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

2.3 A CONSTITUTIONAL BALANCE OF SARS’ POWERS AND THE ‘ADMINISTRATIVE ACTION’ DEBATE

2.3.2 Administrative action
A decision of SARS must fall within the definition of ‘administrative action’ as defined in PAJA in order for the taxpayer to invoke the review remedies in ss 6, 7 and 8 of PAJA. The limitations to such a decision falling under that definition can be summarised as follows.72 The decision of SARS is arguably neither final nor ripe for adjudication by the courts. It is part of a multi-staged process that will ultimately result in a final decision (such as issuing a revised assessment) that in itself will be subject to all of the internal remedies of objection and appeal73 in the Income Tax Act.

In mitigating a strict interpretation of ‘administrative action’ the Supreme Court of Appeal in case of Grey’s Marine case74 gave a wider meaning to the definition. A company established in Hout Bay by a group of women who had historically been excluded from the fishing industry applied to the Minister of Public Works to use property for the establishment of a fish-processing facility and associated restaurant. The Minister of Public Works agreed to let a property to them. The appellants, who were neighbouring occupiers, felt that the development of this area would cause traffic congestion, deprive tenants and visitors of parking and impede access to their premises and to the waterfront. They applied to court to review and set aside the Minister’s decision.

The question at the outset was whether the Minister’s decision constituted ‘administrative action’ falling within the provisions of PAJA. The court held that the Constitution is the repository of all state power, which power is distributed by the Constitution, both directly and indirectly, amongst the various institutions of the state where its exercise is  subject to inherent constitutional constraint. The extent of the constraint varies according to the nature of the power that is being exercised. Where the power is significant, the constraint would be proportionately greater. Where it is less, the constraint would be less. In the case of ss 74A and 74B, because these powers of SARS are exercised early in a multistaged process, the need to exercise constraints must be balanced against the necessity of SARS to have access to the required information, documents or things to conduct a proper inquiry and audit into the taxpayer’s affairs. Because the exercise of this public power usually affects the taxpayer’s patrimony and gives rise to culpability75 by virtue of the impending issue of revised assessments by the same SARS officials, it is submitted that the power is significant, and any constraints should be proportionately greater, ensuring the full suite of constitutional protections envisaged in PAJA being made available to the affected taxpayer.

In referring to the restrictive definition of ‘administrative action’ in PAJA, the Supreme Court of Appeal came to the conclusion in Grey’s Marine case76 that at the core of the definition was the idea of action (a decision) often administered by public bodies undertaking their functions. Sections 74A and 74B require action on the part of SARS in requesting information, documents or things so as to commence a regulatory inquiry and audit, that may inevitably lead to revised assessments being issued by the same SARS officials.

In the Grey’s Marine case77 the Supreme Court of Appeal also pointed out that the definition had to be construed consistently and, wherever possible, with the meaning that is attributed to administrative action as that term is used in s 33 of the Constitution (from which PAJA originates), in order to avoid constitutional invalidity. In this regard, it is submitted that the fact that the power is investigative and that its exercise does not in itself determine whether any tax is payable does not detract from this conclusion. The decision imposes on taxpayers an obligation to do something (to produce information, documents and things) which, but for the exercise of the power, taxpayers would not in law be obliged to do. When SARS exercises these powers the information, documents of things must be produced to a SARS official. A failure by taxpayers to comply exposes them to criminal prosecution under s 75 of the Income Tax Act.

In the Grey’s Marine case,78 it was held that administrative action is the conduct of the bureaucracy in carrying out the daily functions of the state, and necessarily involves the application of policy, usually after its translation into law, with direct and immediate consequences for individuals or groups of individuals. The relevant factors to be taken into account in determining what ‘administrative action’ is, are as follows:79

a. The source of the power;
b. The nature of the power;
c. The subject matter of the power;
d. Whether the power involves the exercise of a public duty;
e. How closely the power is related, on the one hand, to policy matters which are not administrative, and on the other hand to the implementation of legislation, which is.

By SARS exercising its powers under ss 74A and 74B:

a. The source of the power is specifically set out in the Income Tax Act;
b. The nature of the power is to regulate tax compliance;
c. The subject matter of the power is conduct in the form of exercising a discretion;
d. The power is exercised by SARS officials who are empowered to exercise specific public duties prescribed in the Income Tax Act;
e. The implementation of the policy of tax compliance through legislation is to audit
taxpayers in pre-identified areas as envisaged in s 74 of the Income Tax Act, in the definition of ‘the administration of this Act’. In this regard, SARS have also compiled  an internal guideline80 to guide and direct SARS officials in audit and inquiry cases where the powers of ss 74A and 74B (read with s 74) are invoked.

In addition, prior to the advent of the new Constitution, the Supreme Court of Appeal ‘vigorously reappraised’ the reasoning that preliminary decisions linked to investigations do not affect existing rights – where the Supreme Court of Appeal held that preliminary decisions can have devastating effects.81 Hoexter states that: ‘…South African courts will have to work out South African meanings for terms such as ‘direct, external legal effect’ and that ‘limited progress has been made in this regard.’ And then: ‘…it would be a great pity if the term ‘direct’ were to be read as flatly contradicting this jurisprudence or as rendering preliminary decision-making entirely unreviewable.’82 These difficulties are in fact being worked out in the development of the constitutional principle of legality. In the Nextcom (Pty) Ltd v Funde NO and Others83 the court recognised that irregularities performed in leading to a decision where a right to procedurally fair administrative action had been infringed, the complainant was entitled to bring an immediate review application to review the conduct of the Minister:

…[W]here a recommendation is a nullity because of irregularities committed in the course of proceedings leading to the decision to make that particular recommendation, it means that a right to procedurally fair administrative action has been infringed. That infringement cannot be rectified by the Minister’s decision; it remains an infringement of a constitutional right. …Once unlawfulness is manifest in a form which cannot be corrected no matter how the public authority continues to act, there is no point in insisting that the complainant should continue to go through the motions before bringing the matter to court. (Baxter, Administrative Law, p 720.) In my view the review application and this application is not premature. (Emphasis supplied) This set of circumstances is very similar to a taxpayer subjected to its rights to just administrative action being infringed whilst SARS embarks upon an inquiry and audit into the taxpayer’s affairs.

Notwithstanding this, there is still a temptation for courts to narrowly view preliminary natured decisions as not having an immediate ‘direct, external legal effect’ in an attempt to disqualify a taxpayer from relying upon the grounds of review in s 6(2) of PAJA. The decisions and powers of SARS in terms of ss 74A and 74B fall into this category of preliminary decisions linked to investigations, which may devastatingly affect existing rights.84 These powers are a form of ‘seizure’85 encroaching upon various taxpayer rights. The authors of Constitutional Law of South Africa 2nd ed also argue that the interpretative approach of the determination theory should be followed in arriving at a conclusion where the ‘courts will, in practice, work in from the determination theory by accepting that all public power which determines rights will constitute administrative action…’.86 Baxter supports this conclusion in his authoritative work Administrative Law87 where he states that the criterion as to whether or not a sufficiently ‘ripe’ action constitutes a reviewable decision depends on ‘whether prejudice has already resulted or is inevitable, irrespective of whether the action is complete or not’.88 Nextcom’s case89 supports this line of reasoning and in effect follows the determination theory, that all public  power which determines rights that will result in inevitable prejudice (whether the
action is complete or not), will constitute administrative action and be reviewable.90 The reviewable conduct includes all exercise of public power that defies constitutional obligations. This includes s 195(1) of the Constitution read with s 4(2) of the SARS Act. It also includes non-compliance with s 41(1) (c), (d) and (f) of the constitution,91 which applies to ‘conduct’ of public administration (including SARS),92 and provides that SARS can only carry out the functions under the strict guidance of the basic norms and objective value system93 derived from the Constitution. This means that SARS does not have inherent power other than that derived from specific statutory provisions.94 Noncompliance with one or more of the eight jurisdictional facts in s 74 of the Income Tax Act and the definition of ‘administration of this Act’ would be non-compliance with the scope of SARS’ powers. Encroaching upon the privacy (and dignity) of the taxpayer without proper justification95 would also be unlawful conduct.

The underlying right of just administrative action as regulated through the definition of ‘administrative action’ in PAJA would be circumvented by the simple technique of compelling taxpayers to comply without question at the commencement of the preassessment investigation in terms of ss 74A and 74B. Despite the fact that the inevitable revised assessment, penalties and interest charges may follow. This legalistic and literal interpretation is questionable, especially as the result of the inquiry and audit is the immediate enforcement of the ‘pay now argue later’ principle to any revised assessment raised against the taxpayer.

For this reason, it is submitted, taxpayers are entitled to challenge SARS before the actual issuing of the revised assessments, where the powers of SARS under ss 74A and 74B have been applied in an unlawful, unreasonable, procedurally unfair manner, or without adequate reasons. If not, the effect is simply to paralyse the rights of taxpayers in a process that takes them down an avenue of direct, external legal consequences, where the Constitution exists to otherwise protect them. SARS, as an organ of state, cannot escape that scrutiny of the Constitution by simply forcing the taxpayer to submit to these powers, without taxpayers having the right to challenge these powers in terms of PAJA, or the constitutional principle of legality.

As already stated, the reality is that the inquiry and audit is usually the trigger for the inevitable issue of revised assessments shortly after the commencement of that inquiry and audit. In Park-Ross96 Tebbutt J stated that preliminary inquiries that may result in inevitable, significant consequences for the subject under investigation and for this reason the effect on fundamental rights of the person under investigation should not be ignored. It is also noteworthy that in Nomala v Permanent Secretary, Department of Welfare and Another,97 the court held that a matter was ripe for adjudication in relation to the lawfulness98 of administrative action where prejudice was inevitable even though the action had not yet occurred.

In Viking Pony Africa Pumps (Pty) Ltd t/a Tricom Africa v Hidro-Tech Systems (Pty) Ltd & another 2011 (1) SA 327 (CC) the Constitutional Court held:

[37] PAJA defines administrative action as a decision or failure to take a decision that adversely affects the rights of any person, which has a direct, external legal effect.99 This includes “action that has the capacity to affect legal rights”.100 Whether or not administrative action, which would make PAJA applicable, has been taken cannot be determined in the abstract. Regard must always be had to the facts of each case. 101 (Emphasis supplied)

Whether or not administrative action, which would make PAJA applicable, has been taken, ‘…cannot be determined in the abstract. Regard must always be had to the facts of each case.’102 A decision to investigate, and the process of investigation, which excludes a determination of culpability, could not adversely affect the rights of the appellant’s in a manner that has a direct and external legal effect.103 So too a decision to institute proceedings in the High Court for an interdict does not affect the rights of the appellants, or have that capacity. It is the High Court which decides that the Act is being contravened and decides to grant the interdict.104 Having regard to the typical facts and circumstances that occur at the time of a SARS decision to inquire and audit, the inter-relationship between ss 1(c), 33, 41(1), 172(1), 195(1) and 237 of the Constitution, s 4(2) of the SARS Act, and PAJA, such a decision is considered to be ‘administrative action’ for the following reasons:

(a) the decision has been taken by an organ of State exercising a public power or performing a public function in terms of legislation;
(b) the decision involves the exercise of a discretionary power, in that it is for SARS to determine whether and in what circumstances it will require any particular taxpayer to submit, produce or make available information, documents of things;
(c) the decision adversely affect taxpayers’ rights, and has a direct, external legal effect. The fact that the power in question is preliminary and investigative, and that its exercise does not in itself determine whether any tax, penalties and interest is payable, does not detract from the conclusion that tax, penalties and interest may become payable as a result of the preliminary investigation. The decision imposes on taxpayers an obligation to do something (to submit, produce or make available relevant material (as defined)) which, but for the exercise of the power, taxpayers would not in law be obliged to do: normally taxpayers would have a right to keep private and confidential information, documents and things that must now be produced or provided to a SARS official. A failure by taxpayers to comply exposes them to criminal prosecution. Furthermore, these powers exercised by SARS are not made specifically subject to the normal objection and appeal processes in the Income Tax Act;
(d) there is no relevant exclusion in the definition of ‘administrative action’ that
removes this type of decision from that definition in PAJA;
(e) a decision made by SARS in terms of ss 74A and 74B can and will most probably result in culpability in the form of revised assessments being issued by the same  SARS assessors conducting the inquiry and audit, resulting in a decision by SARS that will ‘materially and adversely affect(s) rights’ and have a ‘direct, external legal effect’ on taxpayers.105

Next:  Chapter 2.3.3 Conclusion

In accordance with Circular 230 Disclosure

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Footnotes:

72 The authors of Silke on Tax Administration Lexis Nexis (April 2009) at para 8.9 hold a different view. They simply state, without performing the analysis done in this thesis, that s 74B is ‘administrative action’ and therefore subject to the provisions of PAJA. They cite Bentley D Taxpayer Rights: An International Perspective (1998) 49 and Daiber C Protection of Taxpayer’s Rights in Germany as authority.
73 See section 5.4: Review Application directly to the Tax Court infra.
74Grey’s Marine case supra footnote 21 at para’s [19] to [23].
75 Viking Pony Africa Pumps (Pty) Ltd t/a Tricom Africa v Hidro-Tech Systems (Pty) Ltd & another 2011 (1) SA 327 (CC) at para [37].
76Grey’s Marine case supra footnote 21 at para [23].
77Ibid. at para [22].
78Ibid.
79President of the Republic of South Africa v South African Rugby Football Union 2000 (1) SA 1 (CC).
80 See section 3.2: The SARS Internal Audit Manual infra. The information contained therein sets out internal guidelines to be followed by SARS officials to ensure their methodology is lawful, reasonable (rational and proportional) and procedurally fair in auditing taxpayers.
81Du Preez v Truth and Reconciliation Commission 1997(3) SA 204 (A) and Director: Mineral Development, Gauteng Region v Save the Vaal Environment 1999(2) SA 709 (SCA).
82Hoexter (2012) at page 229 footnote 438 – Du Preez v Truth and Reconciliation Commission 1997(3) SA 204 (A) and Director: Mineral Development, Gauteng Region v Save the Vaal Environment 1999(2) SA 709 (SCA). Hoexter goes on at page 207 to state that: ‘…South African courts will have to work out South African meanings for terms such as ‘direct, external legal effect’. Limited progress has been made in this regard.’ And further at page 229: ‘…it would be a great pity if the term ‘direct’ were to be read as flatly contradicting this jurisprudence or as rendering preliminary decision-making entirely unreviewable.’ (footnote excluded)
83 2000 (4) SA 419 (T).
84See also Croome B Taxpayers’ Rights in South Africa Juta 2010 at page 207; Compare Law Society, Northern Provinces (Incorporated as The Law Society of The Transvaal) v Maseka and Another 2005(6) SA 372 (BH) at 382BE, The Master v Deedat and others 2000(3) SA 1076 (N) at 1083G, and Van der Merwe and Others v Slabbert NO and Others 1998(3) SA 613 (N) at 624D-E, where the courts held that if a functionary merely performs an investigative function that does not materially and adversely affect a person’s rights, it is not an administrative decision. It is submitted in this thesis that a ss 74A and 74B investigative decision and function does materially and adversely affect a taxpayer’s rights.
85R v McKinlay Transport Ltd S.C.R. 627.
86See the authorities at footnote 53 to 55 supra.
87 Baxter L Administrative law (1984) Juta.
88 Quoted in Williams R C The Concept of a “Decision” as the threshold requirement for Judicial Review in terms of the Promotion of Administrative Act PER/PELJ 2011(14)5 http://www.ajol.info/index.php/pelj/article/viewFile/70039/58153 (last accessed 30 March 2013) at page 235.
89Supra footnote 82.
90Woolman et al Constitutional Law of South Africa 2nd ed Juta 2002 at page 63-21.
91‘41. Principles of co-operative government and intergovernmental relations. – (1) All spheres of government and all organs of state within each sphere must-…
(c) provide effective, transparent, accountable and coherent government for the Republic as a whole;
(d) be loyal to the Constitution of the Republic and its people; …
(f) not assume any power or function except those conferred on them in terms of the Constitution…’; Section 41(1) of the Constitution.
92Ibid. s 239.
93Woolman et al Constitutional Law of South Africa 2nd ed Juta 2002 at pages 13-10 and 13-11.
94High School Carnavon & another v MEC for Education and others [1999] 4 All SA 590 (NC); The Monastery Diamond Mining Corporation (Edms) Bpk v Schimper 1983 (3) SA 538 (O); Drakensberg Administration Board v Town Planning Appeals Board 1983 (4) SA 42 (N) at 45A); Baxter Administrative Law at 408; Wiechers Administratiefreg 2 ed at 156; ; Barrett NO v Macquet 1947 (2) SA 1001 (A) at 1015–1016; See also Gzell I V The Taxpayer’s Duty of Disclosure (Paper) October 2006 Hong Kong: where the presenter concluded that a ‘taxpayer’s duty of disclosure is a creature of statute. The content of the duty will depend upon the proper construction of the statutory provision.’ http://www.lawlink.nsw.govau/lawlink/Supreme_Court/ll_sc.nsf/pages/SCO_gzell131006 (last accessed 31 March 2013); See also section 3.3: Lawfulness infra.
95The direct legal effect is that the fundamental right to privacy of the taxpayer is intruded upon, outside justifiable grounds. However, the case law on justification says that there is no ‘privacy’ when investigating business affairs (see Bernstein and Others v Bester and Others NNO 1996(2) SA 751 (CC). Here the deprivation versus the determination theory comes to play, where the latter is broader in meaning – one must merely show that determined rights that emerge going forward may be affected. Various academic writers favour this approach, such as Hoexter (2012) and Woolman et al Constitutional Law of South Africa 2nd ed Juta 2002 at page 63-21.
96Park-Ross and Another v Director: Office for Serious Economic Offences 1995 (2) SA 148 (C) at pages [1641-165A].
97 2001 (8) BCLR 844 (E).
98 See also section 3.3: Lawfulness infra.
99 Section 1 provides that “administrative action”—“means any decision taken, or any failure to take a decision, by—(a) an organ of state, when— (i) exercising a power in terms of the Constitution or a provincial constitution; or (ii) exercising a public power or performing a public function in terms of any legislation; or
(b) a natural or juristic person, other than an organ of state, when exercising a public power or performing a public function in terms of an empowering provision,
which adversely affects the rights of any person and which has a direct, external legal effect”.
100Grey’s Marine case supra footnote 21 at para [23].
101Viking Pony Africa Pumps (Pty) Ltd t/a Tricom Africa v Hidro-Tech Systems (Pty) Ltd & another 2011 (1) SA 327 (CC) at para [37]; Joseph & another v City of Johannesburg & others 2010 (4) SA 55 (CC) at para [27]; Grey’s Marine case supra footnote 21 at para [23]; City of Cape Town v Hendricks & another [2012] ZASCA 90; J R de Ville Judicial Review of Administrative Action in South Africa, (2003) para 2 1 6; Hoexter (2012) at pages 220-7; See also recent Corpclo 2290 cc t/a U-Care v The Registrar of Banks [2013] 1 All SA 127 (SCA) at para [26]: the Supreme Court of Appeal held that the Registrar’s decisions to investigate the appellant’s business and institute proceedings against the appellant’s for an interdict in terms of s 81 of the Act were not administrative actions for the purposes of PAJA as they did not (as required by the definition of ‘administrative action’ in s 1 of PAJA) adversely affect the rights of the appellant’s or have a direct, external legal effect or have that capacity.
102Ibid. at para [37].
103Corpclo case op. cit. at para [26].
104Ibid; Competition Commission of SA v Telkom SA Ltd & another [2010] 2 All SA 433 (SCA) at para [11].
105Viking Pony Africa Pumps (Pty) Ltd t/a Tricom Africa v Hidro-Tech Systems (Pty) Ltd & Another 2011 (1) SA 327 (CC) at para [37].