Risks of tax return non-disclosure increased by Supreme Court of Appeal
A fundamental reason for the existence of the rules of “prescription” in South African tax law is to provide a taxpayer with certainty as regards its tax position. Under certain circumstances, SARS is barred from changing a favourable to an unfavourable assessment. In disputes, prescription is a powerful defence available to compliant taxpayers, allowing them to bring finality to their tax assessments. Whether the defence of prescription is available to a taxpayer is, inter alia, dependent upon disclosure in its annual tax return.
The importance of tax return disclosure was dealt with in quite some detail in the recent Supreme Court of Appeal decision in the matter of CSARS v Spur Group (Pty) Ltd. The court found against the Taxpayer both on the merits of the case, which related to the deductibility, in terms of section 11(a) read with section 23H of the Income Tax Act, 1962, of a contribution made to a share incentive trust, as well as in respect of the Taxpayer’s prescription defence. We will deal with this latter aspect of prescription in this article. We note that neither the Tax Court nor the majority decision of the High Court had to deal with the Taxpayer’s prescription defence as both those courts found in favour of the Taxpayer.
General prescription principles
Section 99 of the Tax Administration Act, 2011 deals with the period of limitations for the issuance of assessments (ie, replacing a favourable assessment with an unfavourable one).
More specifically, section 99(1) provides that the Commissioner may not make an assessment three years after the date of the original assessment by SARS. However, section 99(2)(a) provides that the Commissioner is not bound by the three-year period of limitation where “in the case of assessment by SARS, the fact that the full amount of tax chargeable was not assessed, was due to
(ii) misrepresentation; or
(iii) non-disclosure of material facts.” (our emphasis)
There are accordingly two requirements for the application of section 99(2)(a). Firstly, one of the listed behaviours must be present and secondly, such behaviour must have caused SARS not to assess correctly from the outset. SARS bears the onus to show that the original favourable assessment was the result of one or more of the listed behaviours at the time of the original assessment. This presupposes that the assessor in question, if they had the full and correct information, at the time of the issue of the original assessment, would have issued it on an unfavourable basis. The test is not whether the assessor would have revisited the original favourable assessment if it had the full information. To emphasise the point, nothing that happens after original assessment is relevant. In previous cases like Bosch, for example, it was necessary for the SARS to “go back in time” to the date of original assessment and give evidence that they would have assessed differently if proper disclosure had been made at the time of considering the return on which the assessment was based.
Arguably, the SCA has dramatically reinterpreted these rules in Spur.
The facts of the case
The additional assessments that the Commissioner made in 2015 were in respect of Spur’s 2005-2009 years of assessment, all of which were raised after the three-year period contemplated in section 99(1).
Spur raised the defence of prescription, however, the Commissioner averred that the amounts of tax chargeable in terms of the additional assessments were not so assessed by SARS in the 2005-2009 years of assessments due to misrepresentation and non-disclosure of material facts by Spur. In this regard, we quote the following extracts from the judgment which relate to the disclosures made by Spur:
“ It is common cause that Spur, in submitting its 2005 income tax return, (IT14), answered ‘no’ to the following questions:
‘Were any deductions limited in terms of s 23H?;
. . .
Did the company make a contribution to a trust?
. . .
Was the company party to the formation of a trust during the year?’
 In the 2006 income tax return, Spur answered ‘no’ to the question: ‘Were any deductions limited in terms of s 23H?’
 Lastly, in each of the 2005-2008 income tax returns, the amount of deductions claimed in respect of the contribution, which were limited by s 23H of the ITA, were disclosed by Spur under the category ‘other deductible items’ and not under the line item ‘prepaid expenditure (as limited by s 23H)’”.
Spur’s defence to the allegation of misrepresentation and non-disclosure of material facts was that the aforesaid statements were negligently and inadvertently made and that the Commissioner had failed to establish the requisite causal nexus. This excuse did not assist the taxpayer at all. It highlights the fact that there is no excuse for the non-disclosure, it is simply a question of fact, not of the taxpayer’s state of mind or blameworthiness in the incorrect disclosure.
The judgment included some interesting insights into the SARS audit process which, in our view, highlights the importance of the accuracy of tax return disclosure. This disclosure automatically alerts SARS as to whether further investigation or audit is required to be conducted, in which case SARS has the opportunity to re-assess timeously and similarly a taxpayer, who had made proper disclosure would then be able to validly rely on the prescription defence if the new assessment was not made within the three-year period.
With regard to the SARS auditing system, the court observed that a taxpayer’s return is initially accepted at face value and an assessment is issued accordingly, whereafter during the ensuing three years the return and assessment must be reconciled. In this regard, the SARS official in the case testified that the tax return contains specific questions which were inserted deliberately as so-called “triggers”. Depending on the manner in which the questions were answered by the taxpayers, a trigger could arise when a particular code is activated; further steps would then be taken and the matter could either be resolved at that stage or could proceed to an audit.
The Commissioner submitted that in this case a “yes” answer to the section 23H question, and to the question of whether a contribution was made to a trust, are risk factors which, according to the testimony, would have triggered a risk alert for SARS at the time when the returns were submitted for the relevant year of assessment. The court accepted this evidence.
We observe that there was no evidence mentioned that the trigger would have stopped the original face value assessment from being issued. Thus regardless of the trigger being activated, the original assessment face-value assessment might have been issued anyway. It might thus be an interesting argument for another day, whether SARS can discharge the onus of proof that the original assessment would have been issued on a different basis had SARS had full disclosure. (We do not have sufficient insight into SARS’ AI systems to comment further.) In any event, it also appears that no human being could be called upon to give evidence of the causation of the face value assessment, as this process is automated.
It is the disclosure in the tax return itself which would flag certain matters to SARS. The fact that supporting documents such as annual financial statements, for example, were submitted with a return would not remedy incorrect or misrepresented disclosure in the return as the AI only looks at the return. In this regard, the SARS official in the case testified that only the tax return, and not any supporting documents or schedules, is taken into account for purposes of issuing an original assessment, with the court commenting that “Clearly, the integrity of the SARS assessment process depends largely on the correctness of the information provided in the return, and on SARS’ ability to conduct audits of returns in the ensuing three-year period to ensure a proper tax treatment.”
This will cause some consternation to taxpayers and advisers who typically seek to supplement disclosure in the return with additional documents. Often, the way the questions are posed makes it difficult in practice to answer “yes” or “no”. Taxpayers may also have to make judgment calls which they explain by additional documentation. The court held that SARS was not alerted to the relevant facts in this matter due to misrepresentation and non-disclosure of material facts, even though it could have detected these facts from looking at the supporting documents. This meant that the Taxpayer could not rely on the defence of prescription.
The court concluded that:
“ Spur accepted that false statements were contained in the returns. Against that, it contended that scrutiny of the financial statements and a more alert auditing process would and should have ensured a proper assessment within the prescribed period. It overlooked the face value assessment process understandably undertaken by SARS. Audits are implemented because of triggers caused by specific answers in tax returns. If the questions that would give rise to the triggers are wrongly answered, as happened in this case, the matter may not come before an auditor within the three-year period, and the clarification questions will therefore never be asked.
 I should also add that as a matter of policy, a court would be loath to come to the assistance of a taxpayer that has made improper or untruthful disclosures in a return. Clearly, this would offend against the statutory imperative of having to make a full and proper disclosure in a tax return.”
In practice, Taxpayers are now more keenly aware of the risks of ticking the wrong box, and may well err in favour of answering “yes” to an ambiguous question, risking a possibly unnecessary audit, rather than an open-ended exposure to additional assessment without the benefit of the three-year bar. The difficulty of supplementing return disclosure to ensure a full and accurate tax return is now an open issue.
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