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 4 – SECTION 195(1) OF THE CONSTITUTION AND PUBLIC ADMINISTRATION DUTIES WITH REFERENCE TO SECTIONS 74A AND 74B

4.2.5 Public administration must be accountable

Section 195(1)(f) states that public administration must be  accountable.66Accountability can also be described as the ‘concept of justifiability’.67 In Carephone (Pty) Ltd v Marcus NO and Others,68 the Labour Appeal Court considered the meaning of justifiability. It introduces a requirement of rationality in the merit or outcome of the administrative decision. When the Constitution requires administrative action to be justifiable it seeks to give expression to its fundamental values of accountability, responsiveness and openness. In determining justifiability, value judgements will have to be made which will, almost inevitably, involve the consideration of the ‘merits’ of the matter to determine whether the outcome is rationally justifiable.

As suggested in Carephone (Pty) Ltd v Marcus NO and Others,69 the reviewer should ask the following question:

Is there a rational objective basis justifying the connection made by the administrative decision-maker between the material properly available to him [or her] and the conclusion … eventually arrived at?

Can SARS merely exercise the discretion in ss 74A and 74B in a vacuum, without at least some factual basis that is supported by one or more of the requirements set out in the definition of ‘the administration of this Act’ in s 74 of the Income Tax Act? This would be indicative of an unjustifiable and arbitrary decision. The jurisdictional facts of ss 74A and 74B, read with s 74, of the Income Tax Act require SARS to exercise its discretion with specific reference to one of more of the eight sub-sections set out in that definition. The practical manner in which SARS obtains the supporting facts to fulfil the jurisdictional facts, is set out in the SARS Internal Audit Manual.70 The legislature had a purpose when creating these provisions, and they were not merely inserted as subsections that SARS could quote in support of its inquiry and audit, without at least some factual basis that placed SARS in the position to do so.71 The constitutional requirement and duty placed upon SARS to be accountable in terms of s 195(1)(f) of the Constitution emphasises this fact.

The Code of Conduct states:

2.6 In dealing with you, we will endeavor to: Respect, protect, promote and fulfill your constitutional rights; Act professionally and in accordance with a high standard of professional ethics; Treat you impartially, fairly, equitably and without bias; …Be accountable; Provide you with timely, accessible and accurate information and feedback; Treat you with respect…; (Emphasis supplied)

Some factual basis, matched to one of the requirements of the definition of ‘the administration of this Act’ in s 74, must exist to justify SARS’ decision to use its powers. This will ensure that the exercise of the discretion is lawful and reasonable. As stated by the late Professor Etienne Mureinik,72 the Constitution promotes a ‘culture of justification’, ‘a culture in which every exercise of power is expected to be justified; in which the leadership given by government rests on the cogency of the case offered in defence of its decisions, not the fear inspired by the force at its command. The new order must be a community built on persuasion, not coercion.’

Reasons given by SARS for exercising its discretion in ss 74A and 74B are important, as the inquiry and audit may in fact lead to revised assessments being raised against the taxpayer that will have a prejudicial effect on the taxpayer. Adequate reasons (which go to the root of accountability) must be given as held in the Supreme Court of Appeal case of Sprigg Investment.73 This requires that the decision maker (SARS) sets out its understanding of the relevant law, any findings of fact on which its conclusions depend (especially if those facts have been in dispute) and the reasoning process which led to those conclusions. SARS should do so in clear, unambiguous language, not in vague74 generalities or the formal language of legislation.

The letter of findings process introduced by SARS at the conclusion of the inquiry and audit is also aimed at addressing these requirements. However, in practice there are many instances where SARS does not apply the letter of findings process, especially towards smaller taxpayers. The opportunity for these taxpayers to question the findings of SARS before any prejudicial revised assessment is raised, is denied to them. Therefore it is necessary for taxpayers to question the proposed steps to be taken by SARS at the commencement of any inquiry and audit to ensure proper accountability on the part of SARS, and compliance with its Code of Conduct.

SARS cannot expect taxpayers to seek justification for its reasons from a  myriad of documents and previous communications where such reasons cannot reasonably be determined from those communications.75 Taxpayers cannot be expected to discover for themselves from the previous ‘writing and elaborate discussions’ what SARS’ reasons might be. Moreover, even if the correspondence contains adequate reasons, SARS should identify these reasons in the correspondence.76

As already stated, the issue of accountability in s 195(1)(f) is fundamental to procedural fairness. Without the ‘fair’ participation of the taxpayer in the process leading to the exercise of its discretion to conduct an inquiry or audit, it would be difficult for SARS to justify the connection between the available information and the conclusion it arrives at to proceed with the inquiry or audit, unless prior research has been conducted by SARS into the tax affairs of the taxpayer. If this were the case, there would be few justifiable reasons for SARS not to share these facts with the taxpayer, and to receive the appropriate response (as accountability and transparency demands). The fair participation of the taxpayer in the process started by ss 74A and 74Bis equally subject to the constitutional obligations imposed on SARS. As already stated, these constitutional obligations ins 195(1) (read with s 41(1) of the Constitution) are not subject to any justification as envisaged in s 36 of the Constitution.

In arriving at the decision to inquire about and audit in an accountable manner, SARS will have to show that it has adequate reasons which are informative, set out the decision, contain the findings on material questions of fact and law, refer to any relevant evidence and provide the real reasons for the decision to require the taxpayer to furnish SARS with information, documents or things – not simply restate the provisions of s 74 of the Income Tax Act. Where SARS does not comply with s 195(1)(f), aggrieved taxpayers will have the remedy of reviewing the unconstitutional and ‘invalid’ conduct in terms of s 6, 7 and 8 of PAJA, or, alternatively, the constitutional principle of legality.

Next:  4.2.6 Transparency must be fostered

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Footnotes:

66 Transnet Ltd and another v SA Metal Machinery Co (Pty) Ltd [2006] 1 All SA 352 (SCA) at para [55].
67 Cheadle M H Davis D M & Haysom N R L South African Constitutional Law: the Bill of Rights (2002) Butterworths at page 612.
68 1998 (10) BCLR 1326 (LAC).
69 Ibid. at para’s 1337 F – G.
70 The failure by SARS to follow its own internal guidelines without proper justification on its part would be indicative of unconstitutional and ‘invalid’ (lawful, reasonable and procedurally fair) conduct by SARS.
71 In the case of Nkondo & Gumede v Minister of Law and Order1986 (2) SA 756 (A) the Appellate Division held that the reiteration of the wording of the enabling legislation did not constitute reasons; Ferucci and Others v Commissioner for South African Revenue Service and Another65 SATC 47 at pages 56-7; Sachs v Minister of Justice 1934 AD 11; This is also affirmed in CSARS v Sprigg Investments 117CC t/a Global Investment 73 SATC 114 (SCA) at para’s [12] and [13] quoting with approval from Ansett Transport Industries (Operations) Pty Ltd and Another v Wraith and Others (1983) 48 ALR 500 that mere restating of the legislated provisions are not ‘adequate reasons’.
72 Mureinik E A Bridge To Where? Introducing The Interim Bill of Rights (1994) South African Journal on Human Rights 10 at pages 31 and 32.
73 See the discussion in section 2.5: Adequate Reasons supra.
74 Ibid.; Powell NO and Others v Van Der Merwe and Others 2005 (5) SA 62 (SCA) at page 73 where search and seizure warrants were struck down as too broad and unjustifiably violated the appellant’s right to privacy; For comparative law from the United States of America:US v Williams 337 F Supp 1114 (quoted from the headnote): where the District Court in New York held the ‘enforcement …to compel production of message slips held by taxpayer’s telephone answering service would have provided government with names of persons who were not patients of taxpayer at all, or who were not patients during relevant years, and … was overbroad and out of proportion to ends sought, and as such not entitled to enforcement’; Local 174 International Brotherhood of Teamsters v US, 240 F.2d 387 where ‘agents had burden to show that demand was reasonable under all circumstances and to prove that books and records were relevant or material to tax liability of taxpayer …and the taxpayer… possessed books or records containing items relating to taxpayer’s business.’ (Emphasis supplied); US v Newman 441 F.2d 170; US v Coopers and Lybrand F Supp 942; Hubner v Tucker 245 F.2d 35; First National Bank of Mobile v US 160 F.2d 532.
75 Rean International Supply Co (Pty) Ltd v Mpumalanga Gaming Board 1998 (8) BCLR 918.
76 See section 2.5: Adequate Reasons supra.