Tax disputes: test all grounds of objection

Melanie Harrison ENSafrica

The SARevenue Service’s (Sars) appetite forlitigation seemsto have grown exponentiallyand adispute withSars tendsto endup inlitigation eitherin thetaxcourt orthe highcourt. Suchadispute will generallyarise whena taxpayer disagreeswith an assessment raised by Sars. Oneaspect ofthedispute process which can be overlooked withdire consequences for taxpayers is that a taxpayermust fromthe outset canvassall relevant grounds of objectionas these grounds form the basis of any future litigation.

Inthe Commissionerfor the SA RevenueService v Airports CompanySA, the facts were, inter alia, that Sars raised anadditional assessment for thetaxpayer’s 2011 year ofassessment, pursuant to the disallowance of deductions ofcorporate social investment (CSI) expenditure and allowances interms of section 13quinand 12Fof the Income Tax Act, 1962.

Thetaxpayer lodgedan objection tothe additional assessment raisedby Sars.It only objected to the disal-

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lowanceof theCSIexpenditure. No objection was lodged to section 13quinand section 12F allowancesand the imposition ofan understatement penaltyand interest. Theobjection tothedisallowanceof theCSIexpenditure didnot findfavour with Sars and thetaxpayer lodged a notice of appeal in respect of the disallowance of the CSI expenditure. Thiswas ultimately settled.

In2019, Sarsissued aletter of audit findings in respect of the taxpayer’s 2012 to 2016

IN THE TAXPAYER’S HEADS OF ARGUMENT … HE WISHED TO REVISIT CERTAIN QUESTIONS OF FACT AND INTERPRETATION years of assessment. Consistent withits earlierstance adopted inrespect ofthe 2011 tax year, itindicated it intended to disallow deductions claimed bythe taxpayer in respect of the CSI expenditure,the 13quinand12F allowances, and to impose understatement penalties and interest, in terms of the

Tax Administration Act, 2011).

This promptedthe taxpayerto revisitits 2011objection in which it had not objected to Sars’ disallowanceof itsdeductionsin terms ofsection 13quinand 12F. Followingthe above,the taxpayer requested Sars to agree to the taxpayer’ s amendment of its objection in relation to its2011 year of assessment. The taxpayer sought to object to the adjustmentseffected bySarsin respect of the allowances claimed in terms of sections 13quin and12F, aswell asthe imposition of understatement penalties and interest.

Sarsrefused toallowthe objectionas itwas ofthe opinion that section 104 of the Tax Administration Act, read with rule7 ofthe taxcourt rules, precluded such an amendment andthat thetaxpayer was seekingto introduce newgrounds ofobjection, which was impermissible in terms of rule 32(3) of the tax court rules.

The taxpayerapplied to the tax court in Johannesburg for leave toamend and such leave wasgranted bythe tax court. This decision was overturned on appeal.

In Nesongozwiv Commissioner forSars, thetaxpayer was unsuccessful in the taxcourt. Inbroad terms thematter turnedonthe value of shares disposed of by the taxpayer and resultant donations tax and capital gains taxliability ofthe taxpayer and in this regard evidence was ledby various experts asto thevalue of such shares. The taxpayer was unsuccessful in its appeal to the full court of the high court on the basis as set out below. The decision of the high court was upheld on appeal to the appeal court.

Inthe taxpayer’s heads of argument, it appeared that he wished to revisit certain questions offact andinterpretation. The court found that this raisesan important point of principleanterior to the merits, namely whether these points are properly beforethis courtasgrounds of appeal.

This was becausethe tax courtisa creatureofstatute with theresult that,as was held inLion MatchCompany (Pty)Ltd vCommissionerfor the SA RevenueService, the scope of itsjurisdiction, its powers andthe ambitof anyrightof appealfromits decisions aredefined inthe Tax Administration Act.

The same principle was applied, in relationto an appealto thetax courtin terms of the Value Added Tax Act, 1991,in HRComputek (Pty) Ltdv Commissionerfor theSA RevenueServices when Ponnan JAheld that it hadfollowed that “not having raised an objection to the capitalassessment inits notice ofobjection, thetaxpayerwas precludedfrom raising iton appealbefore the tax court”

The purpose underpinning this principle (which is of generalapplication incivil and criminal appeals too) was setoutthus byCorbettJAin MatlaCoal LtdvCommissioner for Inland Revenue in a matter concerning theIncome Tax Act: “Section 81(3) of the act provides that every objection shall be in writing andshallspecify indetailthe

EVERY OBJECTION SHALL BE IN WRITING AND SHALL SPECIFY IN DETAIL THE GROUNDS UPON WHICH IT IS MADE grounds upon whichit is made. And in terms of section 83(7)(b) theappellant inan appealagainst thedisallowance of hisobjection is limited to the grounds stated inhisnotice ofobjection.This limitation is for the benefit of thecommissioner andmay be waived by him.”

He stressed the importance of adherenceto this principle, “for otherwisethe commissionermay beprejudiced by an appellant shifting the grounds of his objection to the assessment in issue”. At thesame time,however,he heldthat inthe applicationof the principle, acourt should not be “undulytechnical or rigid in its approach” and should look atthe substance ofthe objectionand theissue astowhether itcoversthe pointwhich theappellant wishesto advanceonappeal must be adjudgedon the particular facts of the case

Thus, in both judgments referredto above,theprinciplethat ataxpayercannot introducenew groundsof objection after the fact is reinforced. Careful consideration should be givento the merits bytaxpayers whenpreparing grounds of objection.