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

2.2 THE RELEVANT CONSTITUTIONAL PROVISIONS

2.2.4 Conduct, decisions and public power

The effect of these provisions and commentary above, is that the provisions of ss 74A and 74B would be required to pass constitutional muster with particular reference to ss 1(c), 33, 41(1), 195(1) and 237 of the Constitution, read with s 4(2) of the SARS Act. In essence, the effect of reading these constitutional provisions together with the cases referred to above, is that any decision that adversely affects the rights of a taxpayer must be subject to a procedural and substantive due process. Croome holds the view that a decision by SARS in terms of ss 74A and 74B invariably affects the taxpayer’s patrimony which constitutes a right envisaged in s 33(2) of the Constitution in that ‘a decision … may affect the income tax payable by the taxpayer, the timing of payment, and whether the tax is subject to interest or additional tax (and penalties).’46

When SARS makes a decision in terms of ss 74A and 74B, it is submitted that taxpayers’ rights are adversely affected, with an impending direct, external legal effect, in line with the determination theory.47 The significance of this reasoning is that such a decision is ‘administrative action’ as defined in PAJA. Alternatively, the decision, being an exercise of power, would be subject to the principle of legality. If a court were to decide the decision was not administrative action – an additional remedy would be for the taxpayer to approach the court to declare the actual definition of ‘administrative action’ in PAJA as law inconsistent with the Constitution and therefore invalid. This would also be done through the application of s 172(1) of the Constitution.

Following the reasoning of the authors in Fundamental Rights in the Constitution:
Commentary and Cases,48 it is clear from ss 2, 8(1) and 8(2) that the Constitution regulates conduct. The authors in Fundamental Rights in the Constitution:  commentary and Cases49 argue that conduct is subject to the provisions of the Constitution because the State and its functionaries can only act if authorised by law. Unauthorised conduct is unlawful as confirmed in s 41(1)(f) and read with s 1(c) of the Constitution, in that functionaries can only assume such powers as conferred on them in terms of the Constitution – meaning powers that are lawful, reasonable, procedurally fair and with ‘adequate reasons’. Either the law offends because it is unconstitutional, or the law is interpreted to render the conduct unlawful.

An example of the latter situation would be conduct by SARS outside the  jurisdictional facts50 of ss 74A and 74B. Any request or investigation by SARS must be for purposes of ‘the administration of the Act’,51 as defined in s 74 of the Income Tax Act. If one or more of those defined jurisdictional facts are not present, then the conduct by the Commissioner or his official would be unauthorised and hence unlawful and unconstitutional. The empowering provisions are not necessarily unconstitutional, but the manner in which they are applied may be (ie. the conduct of SARS). If these sections were interpreted and enforced in a manner that is in conflict with ss 1(c), 33, 41(1) and 195(1) of the Constitution, the conduct of SARS would also be unlawful, unreasonable or procedurally unfair and as being contrary to just administrative action, or the principle of legality.

In one of the leading Constitutional Court cases on the principle of legality (also now known as the constitutional principle of legality), namely, the Pharmaceutical
Manufacturers case,52 Chaskalson P held:

[20] The exercise of all public power must comply with the Constitution which is the supreme law and the doctrine of legality which is part of that law… (Emphasis supplied)

There can be no legitimate excuse for a SARS official not complying with the
Constitution in exercising public power by invoking the provisions of ss 74A and 74B.

[27] The principle applies … ‘not only to review of … legislative action but also to the review of administrative action.’… (Emphasis supplied)

The administrative action contemplated would be that envisaged in the Grey’s Marine case,53 where the Supreme Court of Appeal observed that administrative action is:

… the conduct of the bureaucracy (whoever the bureaucratic functionary might be) in carrying out the daily functions of the State which necessarily involves the application of policy, usually after its translation into law, with direct and immediate consequences for individuals or groups of individuals.

The conduct of the bureaucracy known as SARS carries out the functions of administering the provisions of the Income Tax Act, inter alia, ss 74A and 74B.
However, the conduct of the bureaucracy is subject to what the Constitutional Court held in the Pharmaceutical Manufacturers case:54

[41] Powers that were previously regulated by the common law
under prerogative and the principle developed by the courts to
control the exercise of public power are now regulated by the
Constitution. (Emphasis supplied)

The powers of ss 74A and 74B, in line with this authority, are regulated by the
Constitution.

[45] Courts no longer have to claim space and push boundaries to find means of controlling public power. That control is vested in them under the Constitution which defines the role of the courts, their powers in relation to other arms of government and the constraints subject to which public power has to be exercised. (Emphasis supplied)

As a result, the Constitution empowers the Courts to control the powers of SARS under ss 74A and 74B, and as aptly described in the final quote:

[51] Although common law remains relevant to this process, judicial review of the exercise of public power is a constitutional matter that takes place under the Constitution and in accordance with its provisions. (Emphasis supplied)

This includes its constitutional obligations in ss 1(c),33, 41(1) and 195(1) of the
Constitution, giving rise to a series of compulsory duties. Non-compliance with these duties or constitutional obligations would in turn give rise to a right to taxpayers to enforce these constitutional obligations as envisaged in the Constitutional Court judgments of Carmichele v Minister of Safety and Security and Another (Centre for Applied Legal Studies Intervening)55 and the more recent Glenister v President of the Republic of South Africa and Others.56

As to the invalidity of the law or conduct, the following analysis is appropriate.

Law for the purposes of this thesis (as already analysed above) means the actual wording of ss 74A and 74B, read with ss 74 and 75(1)(b) of the Income Tax Act. Conduct can only flow from authorising law or inherent power as per ss 1(c) and 41(1)(f) of the Constitution. The Commissioner has no inherent power to exercise any conduct57 not prescribed in an act of Parliament.58 Sections 74A and 74B of the Income Tax Act would be the authorising law giving rise to the conduct, but subject to the constitutional duties imposed on SARS in terms of the Constitution. The constitutionality of the conduct is determined through interpreting ss 74A and 74B with reference to the lawfulness, reasonableness or procedural fairness requirements and the constitutional obligations placed on SARS in terms of the Constitution.59

This conduct must not be inconsistent with the following specific provisions, namely: ss 10 (dignity); 14 (privacy); 33 (just administrative action – procedural and substantive due process) ; and ss 41(1) and 195 (1) of the Constitution. Section 33 leads more specifically to ss 3, 5 and 6 of PAJA.

Next:  Chapter 2 – 2.2.5 Conduct, audits and inquiries

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Footnotes:

46Croome B Taxpayers’ Rights in South Africa Juta 2010 at page 207 and at 224 where the author quotes from Wheelright K Taxpayer’ Rights in Australia in Bentley D Taxpayers’ Rights: An International Perspective Revenue Law Journal Bond University: Queensland 1998 at page 49 giving an international perspective.
47Woolman et al Constitutional Law of South Africa 2nd ed Juta 2002 at page 63-21 footnote 2, where the authors state:
‘Applying the deprivation theory would, in our view, render the (P)AJA unconstitutional, as to hold that administrative justice only applies to decisions which deprive a person of his or her rights cannot be said to give effect to the
constitutional right to just administrative action (footnote 4 – Hoexter C The Future of Judicial Review in South African Administrative Law (2000) 117 South African Law Journal page 484 at page 516 states that the deprivation theory
‘clearly creates an unacceptably high threshold for admission to the category of “administrative action” ‘). In addition, had the Act intended to be more restrictive, it could have inserted the words ‘existing rights’ instead of ‘rights’ (footnote 5 – Some support for the determination theory may be found in the following dictum of Borochowitz J in Association of Chartered Certified Accountants v Chairman, Public Accountants’ and Auditors’ Board 2001 (2) SA 980 (W) at 997, in holding that the relevant decision amounted to administrative action: ‘[T]he Board’s decision has plainly affected the rights and interests of the applicant. It has determined its rights’ )’; See also Croome B Taxpayers’ Rights in South Africa Juta 2010 at page 208 where the author expresses the view that the wider meaning to the ‘determination theory’ should apply ‘extending the reach of the Constitution.’ citing Currie I & De Waal J The Bill of Rights Handbook 5ed
Juta 2005 at para 6.3 at page 148 and at page 149: ‘The purposive approach to interpretation therefore invariably requires a value judgment to be made about which purposes are important and protected by the Constitution and which
are not.’48 Davis et al Fundamental Rights in the Constitution (1997) Wits: Juta at pages 32-5,37,45.
49Ibid. at page 33.
50 See section 3.3.2: Jurisdictional facts infra.
51In Industrial Equity Ltd v Deputy Commissioner of Taxation and Others (1990) 170 CLR 649 at 659 the Australian High Court held that the powers of access and inquisition must be exercised for the purpose of the Act and that question
is to be considered in the context of the provision levying income tax, as envisaged in that definition in s 74 of the Income Tax Act.
52Supra footnote 11 para’s [20], [27], [41], [45] and [49] – [51].
53Grey’s Marine case op. cit. footnote 21 at para [24].
54Supra footnote 11 at para’s [41], [45] and [51] as quoted below.
55 2001 (4) SA 938 (CC) at para [36].
562011 (3) SA 347 (CC); See also Premier, Western Cape v President of the Republic of South Africa 1999 (3) SA 657 (CC) at para [44]; The Permanent Secretary, Department of Welfare, Eastern Cape Provincial Government and Ano v
Ngxuza and Others 2001 (4) SA 1154 (SCA) at para [15] footnote 23; Reuters Group Plc and Others v Viljoen NO and Others 2001 (2) SACR 519 (C) at para [46]; Carephone (Pty) Ltd v Marcus NO and Others 1999 (3) SA 504 (LAC);
See Chapter 4 infra.57 See also Murphy J The Constitutional Review of Taxation (1997) Revenue Laws at pages 89 and 105: ‘In a literal sense taxation can be seen as a species of expropriation. For that reason many bills of rights explicitly delimit the scope of property rights by enacting a saving provision to admit taxation without incurring any obligation to pay just compensation… Since the rights affected by taxation are unquestionably ‘rights in property’… we need to infer a saving of the taxing power from an interpretation of s 28 as a whole. In the first instance it may be argued that taxation is a ‘deprivation’ of rights in property under s 28(2) and, therefore, shall be permitted ‘in accordance with a law’. The concept of a ‘deprivation’ is a wide one and may take many forms. Section 28(3) makes it plain that expropriation is but one species of a wider genus of deprivations. Taxation is feasibly another. Accordingly, Revenue will argue, the sole requirement for the taxing power in relation to property rights is for it to be ‘in accordance with a law’…’. This analysis holds accord with a reading of s 25 of the Constitution, fundamental right against deprivation of property, where deprivation of property can only take place in accordance with a law of general application, bringing the power to tax within the Constitution’s limitation of rights clause in s 36 – a specific law and provision of general application must
give the power to do so.
58 Based on the ‘rule of law’ as being supreme in s 1(c) of the Constitution, and s 41(1)(f) where SARS may ‘not assume any power or function, except those conferred on them in terms of the Constitution.’(Emphasis supplied)
59 Refer to Davis et al Fundamental Rights in the Constitution (1997) Juta at page 33.

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