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A taxpayer who is subject to a tax audit has certain rights to engage with SARS, which includes the right to be advised of the audit findings, and, where there are any potential adjustments of material nature, the taxpayer has 21 business days to respond in writing to the outcome of the audit.
In a recent case in the Port Elizabeth Tax Court, Mr A v The Commissioner for SARS, the failure to afford these rights to the taxpayer proved fatal to SARS case.
In his 2012 tax return, Mr A claimed a deduction for farming expenses of R1.7m and further included an amount of R7m to be taxed according to the tax table for retirement and retrenchment lump sums. Mr A had been retrenched from a company where he acted as CEO for 16 years.
An additional assessment was issued by SARS where they disallowed the farming expenditure. Further, SARS contended that severance benefits did not apply as the taxpayer was dismissed and insufficient proof of retrenchment was provided.
The first time that the taxpayer learnt that he had been subject to a personal audit was during his appeal against the additional assessment. The court held that SARS could not rely on a procedurally flawed audit conducted without the taxpayer’s knowledge.
An additional assessment is administrative action and the Constitution protects the right to administrative action that is lawful, reasonable and fair. An assessment that is procedurally flawed due to SARS failure to give reasons, offends the principle of legality.
SARS breach of the principle of legality was compounded by its failure to comply with section 42 of the Tax Administration Act, 2011 (“the Act”).
The taxpayer was not kept informed about the audit nor was the outcome of the audit conveyed to him. This deprived the taxpayer of his right to respond to any issues raised during the audit, and in particular the taxpayer could have provided SARS with an explanation of his retrenchment.
If SARS had complied with the Act the outcome of the audit may have been very different. Because SARS failed to comply with the Act, which non-compliance was contrary to both the Constitution and the principle of legality, the court set aside the entire 2012 additional assessment.
- Graeme Palmer is a director in the commercial department of Garlicke & Bousfield Inc
NOTE: This information should not be regarded as legal advice and is merely provided for information purposes on various aspects of tax law.
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