Sars must present facts to overcome prescription hurdle

The prescription provision means that taxpayers enjoy statutory immunity from additional income tax assessments once three years have expired from the date of the original assessment.

However, it appears the South African Revenue Service (Sars) sometimes pushes the envelope.

In a recent case brought by a citrus farmer, the boundaries were set in place again. The court ordered Sars to alter its additional assessment.

Acting Judge Michael Janisch upheld Pear Limited’s appeal before the tax court in the Western Cape against an additional assessment of almost R3 million raised against the company’s 2017 tax return.

Unicus Tax Specialists founder Nico Theron says it is not easy to overcome the prescription hurdle – and the veil of prescription is more often incorrectly lifted than correctly.

“Taxpayers will do well to check if Sars is doing it lawfully as opposed to just paying the bill,” he says.

“In my experience, chances are they may be doing it incorrectly and you may ultimately not have to pay the bill.”

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At issue – cover for citrus exports

The case came about after Sars disallowed an expense of R10 million for an insurance payment in the event that entire consignments of citrus were rejected by export markets.

The presence of citrus black spot and false codling moth, which lays its eggs in citrus, is often given as a reason to reject South African citrus.

The CEO testified that it was not sustainable to keep using the company’s own reserves to cover the risks.

She also acknowledged that the tax deductibility of the premium was “an attractive feature”.

Between the inception of the policy and the end of the company’s year of assessment, the insurer had credited the “experience account” with an amount of R1 197.52, reflected as “notional interest”.

The company cancelled the insurance in June 2021 because it had a small harvest and needed the funds.

The amount that was paid to the company – slightly more than R11.3 million – was incorporated in the taxable income of the 2022 year of assessment.

However, the amount of R1 197 in respect of the notional interest in 2017, as well as the interest in later years, was not included in the tax returns.

The company accepted that it was liable for tax on these interest amounts.

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Query, audit, objection disallowed

Sars queried the huge difference between insurance payments between 2016 and 2017.

The company’s auditors supplied Sars with the reasoning behind the difference and submitted supporting documentation.

Sars made no adjustment to the tax return for the 2017 tax period – until 28 December 2020 when the company was alerted to a notification of a corporate income tax audit.

This happened 10 days after the expiry of a three-year period from the date of the original assessment for 2017.

Despite the prescription, Pear Limited received an additional assessment in May 2021, which it objected to on the basis that the prescription provision applied. The objection was disallowed.

Sars reiterated that it could reopen a prescribed assessment because the failure to assess the full amount was due to the company’s failure to declare the notional interest of R1 197 in the 2017 return.

This, according to Sars, amounted to a “misrepresentation”.

Janisch said this would basically mean every error that is later identified in the return is linked to the original non-assessment of the correct amount of tax.

If that was enough to trigger Section 99(2) of the Tax Administration Act (where the full amount of tax chargeable was not assessed due to fraud or misrepresentation or non-disclosure of material facts), it would mean that every taxpayer that objectively “got it wrong” would be precluded from relying on prescription.

Section 99(1), which aims to create finality in tax assessments, would be stripped of operative effect.

“That is clearly not what the provision intends,” says Janisch in his judgment.

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Determining ‘misrepresentation’

Janisch said if the company had claimed the insurance payment as a deduction under the heading “lease payments” or “maintenance”, there would be no difficulty in concluding that there was a misrepresentation of fact.

The judge noted that if, on the day after the policy was taken out, the company lost fruit in a storm, the insured orchards would have been covered.

The fact that the R1 197 in respect of notional interest was not included in the return does constitute a non-disclosure.

“However, given the extremely small quantum of the amount, I do not consider that this can be treated as a non-disclosure of a material fact.”

Janisch ordered Sars to allow the full deduction of the insurance premium claimed but to exclude the notional interest component.

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Prescription protection

Theron says 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.”

His experience is that Sars will assume the misrepresentation and then during litigation try to plead the facts on what was actually an assumption (at best) of misconduct when it raised the additional assessment.

“This approach flies in the face of a taxpayer’s constitutional right to administrative action that is lawful, reasonable and procedurally fair.”

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