It ignored a franchise motor dealer’s method used to calculate taxes and then raising additional assessments and penalties of up to 200%.
The dealer, Pretoria East Motors, used a customised system supplied by the franchisor that provided taxation data and information for managing internal controls.
The system had a peculiar feature – it reflected some internal transactions as “sales”, which the dealer correctly ignored when calculating taxes.
But the SA Revenue Service (Sars) insisted on including these transactions as VATable supplies for income tax and VAT purposes.
Sars calculated its taxable amount based on what the system appeared to report, ignoring the facts behind the reports.
As a result, if the tax officials did not understand an entry or transaction, they raised an additional assessment.
Further, they ignored the taxpayer’s attempt to show Sars why its conclusion about the tax owed was wrong.
To add insult to injury, all the additional assessments raised were subject to penalties at the maximum rate of 200%, without any explanation why the taxpayer’s conduct was said to be dishonest or directed at the evasion of tax, which is the requirement for the maximum penalty.
Generally, taxpayers bear the burden of proof in tax disputes with the revenue service; it is up to the taxpayer to prove a claim, an exemption or nonliability.
The court accepted that the taxpayer bears the onus in any dispute with Sars, but held that this did not mean that Sars was free to adopt a passive attitude.
The court emphasised that “… the onus was on the taxpayer to show a preponderance of probability that the decisions of Sars … were wrong”.
The court however found that that was “not to suggest that Sars was free to simply adopt a supine attitude. It was bound before the appeal to set out the grounds for the disputed assessments and the taxpayer was obliged to respond with the grounds of appeal and these delineate the disputes between the parties.”
Thus, although the taxpayer bears the onus in tax matters, Sars is equally obliged to engage with the facts and verify the grounds on which an assessment is based.
The court also found that the raising of penalties with an additional assessment must be based on proper grounds.
Sars cannot ignore explanations or reasons from taxpayers and raise additional assessments and penalties without seeking to familiarise itself with and understand the taxpayer’s systems.
The conduct of the revenue service will only be considered administratively fair if the taxpayer is afforded this treatment.
If the revenue service officials are unable or unwilling to get to grips with the systems in operation, it doesn’t lie with them to impose tax as they see fit and leave it to the taxpayer to explain and justify the system in court.
Thus taxpayers must assert their rights before a dispute even reaches the tax court by requesting Sars to provide the grounds on which it is raising an additional assessment.
v Mutshinya and Wellsted work at the law firm Norton Rose Fulbright South Africa