However, there are those taxpayers, sometimes even misled by unscrupulous tax advisors, guising tax disclosures or not providing all details pertaining to transactions. These types of attempts to be innovative with SARS by not making correct disclosures are the most elementary mistake on tax planning and compliance, and easily untangles when you are caught.
SARS recently shows that the system never forgets
In CSARS v M (A5036/2023)  ZAGPJHC 6 July 2023 (“M decision”), the taxpayer failed to disclose receipts totalling R5 680 425.82 during the 2007 to 2010 years of assessment. A decade later the taxpayer’s defence was that the amounts were repayments of interest-free loans advanced by the taxpayer to related parties, which bore no tax consequences. Also, they tried the novelty that, in any event, SARS was precluded from raising additional assessments as more than three years had elapsed since the original assessments were issued by SARS. The High Court touches on important aspects which all taxpayers should bear in mind.
What is an Additional Tax Assessment?
An additional assessment serves as notification to a taxpayer to pay a tax liability, which exceeds the tax liability set out in a prior assessment. Therefore, an additional assessment is issued after an original assessment. Section 92 of the Tax Administration Act, No. 28 of 2011 (“the TAA”) obliges SARS to issue an additional assessment where there is satisfied that an existing assessment “does not reflect the correct application of a tax Act to the prejudice of SARS or the fiscus”.
When does Tax Prescription come into play?
In the Supreme Court of Appeal judgment of Commissioner, SARS v Brummeria Renaissance (Pty) Ltd 2007 (6) SA 601 (SCA), it was held that it is in the “public interest that [SARS] should collect tax that is payable by a taxpayer. But it is also in the public interest that disputes should come to an end”. This sentiment is echoed in section 99(1)(a) of the TAA: it does not permit SARS to make an assessment three years after the date of its original assessment. This restriction (commonly referred to as the “prescription period”) is relevant in the case of, for example, income tax. The prescription period in section 99(1)(a) does not apply (in the case of an assessment by SARS) where the provisions of section 99(2)(a) are satisfied. Therefore, SARS, when making an assessment three years after its original assessment, may only do so if the provisions of section 99(2)(a) are satisfied (namely, where the “full amount of tax chargeable was not assessed … due to – (i) fraud; (ii) misrepresentation; or (ii) non-disclosure of material facts”.
In the case of a self-assessment by a taxpayer for which a return is required, section 99(1)(b) does not permit an assessment to be issued five years after the “date of an original assessment – (i) by way of self-assessment by the taxpayer; or (ii) if no return is received, by SARS”. Therefore, in the case of a self-assessment, the prescription period is five years. The prescription period in section 99(1)(b) does not apply where the provisions of section 99(2)(b) are satisfied (namely, where the “full amount of tax chargeable was not assessed … due to – (i) fraud; (ii) intentional or negligent misrepresentation; (iii) intentional or negligent non-disclosure of material facts; or (iv) the failure to submit a return, or if no return is required, the failure to make the required payment of tax”.
What is the 3 year prescription?
Under section 25(2) of the TAA, there is a legal obligation on a taxpayer to submit a return that is “full and true”. There is, therefore, a legal duty of disclosure on the part of the taxpayer. Where a return contains a false statement of fact, it will amount to misrepresentation. Where the return is not complete, it may amount to a non-disclosure of a material fact. If there is misrepresentation, non-disclosure of material fact or fraud, this may result in the prescription periods being inapplicable, where it is proven that the full amount of tax chargeable was not assessed “due to” misrepresentation or fraud or non-disclosure of material fact. The words “due to” require a causal link between the false statement of fact (misrepresentation), (or fraud, or non-disclosure of material facts) and the fact that the full amount of tax was not assessed.
As to this causal link, interestingly, the High Court in the M decision held that “there can, to my mind be little doubt that SARS established the required satisfaction that the full amount of tax chargeable was not assessed due to fraud or material misrepresentation or non-disclosure of material facts. The resultant substantial increase in the taxpayer’s assessed tax liability for the relevant period of assessment inferentially establishes such ‘satisfaction’. SARS had also notified the taxpayer that it intends to reopen the assessments as there was non-disclosure of material facts … this was done pre-litigation in a number of documents”.
Arguments by crafty taxpayers that SARS was furnished with all supporting documents (such as annual financial statements), when the return was submitted and which set out the correct position, will not stand. In Commissioner, SARS v Spur Group (Pty) Ltd 84 SATC 1, it was remarked that:
“[The taxpayer argued that SARS] had all the relevant and correct facts at [its] disposal because [the taxpayer’s] annual financial statements were submitted together with the tax returns, and that the correct information could be distilled from them, is unhelpful. The mere fact that an astute auditor or assessor could have been able to ascertain from supporting documentation the fact that the return contains a misrepresentation, cannot mean that there is no misrepresentation in the first place”.
However, if the tax chargeable was not assessed for other reasons (for example, other conduct by the taxpayer that does not amount to fraud, misrepresentation or non-disclosure of material facts), then the prescription period is applicable, and an additional assessment cannot be raised more than three years from the date of the original assessment by SARS.
Advisors should stop telling taxpayers that their testimony is enough
While our courts have held that the “intention of the taxpayer … is of great, and sometimes decisive, importance” (Elandsheuwel Farming (Edms) Bpk v SBI 1978 (1) SA 101 (A) at 181), there is a distinction drawn between the (actual) intention of the taxpayer (which materialises through objective factors) and the testimony which a taxpayer provides in respect of that intention.
In ITC 1185 (1972) 35 SATC 122 (N), the court held that, in respect of a taxpayer’s intention:
“the ipse dixit [being the “say so”/ testimony] of the taxpayer as to his intent and purpose should not be lightly regarded as decisive. It is the function of the court to determine on an objective review of all the relevant facts and circumstances what the motive, purpose and intention of the taxpayer were. Not the least important of the facts will be the course of conduct of the taxpayer in relation to the transactions in issue, the nature of his business or occupation and the frequency or otherwise of his past involvement or participation in similar transactions” (emphasis added)
In a similar vein, the Supreme Court of Appeal in Anglo Platinum Management Services v SARS (20725/2014)  ZASCA 180 held that “a court is not concerned with the subjective belief of the parties to the agreement – no matter how genuine this belief may be – but with whether the facts, objectively viewed, establish that this result was obtained”.
In the M decision, the taxpayer’s testimony in the Tax Court was that he received repayments of loans which are not taxable. The High Court, however, held the following in this regard:
“While the taxpayer explained in papers before the Tax Court that these receipts related to repayment of monies lent and advanced by him … he led no evidence in support of his contention that these deposits should not be treated as income in his hands. What is more is that the documentation, gives a different version”
Fraud, misrepresentation or non-disclosure of material facts
As mentioned above, the prescription period of three years (from the date of the original assessment by SARS) does not apply where there is fraud, misrepresentation or non-disclosure of material facts.
However, this is not only the case for income tax. Section 99(2)(a) of the TAA confirms that the prescription period does not apply to the extent that “the full amount of tax chargeable was not assessed” was due to fraud, misrepresentation or non-disclosure of material facts. Section 1 of the TAA, in turn, defines “tax” as including “tax, duty, levy, royalty, fee, contribution, penalty, interest and any other moneys imposed under a tax Act” and a “tax Act” as “this Act or an Act … referred to in section 4 of the SARS Act, excluding the Customs and Excise Act”. Section 4(1) of the South African Revenue Service Act, No. 34 of 1997 (“the SARS Act”) in turn refers to “national legislation listed in Schedule 1”.
Therefore, the exception to the prescription rules have a much broader scope of application than simply to income tax. They apply equally to penalties, interest, and estate duty, for example.
Misrepresentation of facts: Capital v Revenue
Our courts have laid down various legal tests to establish whether an amount is capital or revenue in nature. The aptness of these tests depend on the particular facts and include, for example, the “fruit and tree” analogy (set out in CIR v Visser 1937 TPD 77, wherein it was held that “income” is what “capital” produces and is something in the nature of fruit); and once-off sale principle (set out in CIR v Middelman 1991 (1) SA 200 (C) at 46, wherein it was held that “just as an occasional swallow does not make a summer, so an occasional sale of shares yielding a profit does not of itself make a seller of shares … a dealer therein, liable to be taxed on such profit”).
By virtue of these extensive legal tests laid down by our courts, the law is trite: there is no uncertainty as to what the law regards as capital, and what the law regards as revenue in nature.
Whether an amount is capital or revenue in nature is rather a question of fact: what do the facts indicate when the legal tests are applied? SARS supports this contention in its publication titled “Comprehensive Guide to Capital Gains Tax” by indicating “[i]n capital v revenue disputes the legal principles are well established, and the vast majority of cases are won or lost on the facts”.
Further, Silke similarly agrees with this contention in that it states “[t]he fruit and tree analogy as judicial affirmation of the distinction between income and capital respectively … can never be more than a rough guide, however, as the ultimate question is a factual one.”
As our law is settled on the capital v revenue debacle, an assertion by a taxpayer that he does not know the law will not assist such a taxpayer where there is a misrepresentation on the facts. This is so because there is a maxim in our law that states that “ignorance of the law is no excuse” and that a person “should keep himself informed of the legal provisions which are applicable to that particular sphere” (Coetzee v Steenkamp (579/2009)  ZANCHC 25 at 10).
The question of whether an amount is revenue or capital in nature is a factual question. In the return of a taxpayer, the disclosure of all revenue and capital receipts is required. Where this disclosure does not occur, this would in all likelihood constitute a material non-disclosure of fact. Where the receipt is disclosed as a capital receipt instead of a revenue receipt, there is a false statement of fact and therefore misrepresentation in the return by the taxpayer.
In the Spur Group decision cited above, the Supreme Court of Appeal points out that a “Court would loath to come to the assistance of a taxpayer that has made improper or untruthful disclosures in a return. Clearly, this would offend against the statutory imperative of having to make a full and proper disclosure in a tax return”.
The technical complexity of tax is something which has made tax the chosen field of professionals, as there are beautiful developments in our tax case law of tax principles. This creates significant tax planning opportunities, which in amplified in international tax, but there must be a great caution to always remain fully tax compliant. Regardless of the tax planning strategy adopted, there must equally be a tax compliance strategy. In the same manner, SARS has an audit strategy. When you have a dispute with SARS, be extra careful to not pull the prescription card too soon out of the deck. You may well find that neither SARS nor the Court gives you a sympathetic ear, and tax case law is stacked against you. Make sure your compliance is litigation ready when SARS one day decides to come for a visit or even worse, to tell you what your taxes should have been, as they have extensive financial records on everyone with a bank account, investments, property etc.