Tax Court reminds SARS of its duty to provide adequate reasons in assessments

Background 

The matter involved a capital gains tax (“CGT”) assessment raised by SARS following a group restructuring arrangement between related trusts and companies. SARS applied the General Anti-Avoidance Rules (“GAAR”) contained in Part IIA of the Income Tax Act No. 58 of 1962 (“IT Act”), and determined that the taxpayer had entered into an impermissible tax avoidance arrangement designed to defer or reduce a capital gain. 

The arrangement in question involved the transfer of shares in a company whereby a R157 million loan liability was ultimately part of the purchase. SARS concluded that the arrangement lacked commercial substance and had the sole or main purpose of obtaining a tax benefit; namely, the deferral or avoidance of CGT. Accordingly, SARS assessed the taxpayer on the basis that a taxable capital gain of approximately R27 million had been triggered. 

However, when issuing the revised assessment, SARS merely stated that it had applied section 80A of the IT Act and that a capital gain had arisen, without providing any explanation of how the arrangement satisfied the statutory requirements of an impermissible avoidance arrangement, or how the amount of the capital gain had been calculated. 

The taxpayer objected on both procedural and substantive grounds, arguing that SARS had failed to provide adequate reasons as required by the Tax Administration Act, 2011 (“TAA”), thereby prejudicing its ability to properly challenge the assessment. 

What does the law require from SARS? 

Section 96(2)(a) of the TAA sets out SARS’ obligation to provide reasons when issuing an assessment. These reasons must enable a taxpayer to understand both the legal and factual basis of the assessment raised by SARS.  

Section 42(1) of the TAA states that SARS has an obligation to provide an informative outcome where an audit or investigation has taken place, and the grounds for the proposed changes to the assessment within 21 working days.  

Rule 6 of the Rules promulgated under section 103 of the TAA, provides that where SARS has failed to comply with the sectionsof the TAA, the taxpayer may request formal reasons. 

The abovementioned references, alongside the purpose of the legislation itself, in summary, describes adequate reasons as those which: 

• Refer to the relevant legislative provisions applied; 
• Disclose the material facts and findings made by SARS; and 
• Explain how SARS reached its conclusion. 

The Promotion of Administrative Justice Act, 2000 (“PAJA”) further reinforces this standard by requiring that administrative decisions be “lawful, reasonable and procedurally fair.” A failure to give proper reasons can amount to a breach of the constitutional right to just administrative action under section 33 of the Constitution. 

In contrast, a bare conclusion for example such as “the amount is capital in nature” or “burden of proof not discharged” does not constitute a valid reason, especially where SARS fails to: 

• Engage with the taxpayer’s submissions or evidence; 
• Reference relevant provisions (e.g., section 24J or section 11(a)); and 
• Apply the legal test for capital vs. revenue in nature. 

What is expected from the taxpayer? 

In turn, taxpayers have corresponding obligations under the TAA to: 

• Submit complete and accurate information; 
• Support claims with substantiating documents; 
• Utilise the request for reasons process for its true purpose (and not to, for example, stall SARS for time); and 
• Provide clear grounds for objections (section 104 of the TAA) and appeals (section 107 of the TAA). 

However, the ability of the taxpayer to meet these obligations depends on SARS having clearly communicated its position. Without knowing why SARS took a differing tax position or what provision it relied upon, the taxpayer cannot meaningfully respond, resulting in a prejudice to the taxpayer’s right to dispute resolution. 

What did the court say? 

The court held that this did not constitute sufficient reasons in terms of section 96(2)(a) of the TAA, which requires SARS to set out the material facts and legal basis relied on when issuing an assessment. 

Referring to both administrative law principles and case law, the court emphasised that: 

• SARS is required to do more than simply cite the provision it applied (e.g. section 80A); 
• The taxpayer must be able to understand why SARS believes the arrangement met the requirements of an impermissible avoidance arrangement (i.e. that it had the sole or main purpose of obtaining a tax benefit, and lacked commercial substance); and  
• The assessment must include sufficient factual and legal reasoning to allow the taxpayer to formulate a meaningful objection. 

The court noted that SARS did not identify the specific steps it disregarded under section 80B of the IT Act, did not outline how it had determined that the arrangement lacked commercial substance under section 80C of IT Act, and did not explain the method used to compute the capital gain. 

In the absence of this information, the taxpayer could not reasonably assess the basis for the assessment or exercise its rights under Chapter 9 of the TAA (dispute resolution). 

Although the court proceeded to rule on the substantive GAAR issue, it made it clear that SARS’ failure to provide adequate reasons was a serious procedural defect and contrary to the requirements of fair administrative action under section 33 of the Constitution and PAJA. 

Key takeaways for taxpayers 

This judgment reinforces the importance of administrative fairness and transparency in the tax system. Specifically: 

• SARS is required to give detailed, case-specific reasons when issuing additional assessments which are different to the tax position taken by the taxpayer; 
• Vague conclusions or unexplained statements are not compliant with the TAA or PAJA; 
• Where reasons are inadequate, taxpayers should raise this procedural defect in their objection and may even consider judicial review under PAJA if prejudice arises; and  
• Taxpayers must also ensure that their own submissions are well supported and clearly articulated to help focus the dispute. 

As tax controversy becomes more frequent and complex, the duty to communicate as mandated by legislation remains central to a fair and functional dispute resolution process. 

The Tax court judgment is available on SAFLII here

Author: 

Jessica Brown, Tax Consultant