Clampdown on vague and unsupported objections to tax assessments

A taxpayer recently learned an expensive lesson in tax court: The devil is certainly in the detail when objecting to an assessment raised by the South African Revenue Service (Sars). 

The taxpayer’s objection was not only invalidated twice by Sars, but the Western Cape Tax Court also dismissed with costs his application for a declaratory order that his invalidated objection was, in fact, valid. 

The taxpayer, a specialist neurologist referred to as Dr X in the court papers, and his practice have a total tax and understatement penalty liability of more than R87 million. 

Dr X came under scrutiny in 2021 when Sars audited his affairs and raised assessments for personal income tax, value-added tax (Vat) and donations tax spanning four years. The understatement penalties on Vat alone were R6.5 million.

Dr X’s objections to the assessments were invalidated on the ground that they were in breach of Rule 7(2) of the tax court, which sets out the requirements for a valid objection. 

Nico Theron, founder of Unicus Tax Specialists, says it is the first case to his knowledge that investigates the details of the specific rule. 

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Vague and unsupported

Sars has recently been clamping down on “vague and unsupported” objections, he adds.

The objection must be submitted on a prescribed form. It must set out the grounds for the objection “in detail” and include the assessed amount being objected to. 

“The detail that goes into the objection is not there to look impressive, it is there to protect the taxpayer’s rights and to avoid a fate similar to the one suffered by Dr X and his practice,” says Theron. 

It was clear from the judgment that Dr X gave Sars the runaround during the audit process. He initially refused Sars officials access to his premises, he refused officials from Sars’s electronic forensic services department access to his accounting and operating systems, and he did not submit the requested documentation on time or at all during the audit.

In the objection, he only submitted documentation that he felt necessary to substantiate his objection. Theron says the judgment wants to stop the common practice of “vague and unsupported objections”. 

“According to the Dr X case, vague and unsupported objections are invalid,” Theron wrote in an analysis of the case. “Not disallowed. Invalid.”

Judge Sheldon Magardie was scathing in his judgment. 

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The detail

The overarching requirement of “detail” in the taxpayer’s grounds of objection and the requirement that the taxpayer must “specify (and) in detail” the part or specific amount of the assessment objected to makes it clear that a “globular, vague and unspecific” objection does not pass muster as a valid objection in terms of the rule. 

“In my view, all of these requirements – specificity in the formulation of the grounds of objection and submission of documents required to substantiate the objection – are directed at ensuring that Sars is placed in a position where it is able to properly determine the merits of the objection itself and whether to allow or disallow the objection in whole or partially,” says Magardie.

An objection that is valid as a consequence of meeting the specificity requirements of the rules can be rationally determined on its substantive merits. An objection that is vague, imprecise, lacks detail, and does not submit the documents required to substantiate the grounds of objection that it advances cannot. 

“A taxpayer is in my view not entitled to play possum in an objection to a tax assessment. Were it otherwise, it would be all too easy for vague and generalized objections to pass the hurdle established by rule 7(2)(b). This would defeat the purposes of an effective tax dispute resolution system and with it, the efficient collection of taxes due to the fiscus by taxpayers following an assessment by Sars.” 

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Documentary proof

An example of vagueness and lack of documentary proof was Dr X’s objection to an assessment of donations tax. The doctor paid his son amounts of more than R1.9 million.  

The doctor claimed the payments were for his son’s living and study expenses.

“The lack of specificity and absence of supporting documentation relating to what was alleged to be bona fide maintenance payments to the taxpayers son, is perplexing.”

Judge Magardie says it would have been reasonable to expect that in the taxpayer’s proverbial second bite at the cherry in the second objection, he would provide more detail and documentary evidence. However, there was no proof of his son’s university registration or a tuition fee statement in relation to study expenses. 

Sars also raised income tax assessments in respect of “unexplained deposits” of some R36 million into Dr X’s bank account. In the objection, he claimed that the deposits were previously declared, yet he offered no evidence to prove it. 

Theron says it is “crucially important” to ensure compliance with Rule 7(2). To do so will require a comprehensive understanding of the substantive law that forms the subject matter of a dispute, the procedural law that governs tax disputes, what exactly must be proven, and what a piece of evidence actually proves. 

This article was republished from Moneyweb. Read the original here.