The High Court handed down judgment in the matter between I-CAT International Consulting (Pty) Ltd v CSARS [1] recently, in which the court had to determine whether an assessment had become prescribed in terms of the Tax Administration Act, 28 of 2011 (“the TAA”).
This followed consequently upon an application brought by the taxpayer to have a decision by SARS not to allow a reduced assessment request in terms of section 93(1)(d) of the TAA reviewed and set aside. The taxpayer’s reduced assessment request related to the taxpayer’s 2015 assessment. SARS refused the request on the basis that the 2015 assessment sought to be altered by the taxpayer was older than three years and has prescribed.
The question then: was SARS correct in its conclusion that the assessment has prescribed?
To answer this question, the court looked at the exceptions to prescription – those contained in section 99(2) of the TAA. If there is an exception in section 99(2) that applies in this case, then SARS’ conclusion is incorrect, and they must reconsider their decision to decline the section 93(1)(d) request. The court found in favour of the taxpayer and ordered SARS to reconsider its decision.
The taxpayer placed reliance on a particular exception in section 99(2), being section 99(2)(d)(i) of the TAA. That provision reads along the lines that an assessment does not prescribe if that assessment needs to be altered to give effect to the resolution of a dispute in terms of Chapter 9 of the TAA.
For those who understand section 93(1)(d) and the remedy of objection and appeal as detailed in chapter 9, it beggars’ belief that a taxpayer can succeed with a 93(1)(d) review application on the basis of a chapter 9 related exception. Chapter 9 and section 93(1)(d) are two very distinct and very different processes completely unrelated to each other. Whilst there is a link between 99(2)(d)(i) and section 93, that link is with 93(1)(a), (b) and (c) and certainly not to section 93(1)(d).
But allow me to explain my understanding of the court’s logic in arriving at its conclusion. Whereafter I shall illustrate that while the conclusion is correct, the rationale for the conclusion is wrong, with respect.
The taxpayer had entered into a chapter 9 dispute with SARS in respect of its 2014 year of assessment (yes, you read that correctly – 2014, not 2015). The dispute in 2014 revolved around the deductibility of an expense for income tax purposes (“the 2014 expense”). The taxpayer argued that the 2014 expense was deductible, and SARS argued it was not. Ultimately, though, that dispute was settled presumably along the lines that a portion of the 2014 expense is deductible in 2014 and another portion of the expense was incurred in a later year of assessment (2015), but the deductibility/otherwise thereof (the portion incurred in 2015) fell outside the scope of the dispute (being a different year of assessment to the one under chapter 9 dispute).
The High Court effectively held, on my reading of the judgement, that the 2015 assessment does not prescribe because there was a chapter 9 dispute in 2014 that has been resolved and that the 2015 assessment can be altered post prescription because doing so will give effect to a dispute resolved on 2014 in terms of section 99(1)(d)(i). With respect, that makes no sense, whatsoever.
The fact is, there was no chapter 9 dispute in 2015. A chapter 9 dispute commences with an objection in terms of section 104 of the TAA to, insofar relevant here, an assessment. There was, on my reading of the facts, no objection in 2015. It is also worth stating that there is also rather a big difference between a hypothetical chapter 9 objection and a chapter 9 objection. The one is actually an objection in terms of chapter 9, and the other one is a figment of someone’s imagination.
Also, if there was an objection in 2015 the taxpayer would then never have had to rely on section 93(1)(d) to get the 2015 assessment reduced – they would have relied on section 93(1)(a) (or (b) or (c)) if that objection was allowed (and the dispute resolved in terms of chapter 9) to seek a reduced assessment on 2015. Absent an actual chapter 9 dispute (as opposed to an imaginary one) on the right year of assessment, section 99(2)(d)(i) simply cannot apply to prevent prescription.
However, it so happened that SARS, at one stage during the 2014 chapter 9 dispute process, argued that a portion of the 2014 expense was incurred in 2015. It also so happens that this argument was raised before the 2015 assessment was older than three years. Enter then section 99(2)(d)(iii) of the TAA. That section provides that if SARS becomes aware of a readily apparent undisputed error in an assessment before the assessment is, insofar relevant here, older than three years, then it does not prescribe. This is the exception that ought to, in my view, have led to the conclusion that the 2015 assessment did not prescribe. Not section 99(2)(d)(i).
What is fascinating, though is that the request for reduced assessment was declined on the basis of prescription in the first place.
How does one effectively argue that an expense (or portion thereof) is deductible in a later year of assessment and effectively later deny that it is so deductible in that later year of assessment? Allow me to explain why I am saying this.
In 2014, SARS said the expense is deductible but not all of it on the basis of the year of assessment in which the expense is incurred. It seemingly takes issue only with the year of assessment – not the deductibility thereof. The effective admission as to deductibility in a later year of assessment when it was obviously not claimed by the taxpayer in that later year means you must be aware of the mistake in the assessment for that later year of assessment. To deny this (even under the guise of prescription) seems almost ridiculous.
Unless, of course, one interprets section 99(2)(d)(iii) as meaning the taxpayer must have actually applied for a reduced assessment before the assessment has prescribed for section 99(2)(d)(iii) to be applicable. Stated differently, if section 99(2)(d)(iii) must be interpreted to mean that SARS can only act under section 93(1)(d) post-prescription if the taxpayer formally filed a reduced assessment request before the assessment prescribes, then SARS’ defence on prescription in this case would make sense. That this is so follows from the fact that no formal section 93(1)(d) request seems to have been made by I-CAT before the assessment prescribed. On this interpretation, then SARS hands would have been tied, so to speak. Even if they believe the expense is deductible in 2015, they cannot allow it post-prescription, or so the argument would go.
Indeed, in my experience, I have encountered this interpretation of section 99(2)(d)(iii). However, it is submitted that the interpretation is incorrect. Unlike the case of chapter 9 disputes, there is no prescribed process nor any prescribed form to ask for a reduced assessment under section 93(1)(d). So, for argument’s sake, if I accept a settlement under the understanding that 2015’s expenses are understated and must be increased then why can I not be said to have applied for a reduced assessment in doing so? Further still, as was held by the Court in Rampersadh and Another v CSARS[2], SARS can act unliterary under section 93(1)(d) without the taxpayer even asking for a reduced assessment.
It is submitted that if SARS is aware of the error (regardless of by what means SARS become aware of the error), they can (and one could argue they must – as was also held by the court in the Ramphersadh case) then act under section 93(1)(d) and if that awareness comes about before prescription, then prescription does not tie SARS’ hands and they can proceed to reduce the assessment post prescription.
Unless SARS argues that they were only aware of the expense being incurred in 2015 and not that it was deductible. To incur an expense is indeed only one requirement for deductibility, and so SARS could well argue that, at best, they were aware that the expense was incurred in 2015 but not that it was in fact, deductible. Bear in mind that it is the taxpayer who must, in terms of section 102 of the TAA, prove that an expense is deductible. Again, on this approach, SARS’ hands would be tied, so to speak, and they would not be able to act post-prescription because they were not aware of a readily apparent undisputed error in the 2015 year of assessment.
Of course, one might argue that it is highly likely that if it is the same expense, incurred for the same reason, by the same taxpayer just in a different year of assessment than 2014 (where SARS agreed it is deductible), then it will also be deductible in 2015. Indeed. However, these are assumptions based on probabilities. SARS arguably cannot act under section 93(1)(d) on the basis of assumptions and probabilities.
It does, however, seem likely, though from the facts that SARS must have known the expense was deductible in 2015 (and not only that it was simply incurred in 2015). To raise prescription as a defence in this case seems to be based on overly prudent or too narrow an interpretation of the provisions of the TAA. I would like to believe that raising prescription in this case as a defence is not a matter of tactics to avoid allowing what seems to be obviously allowable (even post 3 years).
The above goes to show how intricate the provisions of the TAA are and the critical role they play in the resolution of tax disputes. Still, though, I cannot believe that this case went all the way to the High Court when, really, on the proper interpretation of the provisions of the TAA, the reduced assessment request ought to have, in my view, been allowed in the first place.
It would be interesting to see if SARS takes this judgment on appeal. Doing so is likely, in my view, to also bring the interpretation of section 99(2)(d)(iii) into question. Clarity on that provision would be most welcome. Not taking it on appeal opens the door in certain cases for argument that where an issue in one year of dispute also relates to another year, that other year is also shielded from prescription despite the fact that no actual chapter 9 dispute was launched on that other year. Bear in mind that such arguments could also favour SARS…
[1] Pretoria (Case number: 41667/2021), 24 April 2023
[2] [2018] ZAKZPHC 36.
