Posted in sections, this is my Doctoral Thesis on taxpayers rights when audited by the tax authorities in South Africa – equally applicable to many English-based law systems in Africa and abroad (eg. India). This will be of particular use to any tax practitioners doing work in Africa and in other English-based legal systems around the world.

Analysis Of Challenging The Commissioner’s Discretionary Powers In Auditing Taxpayers under The Constitution Of The Republic of South Africa

CHAPTER 3 – LIMITATIONS TO INVOKING SECTIONS 74A AND 74B OF THE INCOME TAX ACT

3.5.2 Audi alteram partem139

Procedural fairness in the form of the audi alteram partem principle140 gives taxpayers an opportunity to participate in any decisions that will adversely affect them, and gives them a chance to influence the outcome of those decisions.141 This will improve the quality and the rationality of administrative decision-making, enhancing legitimacy.142 An example is the letter of findings process referred to above where SARS must give adequate reasons at the conclusion of an audit and inquiry, and an opportunity to the taxpayer to respond. Failure by SARS to adhere to this process properly will result in a review, either setting aside the revised assessment or the letter of findings.143

Goldstone J in Janse van Rensburg v Minister of Trade and Industry NO144 explained the importance of fairness in relation to discretionary power:

…it has become more and more common to grant far-reaching powers to administrative functionaries. The safeguards…all the more important… Observance of the rules of procedural fairness ensures that an administrative functionary has an open mind and a complete picture of the facts and circumstances within which the administrative action is to be taken. In that way the functionary is more likely to apply his or her mind to the matter in a fair and regular manner.

In the Supreme Court of Appeal Conradie JA stated that fairness must be decided on the circumstances of each case and whatever is done must display the attributes of fairness and transparency: Metro Projects CC v Klerksdorp Local Municipality.145 These are also obligations imposed on SARS through s 195(1) of the Constitution.

Hoexter146acknowledges that there are many instances where the legislated procedure of fairness and the audi alteram partem principle are just not catered for in PAJA owing to the restrictive nature of the definition of ‘administrative action’. Sections 74A and 74B are arguably such provisions if this type of decision by SARS is considered not to be administrative action. In order to overcome this problem, Hoexter147 advocates that the courts make use of the constitutional principle of legality that governs the use of all public power rather than just the narrower realm of administrative action.148 As stated earlier in this thesis, the exercise of public power is only legitimate where lawful149 and can only be lawful if the body exercising the public power acts within the powers lawfully conferred upon it.150 More recently there have been developments to suggest that this includes the right to be heard.151
Procedural fairness includes giving taxpayers the opportunity to interact with SARS to ensure that considered and rational decisions are made, that relate to the purpose that SARS is given power to inquire and audit into the tax affairs of taxpayers: namely, to verify proper compliance. Not to meet personal revised assessment budgets, but to comply with the jurisdictional facts of ss 74A and 74B as read with the appropriate subsections of s 74. This is where the interactions, through the audi alteram partem rule, between taxpayers and SARS will give taxpayers the assurance that SARS is not transgressing its constitutional obligations in ss 1(c), 33, 41(1), 195(1) and 237 of the Constitution. A failure by SARS to justify the exercise of its public power in terms of ss 74A and 74B in compliance with the audi alteram partem principle, diligently and without delay, would cause its conduct to be invalid in terms of s 2 of the Constitution.

Taxpayers affected by this conduct will be entitled to launch a review application either in terms of PAJA – ss 7 and 8 read with s 6 of PAJA in that ‘action was procedurally unfair’ in terms of s 6(2)(c), or s 6(2)(i) in that the ‘…action is otherwise unconstitutional or unlawful’, or that the conduct is a transgression of the principle of legality.

Finally, there are instances where the courts have held that the audi principle need not be adhered to where a prior hearing would defeat the process being embarked upon.152 In Gardener v East London Transitional Council and Others153 it was stated that fairness was a relative concept: ‘The meaning to be attached to ‘procedurally fair administrative action’ must therefore be determined within the particular framework of the act in question viewed in the light of the relevant circumstances. The procedure must be fair not only to the holder of the right affected by the administrative act but also the executive or administration acting in the public interest.’ The court went on to state that it does not believe: ‘that the audi principle is absolutely applicable to every administrative act. Such an interpretation would make possible the misuse of the Constitution to hold up necessary social reform measures or for that matter any executive or administrative act…’.

Following this line of reasoning, SARS may also rely on the Supreme Court of Appeal judgment in Chairman of the Board on Tariffs and Trade and Others v Brenko Inc and Others,154 where the court held that there was no single set of principles for giving effect to the rules of natural justice which would apply to all investigations, inquiries and exercises of power, regardless of their nature; on the contrary, the courts have recognised and restated the need for flexibility in the application of the principles of fairness in a range of different contexts.

Following the reasoning in these judgments, SARS may argue that when considering the wide powers conferred upon it (which have both an investigative function as well as a determinative function in imposing additional tax on taxpayers), whilst it has a duty to act fairly, it does not follow that it must discharge that duty precisely in the same way in regard to the different functions performed by it. However, when SARS exercises its deliberative function, taxpayers have a right to know the substance of the case that they must meet. Moreover, taxpayers will be entitled to an opportunity to make representations. There is always the suspicion that the assessors are attempting to meet an internal SARS financial budget, where there is no rational connection between the purpose behind SARS being entitled to inquire into and audit a taxpayer’s affairs to verify tax compliance, and the SARS official’s personal goals. SARS officials are nevertheless bound by their constitutional obligations by adhering to the rule of law and displaying a high standard of professional ethics; unbiased, impartiality, and equitable conduct; and conduct that is accountable and transparent. These constitutional obligations in terms of ss 1(c), 41(1), and 195(1) of the Constitution supports taxpayers rights to natural justice and the audi principle.

The problem of whether or not the audi principle applies to ss 74A and 74B is also overcome in some instances where taxpayers have a legitimate expectation that SARS must uphold. This aspect is dealt with in the section 3.6 below, where there is now a legitimate expectation that SARS issues a letter of findings at the conclusion of an inquiry and audit.

It is submitted that this also applies to the Code of Conduct and the SARS Internal Audit Manual155 where the legitimate expectations of the fair, impartial and unbiased standards of SARS in an inquiry and audit, has been created. The taxpayer can make inquiries about the scope, purpose and motivation behind the inquiry and audit, when SARS communicates with the taxpayer to commence the inquiry and audit. The taxpayer can enquire about SARS’ duties to gain insight into the business process of the taxpayer, the industry of the taxpayer, and any industry or taxpayer specific risks identified, as envisaged in the SARS Internal Audit Manual.156 In this way, the audi principle is fulfilled.

Next:  3.6 LEGITIMATE EXPECTATIONS – 3.6.1 The Legitimate Expectations Doctrine in the context of ss 74A and 74B

In accordance with Circular 230 Disclosure

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Footnotes:

139 Attorney-General, Eastern Cape v Blom 1988 (4) SA 645 (A), 660H; and Podlas v Cohen NO and others NNO 1994 (3) BCLR 137 (T) where it was held that the audi alteram partem principle applies when a statute empowers a public official to make a decision prejudicially affecting an individual in his liberty, property or existing rights, unless excluded by necessary implication; Bailey v Commissioner for Inland Revenue 1933 AD 204 at 220; Cekeshe and Others v Premier, Eastern Cape, and Others 1998 (4) SA 935 (Tk); Morelettasentrum (Edms) Bpk v Die Drankraad 1987 (3) SA 407 (T); For a qualified contrary view see Contract Support Services (Pty) Ltd v C:SARS 61 SATC 338 analysed in section 4.7: Pitfalls in bringing the Rule 53 Applicationinfra.
140 Podlas v Cohen NO and others NNO 1994 (3) BCLR 137 (T) where it was held that the audi alteram partem principle applies when a statute empowers a public official to make a decision prejudicially affecting an individual in his liberty, property or existing rights.
141 Hoexter (2012) at page 363.
142 Ibid.
143 The letter of findings approach was announced as a practice by the Commissioner in the unreported application of Drs Du Buisson, Bruinette & Kramer Inc. v C:SARS Case No. 4595/02 in the High Court of the Transvaal Provincial Division brought by the taxpayer to prevent SARS proceeding with an audit in terms of ss 74A and 74B; Also see the Xstrata case in footnote 145 supra.
144 2001 (1) SA 29 (CC).
145 2004 (1) SA 16 (CC).
146 Hoexter (2012) at page 397.
147 Ibid.
148 See section 2.4 supra; See also Fedsure Life Assurance Ltd v Greater Johannesburg Transitional Metropolitan Council 1999 (1) SA 374 (CC) at para [59].
149 Ibid. at para [56].
150 Ibid. at para’s [56]-[59]; Pharmaceutical Manufacturers Association of SA: In re Ex parte President of the Republic of South Africa 2000 (2) SA 674 (CC).
151 Hoexter (2012) at pages 121-5; Albutt v Centre for the Study of Violence and Reconciliation 2010 (3) SA 293 (CC).
152 Contract Support Services (Pty) Ltd and Others v CSARS 61 SATC 338 at page 350; Arepee Industries Ltd v CIR 55 SATC 139 at pages 144-5.
153 1996 (3) SA 99 (ECD) at para’s 116 D-G.
154 64 SATC 130.
155 See section 3.2: The SARS Internal Audit Manual supra.
156 Ibid.:‘In order to carry out his tasks properly the auditor has to make professionally and technically sound decisions on the nature and scope of the audit. This requires insight into the knowledge of the business process of the taxpayer as well as those of the industry or target group of which it is part’.