Albert Einstein once said that “the hardest thing in the world to understand is the income tax.” If he were around today, he might have instead said that “the hardest thing in the world to understand is how to challenge a tax assessment in South Africa.” Whilst this may be overstating matters a tad, the SCA’s recent judgment in the case of The Commissioner for the South African Revenue Services v ABSA Bank Limited and United Towers Proprietary Limited lends some credence to this rejigged Einstein adage. We explain why below.
Background
ABSA concluded a cross-border investment arrangement involving a series of interlinked transactions across multiple entities. SARS viewed parts of the transaction as an impermissible tax avoidance arrangement and therefore sought to apply the general anti-avoidance provisions in the Income Tax Act 58 of 1962 (sections 80A to 80L). In short, these sections allow the Commissioner – in certain defined circumstances – to give effect to the substance of a transaction instead of its form.
Pursuant to an audit of the transaction, SARS – as it is obliged to do under section 80J of the Income Tax Act – gave notice to ABSA of (along with reasons for) its belief that the transaction constituted an impermissible tax-avoidance arrangement under section 80B of the Income Tax Act. Prior to the expiry of the period within which ABSA was to respond to the section 80J notices, ABSA submitted a request to SARS under section 9 (1)(Note1) of the Tax Administration Act 28 of 2011 to withdraw the section 80J notices. SARS refused. It was this refusal that ABSA sought to review in the High Court along with the tax assessments which followed the section 80J notices.
The High Court
The main issues before the High Court were:
1. The effect of sections 104 and 105 of the Tax Administration Act on the ability of a taxpayer to institute proceedings outside of those specified in section 104;
2. The correct characterisation of the dispute (this was key in determining the first issue, as explained below);
3. ABSA’s participation in and knowledge of the tax-avoidance arrangements; and
4. The reviewability of SARS’s decision not to withdraw the section 80J notices.
Section 104 of the Tax Administration Act provides a disputes procedure for, amongst others, objecting to tax assessments. Section 105 simply provides that a taxpayer “may only dispute an assessment or ‘decision’ as described in section 104 in proceedings under this Chapter, unless a High Court directs otherwise”. The High Court’s take on this was that, plainly, a court has a discretion to approve a deviation from the default section 104 route. SARS and ABSA agreed that a deviation is permissible in “exceptional circumstances”. The parties were at odds however as to what constitutes exceptionality.
The High Court held that exceptionality need not be exotic, rare or bizarre, but rather a circumstance sensibly justifying a deviation from the default procedure. The court found that a dispute turning purely on a point of law is an exceptional circumstance and that, here, this was the case.
In making this finding, the High Court considered the wording of the section 80J notices and subsequent assessments and found that the Commissioner accepted that ABSA was ignorant of the full ambit of the scheme and issued the assessments on that basis. It followed, so the High Court reasoned, that SARS was bound to this factual matrix and that there was therefore no dispute of fact; only one in law, which was whether, on the accepted facts of the case, ABSA participated in an impermissible tax avoidance arrangement with a tax avoidance motive in mind. On this, the High Court held that ABSA could not have participated and been a party to something it was ignorant of.
As to the reviewability of the decision not to withdraw the section 80J notices, the High Court readily accepted that the issuing of the section 80J notices was not reviewable because it was not final in effect. Despite this, the High Court found that the decision not to withdraw the section 80J notices was reviewable “because it nevertheless had an impact”. What precisely this impact was is unclear from the judgment. It was common cause between the parties that the assessments themselves – being final in effect – constituted administrative action (and were therefore reviewable).
In summary, the High Court found that:
· It was able to entertain the matter under section 105 of the Tax Administration Act because exceptional circumstances existed (a question of law only);
· SARS’s refusal to withdraw the section 80J notices was reviewable under the principle of legality;
· The section 80J notices (and assessments) indicated that ABSA was liable to be taxed in respect of an impermissible arrangement despite its ignorance of that arrangement and that this was incorrect in law because it did not establish that ABSA was a party to and participated in the arrangement; and
· The fate of the assessments, based on the flawed section 80J notices, was indistinguishable from that of the section 80J notices.
Accordingly, the High Court set aside the section 80J notices and the resulting assessments.
The Supreme Court of Appeal (SCA)
The pertinent issues on appeal were:
· The reviewability of a decision by SARS not to withdraw the section 80J notices pursuant to a request by ABSA under section 9 (1) of the Tax Administration Act; and
· The High Court’s characterisation of the dispute as wholly a question of law.
In short, the SCA found that SARS’s refusal to withdraw the section 80J notices was not reviewable because that decision was not final in effect; only the tax assessments were reviewable by the High Court under section 105 of the Tax Administration Act if they involved questions of pure law.
The SCA disagreed with the High Court’s characterisation of the dispute because:
· The section 80J notices do not say that SARS accepts ABSA’s version of events (being that ABSA had no knowledge of the nature of and ambit of the scheme involved);
· In the correspondence with ABSA around the section 80J notices, SARS expressly disputes the contentions raised by ABSA; and
· The affidavits filed by SARS in the review proceedings indicate that SARS disputes ABSA’s alleged ignorance of the scheme.
These factors were indicative of a dispute of fact. Accordingly, the SCA replaced the High Court’s order with one dismissing the review application brought by SARS (effectively forcing ABSA to have the matter adjudicated under section 104 of the Tax Administration Act).
Commentary
The reasoning of the SCA on reviewablity is difficult to fault. How can the issuing of a section 80J notice not be considered reviewable when the refusal to withdraw the same notice is reviewable? The mental gymnastics involved in this conclusion are hard to grasp (and not fully explained by the High Court other than by referencing two cases, both of which appear distinguishable on the facts). There can therefore be no real quarrel with the SCA’s finding that the refusal to withdraw the section 80J notices was not reviewable. Patently, that refusal was not a final decision having an adverse effect (a pre-requisite to a review whether under PAJA or the broader principle of legality). It was common cause that the tax assessments themselves were reviewable by the High Court so long as the dispute was purely a question of law (which the High Court found to be the case).
The approach of the SCA in overturning this finding is attractive at face value. Nowhere in the section 80J notices (an excerpt of which was reproduced in the High Court judgment) does it say that SARS accepts ABSA’s version of events without question. Moreover, according to the SCA, SARS expressly disputed ABSA’s contentions in correspondence related to the section 80J notices.
The main difference between the High Court and the SCA was their differing interpretations of the evidence. The High Court considered that the totality of the evidence indicated that SARS issued the assessments despite its apparent acceptance that ABSA was ignorant of the key tax avoidance elements of the scheme. The SCA differed and found that SARS did not accept ABSA’s version of events: a far stricter approach appears to have been adopted, curtailing a taxpayer’s recourse to the courts.
Key takeaways
· It is not competent to review the issuing (or refusal to withdraw) section 80J notices because these decisions are not final in effect;
· A taxpayer is entitled to review a section 80B tax assessment in the High Court if it involves a pure question of law;
· Before embarking on such proceedings, a thorough assessment of the nature of the dispute is therefore crucial (given the strict approach adopted by the SCA); and
· If there is doubt about the nature of the dispute, it may be advisable for the taxpayer to invoke the dispute resolution procedure catered for in section 104 of the Tax Administration Act. The risk with adopting the wrong approach upfront is that the taxpayer is forced to start proceedings afresh (years down the line) via section 104. This is particularly problematic when one considers the ‘pay now, argue later’ principle!
Note: [1] Which provides that a decision made by a SARS official or a notice to a specific person issued by SARS under a tax Act (excluding a decision given effect to in an assessment or a notice of assessment that is subject to objection and appeal) may in the discretion of a SARS official or at the request of the relevant person be withdrawn or amended.
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