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

3.3.2 Jurisdictional facts
Before SARS is entitled to make a decision in terms of ss 74A and 74B, read with s 74, to investigate a taxpayer, it must satisfy the jurisdictional facts in those sections. SARS must first consider the empowering law and decide whether the facts of the matter warrant exercising the power: (1) that the investigation has a legitimate purpose and that the inquiry may be relevant to that purpose, (2) that the information sought is not already within SARS’ possession, and (3) that SARS has followed the procedural steps required by the Income Tax Act and the Constitution.39 Jurisdictional facts include conditions imposed by the empowering legislation that the SARS must satisfy. In South African Defence and Aid Fund and Another v Minister of Justice40 Corbett J held: ‘if the jurisdictional fact does not exist, then the power may not be exercised and any purported exercise of the power would be invalid.’ (Emphasis supplied)

Proper compliance with the jurisdictional facts of ss 74A and 74B would include the following: proper delegation of the relevant powers by the Commissioner to the SARS officials in terms of s 74 and s 3 of the Income Tax Act; ensuring that the inquiry relates to a ‘taxpayer’ as defined in the Income Tax Act; and ensuring compliance (with supporting facts) with one or more of the eight sub-sections in s 74 under the definition ‘the administration of this Act’.

In addition, compliance by SARS with the duties and responsibilities attached to exercising discretion in respect of ss 74A and 74B is required. This is especially so where SARS officials are given broad discretionary powers that are not subject to specific guidelines, such as was the case in Dawood’s case.41 See section 3.2 above. In that case the Constitutional Court held that unguided discretionary powers should be subject to provided guidelines, which must be adhered to.

In this regard the guidelines contained in the SARS Internal Audit Manual42 should not, without lawful justification, be ignored by SARS in exercising its discretion in terms of ss 74A and 74B. These guidelines are important in assisting SARS officials to prepare and engage in exercising their powers of inquiry and audit, in that the following key factual areas are to be taken into account as prescribed in their guidelines: does SARS have proper ‘insight into … the business process of the taxpayer …’?; ‘has SARS screened the tax returns of the taxpayer and determined that they warrant an audit’?; has SARS identified ‘which elements of the tax return(s) need to be audited’?; and has SARS obtained ‘information from other sources … (on) … the potential issues of the relevant (audit) …’?43

Hoexter is of the view44 that South African law has adopted a compromise between objective and subjective jurisdictional facts.45 In terms of objective jurisdictional facts,46 a fact or state of affairs must exist objectively before the power can be validly exercised.However, in the case of subjective jurisdictional facts, the court needs only to consider the opinion of the administrator to determine whether or not the facts or state of affairs exist.

Subjective clauses such as ss 74A and 74B which give wide discretionary powers47 to SARS are curbed. The constitutional principle of legality implies that courts must be able to satisfy themselves as to the lawfulness of the administrative action, or exercise of public power,48 including factual assumptions on which the action is based. This is taken further by the right to reasonable administrative action49 and the requirement of rationality inherent in the principle of legality.50

There are also instances where SARS will be obliged to exercise a discretion in favour of a taxpayer, notwithstanding the fact that it has an unfettered discretion in terms of legislative provisions such as ss 74A and 74B.

The locus classicus in this regard is Stroud Riley & Co Ltd v SIR:51

It seems to me that in dealing with a matter of this nature the respondent is required firstly to enquire into the facts. If after such enquiry he is satisfied … he is bound, as a matter of duty, to authorize the refund to the taxpayer…In the latter respect he has no discretion in the matter in spite of the use of the word ‘may’ in the section which authorizes him to make a refund. The general
principle applicable was laid down in Macdougall v Paterson (1851) 11 CB 755 at 766 by Jervis CJ as follows:

‘The word “may” is merely used to confer the authority: and the authority must be exercised, if the circumstances are such as to call for its exercise.’

In dealing with a similar provision in Australian legislation, it was held in Finance Facilities (Pty) Ltd v Federal Commissioner of Taxation52:

If the Commissioner, having considered the matter, is satisfied of facts out of which the power to allow the rebate arises, he cannot nevertheless refuse to allow it.53 (Emphasis supplied)

SARS is therefore obliged to exercise its discretion in favour of the taxpayer if certain conditions (jurisdictional facts) are not met. For instance, if SARS is to comply with the jurisdictional facts of ss74A and 74B it cannot commence a proposed investigation against a person that is not a ‘taxpayer’ as defined. An example is a group of persons whose identity as taxpayers is unknown. The discretion to commence the inquiry or investigation should not be made; or exercised in favour of the taxpayer.

Another example in determining whether or not to proceed is where SARS is obliged to review the relevant facts about the taxpayer at hand in line with its own internal guidelines as discussed above. Failure to comply with it’s internal guidelines is an indication that SARS have not taken into account relevant factors (s 6(2)(e)(iii) of PAJA), or have failed to comply impartially with a mandatory procedure or condition imposed by internal policy. In terms of s 6(2)(b) of PAJA, the failure by SARS to comply with a ‘mandatory’ procedure or condition54 will result in the official’s conduct being unlawful, in that a precondition to a jurisdictional fact has not been met. As to a distinction between mandatory and directory provisions, the mere fact that a provision is directory does not mean that it can be ignored.55

Next:  Chapter 3.3.3 – Abuse of Discretion

In accordance with Circular 230 Disclosure

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Footnotes:

39 See American comparative law: US v McCarthy 514 F 2d 368 (quoted from the headnote): ‘…(1) that the investigation has a legitimate purpose and that the inquiry may be relevant to that purpose, (2) that the information sought is not already within the Government’s possession, and (3) that the Government has followed the procedural steps required by the Internal Revenue Code’.
40 1967 (1) SA 31 (C): Corbett J at page 33 states: ‘Before the State President is entitled to exercise this power to declare an organisation to be an unlawful organisation he must be satisfied that one or more of the conditions … exist.
In order to satisfy himself in this way he must have before him some information relating to such matters as the aims and objects of the organisation in question, its membership, organisation and control, the nature and scope of its activities, what its purpose is and what it professes to be…The content of this kind of condition is often referred to as a ‘jurisdictional fact’ (see Minister of the Interior v Bechler and Others, 1948 (3) SA 409 (AD) at p. 442; Rose- Innes, Judicial Review of Administrative Tribunals in S.A., at pages 99 – 100) in the sense that it is a fact the existence of which is contemplated by the Legislature as a necessary pre-requisite to the exercise of the statutory power. The power itself is a discretionary one. Even though the jurisdictional fact exists, the authority in whom the power resides is not bound to exercise it. On the other hand, if the jurisdictional fact does not exist, then the power may not be exercised and any purported exercise of the power would be invalid.’ (Emphasis supplied); Farjas (Pty) Ltd another v Regional Land Claims Commissioners, KwaZulu-Natal 1998(5) BCLR 579 (LCC) at para [22]; Baxter L Administrative Law (1984) Juta at page 456 ff: ‘A public official must first consider the law which empowers her and decide whether on the facts of the particular matter, she has the power or jurisdiction to deal with it (at 452)’; See also Martin v Chandis 128 F.2d 731 (quoted from the headnote): where it was held that the ‘production of papers and records for examination are statutory, and in order to obtain the relief granted by statute, …(the tax authority)… must bring himself within the terms thereof’; US v McCarthy 514 F 2d 368(quoted from the headnote): ‘In order to establish a prima facie case for
enforceability of an IRS summons, plaintiffs must plead: (1) that the investigation has a legitimate purpose and that the inquiry may be relevant to that purpose, (2) that the information sought is not already within the overnment’s possession, and (3) that the Government has followed the procedural steps required by the Internal Revenue Code’.
41 Dawood and another v Minister of Home Affairs and others; Shalabi and another v Minister of Home Affairs and others and Thomas and another v Minister of Home Affairs and others 2000 (3) SA 936 (CC).
42 See section 3.2: The SARS Internal Audit Manual.
43 Ibid. at pages 2-6.
44 Hoexter (2012) at pages 296-302.
45 as identified by Corbett J in South African Defence and Aid Fund v Minister of Justice 1967 (1) SA 31 (C) at pages 34H-35D; See also Martin v Chandis 128 F.2d 731 where it was held that the ‘production of papers and records for examination are statutory, and in order to obtain the relief granted by statute, …(the tax authority)… must bring himself within the terms thereof’.
46 CSARS v Sprigg Investments 117CC t/a Global Investment 73 SATC 114 (SCA) at para’s [12] and [13] where the Supreme Court of Appeal favoured an objective approach to the furnishing of adequate reasons by SARS.
47 In Amoils v Johannesburg City Council 1943 TPD 386 the court held ‘an unreasonably wide by-law should not be held to be valid because of any presumption that a by-law will be reasonably administered by a local authority.’
48 Henbase 3392 (Pty) Ltd v Commissioner, South African Revenue Services 2002 (2) 180 (T).
49 See section 3.4: Reasonableness infra.
50 Hoexter (2012) at pages 121-5.
51 SATC 143 at page 151; Also refer to the dictum of Corbett J in footnote 47 supra.
52 (1971) 2 ATR 573 at page 578.
53 See also Crown Mines, Ltd v Commissioner for Inland Revenue 32 SATC 190at 100,102; Noble & Barbour v SAR & H 1922 AD 527 at page 540; CIR v King 1947(2) SA 196(AD) 4 at page 209.
54 Croome B & Olivier L Tax Administration 2010 (Juta) at page 52.