For a video explanation of this judgment see 3 parts below:
According to a 2024 judgment from the Western Cape Tax Court (“the 2024 judgment”)[1], SARS acted incorrectly in lifting the veil of prescription to raise a tax liability on an old tax year. The judgment echoes views I have expressed many times before (see, for example, those expressed in a 2020 article here and in my book Practical Guide to Handling Tax Disputes). Indeed, in my experience, this incorrect approach to lifting the veil of prescription is not an isolated case. In fact, in my view (and those of the Western Cape Tax Court) and in my experience, the veil of prescription is more often incorrectly lifted than correctly.
Section 99 of the Tax Administration Act, 2011 deals with prescription. In principle, the section creates a general rule that prevents SARS from re-opening old assessments. But, as with most tax rules, there are exceptions. Indeed, dishonest taxpayers cannot hide behind prescription to avoid paying taxes.
The trouble, in the 2024 judgment and indeed in practice, is SARS’ interpretation of the exception to the general rule. You see, SARS, often, in my experience (and as was the case in the 2024 judgment), takes the view that a taxpayer who makes a mistake in a tax return is automatically dishonest. Keen readers will immediately realise that that logic does not stack up. Indeed, the 2024 judgment confirms it does not.
The reality is that an assessment can be wrong and still be protected by prescription. This is something SARS seems to be refusing to accept by taking the position that if they find something wrong on an assessment, then the taxpayer is automatically guilty of some form of dishonesty (their favourite being “misrepresentation”).
The 2024 judgment confirms my views that SARS must objectively prove the existence of dishonesty and the mere fact that an assessment is incorrect, does not mean that the taxpayer was dishonest/misrepresented. Proof of the objective existence of the misconduct and also, proof that the misconduct caused SARS not to assess the taxpayer correctly the first time around is what is required. And it deserves mentioning that an assumption of misconduct falls well short.
It is typical, in my experience, that SARS will, when finalising an audit on a prescribed tax year, assume the misrepresentation and then (much, much later) during litigation phase, seek to plead the facts on which reliance is placed for what was, at the time the assessment was raised, an assumption (at best) of misconduct. This approach flies in the face of a taxpayer’s Constitutional right to administrative action that is lawful, reasonable and procedurally fair. One only needs to look at the provisions of section 96 and 42 of the Tax Administration Act which, for example, requires of SARS to provide the facts and the law (or “grounds for assessment”) for their assessments in certain cases (which is pretty much always when they are lifting prescription) and even already before raising the assessment.
If the objective existence of misconduct is what is required in order for SARS to lift the veil of prescription (which it is according to me and the 2024 judgment) then the objective existence thereof is what must be established at the time of raising the assessment. Not, say, 5 years later when we are going on trial. Let me explain differently: it is not, in my view, competent for SARS to assume the existence of the misconduct at the time of raising the assessment and to try to prove it later when called upon by a court to do so. Such an approach would be nothing short of an abuse of power.
Now, one might reasonably ask: how would you know if SARS is assuming or whether they have actually done their job to establish the objective existence of the misconduct at the time of raising the assessment? Look at the grounds for their assessment which the legislature has forced SARS to provide in the notice of assessment under section 96 of the Tax Administration Act and indeed even before the assessment is raised in terms section 42. Too often, in my view, you will find vague and completely unsubstantiated allegations of “misconduct’ in the grounds for assessment. My personal favourite being: “I can make an audit adjustment, therefore you are guilty of misrepresentation”. It is exactly this approach that the 2024 judgment has called out for being inconsistent with the law. Something I have been saying for years.
I would venture to guess that there are many, many other cases where this approach has been incorrectly adopted. One would think that this judgment will put a stop to it and that SARS will repent on all the other cases (which, I have been told to say, I assume exists) where they may not have made decisions in line with the approach adopted by the tax court in the 2024 judgment. But then, SARS has stated before in relation to another tax court judgment they didn’t like “SARS … will not follow the application of the law in this [tax court] judgment, which it is entitled to do as tax court judgments … have no binding effect”.[2]To be fair, it is factually correct to say tax court judgments do not have binding effect.
Maybe SARS will appeal the 2024 judgment. Perhaps that’s why they waited this long to make the judgment available on their website. For reference, a judgment handed down by the same tax court in another matter (the Dr x Case – see my article on that one here) two days before the one I discuss in this article was available long before the one I am discussing in this article. Maybe that’s because the tax court favoured SARS in that other one?
If you are facing a dispute with SARS on a prescribed assessment, know this:
- chances are this 2024 judgment suggest they may have a weak case on prescription (depending on the facts of your case);
- but don’t expect them to know or accept it.
In my experience, defences based on prescription are only properly or seriously considered by SARS late in the dispute process (typically at litigation stage) but, given the judgment handed down by the same court in the DR X case (supra) it is crucial you properly argue the facts and the law in your objection already – lest your objection gets invalidated by SARS and SARS never being called to prove their case.
Unicus Tax are dispute resolution experts, known for incredible success rates in disputes against SARS. SARS is no push over – you need a strong partner. That’s us (just in case it wasn’t clear).
For those interested in a more detailed analysis of the 2024 judgment (and others), visit the Unicus Tax YouTube channel where I discuss the detail of the judgment on prescription and indeed the merits of the case. They are free to watch.
[1] Pear (Pty) Ltd vs CSARS (ITC146080) (Western Cape Tax Court) (5 December 2024)
[2] SARS’ guide to Understatement Penalties at footnote 70.
