Posted in sections, this is my Doctoral Thesis of 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

3.3.3 Abuse of Discretion
As explained by Hoexter56, discretionary powers are easily recognised by the permissive statutory language and the use of words like ‘may’57 in provisions such as ss 74A and 74B. The exercise of such discretions creates the temptation to abuse the discretion, which is why significant authority exists on abuse of discretion.58 The traditional grounds of abuse of discretion are: mala fides, ulterior purpose or motive, and failure to apply mind. Abuse of discretion could also fall within the description in s 6(2)(f)(ii) of PAJA of not being rationally connected to: the purpose of the empowering provision; the information before the administrator; and, the reasons given for it (all of which would also form part of the principle of legality).

In Dawood’s case,59 O’Regan J of the Constitutional Court in a unanimous decision held the following in relation to discretionary powers:

[53] Discretion plays a crucial role in any legal system60. … It is for the Legislature to ensure that, when necessary, guidance is provided as to when limitation of rights will be justifiable. It is therefore not ordinarily sufficient for the Legislature merely to say that discretionary powers that may be exercised in a manner that could limit rights should be read in a manner consistent with the Constitution in the light of the constitutional obligations placed on such officials to respect the Constitution. Such an approach would often not promote the spirit, purport and objects of the Bill of Rights. Guidance will often be required to ensure that the Constitution takes root in the daily practice of governance. …

[46] … conferring a broad discretion upon an official, who may be quite untrained in law and constitutional interpretation, and expecting that official, in the absence of direct guidance, to exercise the discretion in a manner consistent with the provisions of the Bill of Rights. …

[47] It is an important principle of the rule of law that rules be stated in a clear and accessible manner.61 It is because of this principle that s 36 requires that limitations of rights may be justifiable only if they are authorised by a law of general application. (Emphasis supplied)

The definition of ‘administration of this Act’ in s 74 of the Income Tax Act has defined the parameters within which SARS can make a decision ‘for the purposes of administration of this Act’ envisaged in ss 74A and 74B. But it contains no specific guidelines. Furthermore, the mere reiteration by SARS of the specific sub-sections in that definition would not be regarded as adequate reasons62 to justify the necessity to proceed with an inquiry or audit, and could therefore amount to an abuse of its discretion,63 in that the discretion exercised is arguably not rationally connected to the purpose of the empowering provision, or, the information before the administrator, or, the reasons given for it.

In addition to this, the principles set out in the Stroud Riley64 above (which in some instances compel SARS to exercise its discretion in a particular manner such as not to proceed with the inquiry and audit) will apply. If SARS fails to comply with its own internal guidelines (SARS Internal Audit Manual),65 as envisaged in Dawood’s case above, in commencing an inquiry and audit, such conduct would be indicative of an abuse of discretion. For instance, in line with its internal guidelines, the initial gathering of the facts of a targeted taxpayer will assist in determining whether or not SARS should proceed with the inquiry and audit. The information before SARS will assist in justifying a rational connection between the decision and the purpose of the empowering provision.

The internal guideline states that the SARS assessor, in the absence of evidence to the contrary, should cease the inquiry and audit. The taxpayer will also know the ‘substance of the case’ being faced.66 Otherwise, it may arguably be exercising its powers for some ulterior purpose or motive, in an arbitrary, capricious manner, or without having satisfied all the jurisdictional facts –unconstitutional conduct in terms of s 2 of the Constitution.

Next:  Chapter 3.3.3.1 – Improper or ulterior purpose or motive

In accordance with Circular 230 Disclosure

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Footnotes:

56 Hoexter C & Lyster R The New Constitutional & Administrative Law (2002) Juta at pages 25-6.
57 See also Wade H W R & Forsyth C F Administrative Law 7th ed (1994) Oxford at 391.
58 Hoexter (2012) at pages 307-25.
59 2000 (3) SA 936 (CC) at para’s [46] to [54].
60 Footnote 73 in the case – Although there was a time when some thought that discretion was inappropriate in a legal system based on the rule of law (see for example, Dicey Introduction to the Study of the Law of the Constitution 10ed. (Macmillan, London 1959)), this is no longer the case. It is recognised that discretion cannot be separated from rules and that it has an important role to play in any legal system. See the ground-breaking work by K C Davis Discretionary Justice: A Preliminary Inquiry (Louisiana State University Press, Baton Rouge, 1969). Administrative lawyers now generally acknowledge the importance of discretion to a functioning legal system. The challenge for administrative law is to ensure that discretion is properly regulated. See, generally, Galligan Discretionary Powers: A Legal Study of Official Discretion (Clarendon Press, Oxford, 1986); Harlowand Rawlings Law and Administration 2ed. (Butterworths, London, 1997); Craig Administrative Law 3ed. (Sweet & Maxwell, London, 1994); and Baxter Administrative Law (Juta, Cape Town, 1984). See also Baron v Canada (1993) 99 DLR (4th) 350 at 363, 365-8; and the discussion in the dissenting judgment of L’Heureux-Dubé J in Young v Young (1993) 108 DLR (4th) 193 at 238 and where Young v Young (1993) 108 DLR (4th) 193 referred to.
61 Footnote 71 in the case – ‘The rule of law is a foundational value of our Constitution (see s 1(c) of the Constitution of the Republic of South Africa 108 of 1996). See also Pharmaceutical Manufacturers Association of SA and Others: In re Ex parte President of the Republic of South Africa and Others 2000 (2) SA 674 (CC) at para [40].’
62 See section 2.5: Adequate Reasons supra.
63 Hoexter (2012) at pages 307-25.
64 Stroud Riley & Co Ltd vs SIR 36 SATC 143 at 151.
65 See section 3.2: The SARS Internal Audit Manual at pages 2-6.
66 Chairman of the Board on Tariffs and Trade and Others vs Brenko Inc and Others 64 SATC 130 at para’s [29] and [30].