This article was first published in Business Day. The recent decision of the Supreme Court of Appeal (“SCA”) in the matter of SARS v Pretoria East Motors (Pty) Ltd (291/12)  ZASCA 91 is important insofar as it deals with SARS’s obligations when conducting a tax audit. (The SCA judgment by Ponnan JA was delivered on 12 June 2014).
The case involved a SARS Income Tax and VAT audit of Pretoria East Motors (Pty) Ltd (“Pretoria East”), an authorised dealer on behalf of Toyota South Africa (Toyota SA). Pretoria East conducted business as a car dealership in Pretoria, selling new and used vehicles. During 2003 SARS officials conducted a detailed audit of the taxpayer’s tax affairs for the 2000 – 2004 years of assessment. Upon conclusion, additional Income Tax and VAT assessments were raised, including penalties at the maximum rate of 200 per cent.
The taxpayer’s accounting system was a customised system, installed not by the taxpayer but by Toyota SA. It not only reflected the taxpayer’s financial position, but also provided statistical information to Toyota SA to manage the complexities inherent in the taxpayer financing its operations under a floor plan agreement with Toyota Financial Services (Pty) Ltd. One of the system’s peculiarities was that some purely internal transactions were reflected as “sales” on the system. The accounting system could therefore be misleading, if not properly understood. (Evidence was that: “It is a very complicated system that Toyota South Africa has got which requires substantially more information that you would normally have in an accounting system.”)
The SCA Judge Ponnan first dealt with the onus under sec 82 of the Income Tax Act. The onus was on Pretoria East to show on a preponderance of probability that the decisions of SARS against which it appealed were wrong (CIR v SA Mutual Unit Trust Management Co Ltd 1990 (4) SA 529 (A) at 538D).
SARS raised additional assessments on the basis of information in the taxpayer’s own records. Basically, the SARS auditor examined the Pretoria East accounts and, where she found a discrepancy that she did not understand and for which, in her view, no adequate explanation was furnished, she simply raised an assessment to additional tax - either Income Tax or VAT or, in some instances, both.
The SCA pointed out the following:
The upshot was that the SCA ordered SARS to pay the taxpayer’s costs (two counsel) in the SCA.
The Tax Administration Act, No 28 of 2011 (“the TAA”) provides that SARS should, ten days prior to commencing a field audit, provide the taxpayer with notice of said audit. The notice “…must … indicate the initial basis and scope of the audit or investigation.” (sec 48(2)(b))
If one reads the above-mentioned section in conjunction with the Pretoria East case, the following conclusions could be drawn regarding the manner in which tax audits should be undertaken by SARS:
In overseas jurisdictions it is said that revenue authority auditors should have an understanding of “commerciality”. An example can be found in the Australian Tax Office (“ATO”) Guidelines on information-gathering. It states as follows under the heading “Understanding your circumstances”:
“Our information gathering helps us to understand your circumstances and activities. If you own a business, we seek to develop our understanding of it by obtaining information, including:
And at the audit stage:
“When collecting information for an audit, we will generally have more contact with you and spend time at your premises to examine documents, record your processes and discuss issues with your key personnel. We need to gather sufficient information to either establish our view and support that position or determine that no further action is required.”
Had the SARS auditor as part of her Pretoria East audit approached the matter in line with the ATO guidance above, she might have been spared the SCA’s censure.
Read in conjunction with the TAA, the Pretoria East judgment is therefore helpful as it gives some indication regarding the obligations and responsibilities of SARS auditors when conducting tax audits.
Should a taxpayer facing a SARS audit feel that there might be misconceptions about its business operations, or that the auditors do not understand the business, they should invite the SARS auditors e.g. to physically inspect the operations and / or provide them with a “walk-through” of any relevant system, etc. Such invitation should be in writing and, should the taxpayer’s attempts to explain the “commerciality" of its business operations be rebuffed, its efforts should be formally recorded so that same can be available in subsequent proceedings.
In the Pretoria East case that stood the taxpayer in good stead (ten years later) in the hearing before the SCA.
This article was first published in Business Day.
KPMG has launched a state of the art digital platform that enhances your experience and provides improved access to our content and our people, whatever device you are on.