By Prenisha Govender, Baker McKenzie, Johannesburg
A March 11 High Court of South Africa judgment sheds light on how taxpayers can, in exceptional circumstances, enforce and protect their rights through court proceedings, as opposed to following the tax authority’s lengthy dispute resolution procedures.
In the case, Absa Bank Limited and Another v CSARS (2019/21825 [P]) [2021] ZAGPPHC (11 March 2021), the taxpayers, Absa Bank Ltd and its wholly-owned subsidiary, Absa Towers (Pty) Ltd, sought to review the decisions taken by the South African Revenue Service (SARS).
At issue was SARS’ decision not to withdraw notices issued under section 80J of the Income Tax Act, 1962 that expressed its intention to invoke South Africa’s general anti-avoidance rule (GAAR) and its decision to issue letters of assessment while the first decision was still pending.
How did the dispute arise?
The dispute arose from SARS’ allegation that the taxpayers were part of an impermissible tax avoidance arrangement to evade tax liability.
The taxpayers purchased tranches of preference shares in a South African company called PSIC3, which entitled the taxpayers to dividends when declared. PSIC3 subsequently bought preference shares in another South African company called PSIC4.
PSIC 4 thereafter invested in an offshore trust, DI Trust, as part of a capital outlay. The DI Trust then lent money to another South African company, MSSA by means of subscribing for floating-rate notes. This company was a subsidiary of a group of companies domiciled in Australia.
The DI Trust made investments by way of the purchase of Brazilian government bonds. It then derived interest thereon. In turn, PSIC4 received, from the DI Trust, interest on its capital investment in DI Trust.
As a result, PSIC4 was able to declare a dividend payable to PSIC3, and in turn, PSIC 3 declared a dividend payable to the taxpayers. Due to the fact that a dividend was declared between two South African resident companies (i.e., PSIC4 and PSIC3), the dividend received by the taxpayers was tax-free. This led SARS to allege that the taxpayers had participated in an impermissible tax avoidance arrangement to evade tax liability.
SARS thereafter issued section 80J notices, indicating its intention to invoke the GAAR. In response to the section 80J notices, the taxpayers submitted reasons as to why the GAAR should not apply and requested SARS to withdraw its section 80J notices.
Thereafter, without withdrawing the section 80J notices, SARS issued letters of assessment in respect of a tax liability, imposed under section 80B Income Tax Act, 1964.
Consequently, the taxpayers sought to review the decision by SARS not to withdraw the 80J notices and to issue letters of assessment.
Reviewability of the decisions by SARS
SARS’ view was that the case should be dismissed because it would be incorrect to not follow the dispute resolution processes and approach the court of law at the inception of a dispute about tax liability.
On the other hand, the taxpayers argued that the dispute was based on a pure point of law, which is an appropriate rationale for the court to hear the matter. Secondly, the taxpayers argued that, according to section 34 of South Africa’s Constitution, the guarantee of access by a person to a court to resolve a dispute had not been compromised by the provision of a system of internal remedies.
In determining whether the decisions taken by SARS could be reviewed by the High Court, the court considered the following provisions of the Tax Administration Act, 2011 (TAA):
The court considered Section 9, which allows for a decision or notice by SARS to be withdrawn by a SARS official at the request of the person affected by the decision. Section 9 does, however, expressly exclude a decision given effect to in an assessment or a notice of assessment that is subject to objection and appeal. SARS was of the view that section 9 did not include section 80B assessments.
The court held that section 9 excluded cases where tax is paid and the objections and appeals process is pending, which was not the case in this matter.
In addition, the court considered section 105 of the TAA, which 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 otherwise directs.”
Section 104 states that a taxpayer may object to and appeal against “any other decision that may be objected to or appealed against under a tax Act.”
As such, it was held that the words “unless a High Court otherwise directs” under section 105 indicated there is more than one process, and the court has the discretion to deviate from the default route. The court would, however, require a justification, which would be exceptional circumstances to justify the deviation from the usual procedure. Exceptional circumstances include a dispute that turns wholly on a point of law, as in this case.
Administrative action vs principle of legality
The court also considered whether the section 80J notices were an administrative action or the excise of public power, which was reviewable under the principle of legality.
The court held that the section 80J notices were not administrative action, as the notices were not final and had no legal external effect. The court, therefore, held that it was appropriate to proceed by way of legality.
The court found in favour of the taxpayers, and SARS’ refusal to withdraw the section 80J notices, and the decision to issue the notices of assessment to the taxpayers, were reviewed and set aside. In addition, the court granted a cost order in favour of taxpayers.
Key takeaway
One of the key takeaways of this case is that taxpayers must be aware of their rights and options with regard to tax dispute resolution. Taxpayers are not obliged to pursue a remedy in terms of the lengthy procedures set out in tax legislation; they may apply directly to a court of law for relief in exceptional circumstances, which includes a dispute on a point of law.
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Prenisha Govender is Associate, Tax Practice, Baker McKenzie, Johannesburg
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