Following years of litigation dating as far back as 2017, the High Court has confirmed that SARS is well within its right to increase, at appeal stage, the tax liability it has claimed in an additional assessment; without having to issue a new assessment first.
Natasha Wilkinson
Head: Tax Disputes and Legal Strategy & Tax Residency
Facts
In Lion Match Company (Pty) Ltd v Commissioner for the South African Revenue Service (A202/2020) [2023] ZAGPPHC 384, the taxpayer disposed of its shares in the Kimberly-Clark group during the 2008 year of assessment; which triggered a capital gains tax event.
On 30 April 2013, SARS issued an additional assessment (“the additional assessment”), decreasing the base cost declared by the taxpayer and, therefore, simultaneously increasing the taxpayer’s taxable capital gain. The taxpayer shortly thereafter delivered an Objection. Following an unsuccessful Objection, the taxpayer delivered an Appeal on 16 May 2014.
In SARS’s Rule 31 Statement of Grounds of Assessment (“the Rule 31 statement”), SARS included a new, increased determination of the base cost which differs from the amounts stipulated in the additional assessment. This resulted in taxable capital gain being increased by R34 million. According to SARS, this new determination was done on the basis that SARS adopted a “conservative” base cost when the additional assessment was issued by SARS.
Prior Court Battles
Tax Court 2017
In 2017, the taxpayer approached the Tax Court for an interlocutory order that SARS failed to comply with the Rules. This was so because the taxpayer argued that the increased base cost amount in the Rule 31 statement constitutes a novation of the whole factual or legal basis of the additional assessment, which the Rules prohibit. Accordingly, the taxpayer sought the striking out of the offending portion of the Rule 31 statement, and for SARS to file a revised Rule 31 statement.
The Tax Court ruled that the legal and factual basis for the additional assessment was not completely changed, and that the taxpayer, in any event, bore the onus of proving the base cost amount averred was correct from the start.
Supreme Court of Appeal
In 2018, the taxpayer appealed directly to the Supreme Court of Appeal against the decision by the Tax Court to dismiss the taxpayer’s application to set aside the Rule 31 statement. The Supreme Court of Appeal struck the matter from the roll, on the basis that the decision by the Tax Court is not appealable.
Tax Court 2019
Following the unsuccessful interlocutory application, the appeal was set down for hearing for two weeks, commencing on 18 November 2019. On the morning of 18 November 2019, the taxpayer’s newly-appointed legal representatives requested a postponement of the hearing of the appeal. This application for a postponement was unsuccessful; and, therefore, the appeal was required to proceed.
The newly-appointed legal representatives argued that their mandate related solely to moving the application for a postponement. As such, the representatives were released from the proceedings.
SARS argued that the appeal should nevertheless be decided by the Tax Court; particularly, in relation to SARS’s contention that its new, increased taxable capital gain should be allowed, to what is stated in SARS’s additional assessment.
The Tax Court, however, refused to hear the matter on the basis that it argued that section 129(1) of the Tax Administration Act, 2011 only allowed for it make a decision “after hearing the appellant’s appeal”. Accordingly, the Tax Court dismissed the appeal, after remarking that the taxpayer ought to have “explicitly rather than tacitly withdrawn the appeal”.
Current Decision by High Court
Before a full bench of judges, the taxpayer appealed the decision of the Tax Court, due to the postponement application being refused. SARS counter-appealed the decision of the Tax Court, due to the dismissal of the appeal without SARS’s version being heard.
The High Court dismissed the taxpayer’s appeal in respect of the unsuccessful postponement. In respect of SARS’s counter-appeal, the High Court held that the absence of the taxpayer at the hearing did not prevent the Tax Court to continue with the appeal hearing, as it was still an active appeal.
The High Court then moved on to consider the evidence furnished by SARS in support of its increased base cost and taxable capital gain. It held that, as there was no rebutting evidence by the taxpayer and no reason to reject SARS’s recalculations, the High Court issued an order for the increase of the base cost and, therefore, the increase of the taxable capital gain stated in the additional assessment.
Commentary
While it is unclear from the various judgments whether the period to issue the additional assessment (dated 30 April 2013) had prescribed, this may very well have been the case as the dispute relates to the 2008 year of assessment. If the period to raise the additional assessment had prescribed, this may have disposed of the matter in its entirety.
Prescription may also explain SARS’s apprehension to issue a new assessment at the time of the Rule 31 statement being delivered; as section 99(1)(a) of the Tax Administration Act specifically prohibits the issuance of an assessment three years after an original assessment being issued. SARS may have foreseen that this new assessment would not be allowed and so raising a new ground for assessment that did not constitute a novation of the whole legal or factual basis for the assessment (but merely a change to the disputed tax amount), cured this problem for SARS in this particular matter.
It is also unfortunate that the taxpayer did not present its appeal in the Tax Court; did not include expert summaries in preparation for the appeal; and offered the court conflicting information in support of its grounds for postponement of the appeal. Had a different approach been adopted on this matter, the outcome may very well have been a favourable one for the taxpayer.
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