS is thinking of the wrong capital loss etc. The absence of numbers from the notice arguably does not negatively affect the taxpayer’s right to show the proposed assessment to be wrong.
On the other hand, if SARS, for example notifies the taxpayer that SARS intends to include an amount in gross income on the basis it was received and intends to raise an assessment accordingly then the taxpayer is effectively deprived of the right to be heard before the assessment is raised because there is no amount. How does the taxpayer respond to such a vague statement? Which amount is SARS referring to? Depending on the amount, it could in fact be exempt dividends meaning physical receipt does not translate into taxable income. It could be amounts not beneficially received albeit physically received etc.
In the two examples above, it comes down to whether the inclusion of numbers/amounts in the section 42(2)(b) TAA notice puts the taxpayer in a position that it can respond to SARS’ proposed assessment in a meaningful and constructive way that might lead to taxpayer illustrating why, in the taxpayer’s view, the proposed assessment ought not to be raised. Perhaps that’s why the court concludes that amounts are not necessarily required in a section 42(2)(b) notice.
Whether or not the inclusion of amounts in the notice issued to the taxpayer in the case under consideration was required to give effect to the taxpayer’s right to be heard is not clear from the judgement. Suffice it to say that we agree that amounts are not necessarily required in a section 42(2)(b) notice.
As regards the basis for the court’s conclusion (i.e. that section 96 refers to ‘amounts’ and ‘grounds’ and section 42 only to ‘grounds’), it is respectfully submitted that we are not necessarily in agreement. As has been illustrated above, the mere fact that there is a distinction between “grounds” and “amounts” in section 96 of the TAA does not mean the legislature intended to require amounts only to be reflected in the notice of assessment. If that were the case it may, in some cases, result in taxpayers effectively being deprived of the right to be heard before the assessment is raised which, it is submitted, will defeat the purpose of section 42(2)(b) of the TAA.
 Trustees of the CC Share Trust and Others v Commissioner for the South African Revenue Service (38211/21)  ZAGPPHC 597 (24 July 2023)
 Or at least, not necessarily.
 Natal Joint Municipal Pension Fund v Endumeni Municipality  ZASCA 13 ;  All SA 262 (SCA).
 81 SATC 373
 (2017/44380)  ZAGPJHC (28 November 2017) at para. 11
 Top Watch (Pty) Ltd v Commissioner of the South African Revenue Service (2017/4557)  ZAGPJHC 466 (11 June 2018) and Singh v Commissioner for the South African Revenue Service (500/2001)  ZASCA 31 (31 March 2003)
 Evident from the word “proposed” in “proposed assessment” as used in section 42(2)(b) of the TAA.