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

3.3.3.1 Improper or ulterior purpose or motive
Improper or ulterior purpose or motive67 forms a sub-section to abuse of discretion. Section 6(2)(e)(ii) of PAJA deals with an improper or ulterior purpose or motive. Should SARS act with improper or ulterior purpose or motive in relation to the provisions of ss 74A and 74B, its conduct will be invalid. That would be sufficient to launch a judicial review application on the strength of a transgression of s 6(2)(e)(ii) of PAJA; or the principle of legality, where the administrator should exercise such powers only for the purposes they were conferred.

A typical example of an improper or ulterior purpose or motive occurs where SARS is in conducting a criminal investigation, under the guise of a civil regulatory investigation, in contravention of the principles in s 35(3)(j) of the Constitution, the guarantee against selfincrimination, under the auspices of a ss 74A and 74B inquiry or audit.

In Probe Security CC v Security Offices’ Board and Others68,the inspectors of a regulatory authority conducted an inspection into the affairs of the applicant at its premises, carried out a search of the premises and demanded inspection and copies of certain documents at these premises. The applicant claimed that the inspection was a violation of its common-law and constitutional rights, inter alia, those to privacy. It was clear that the regulatory authority permitted regulatory inspection. However, Satchwell, J was of the opinion that in instances where criminal offences have been committed in relation to those regulations, and criminal prosecutions are admissible, certain minimum requirements as to reasonableness69 and fairness have to be met before the inspection authority can be held to be acting intra vires and lawfully. While inspections could be of a routine regulatory nature, they could well incorporate an investigatory and disciplinary function that could result in the seizure of documents and which, in turn, could form the basis for the support of allegations of contraventions of the governing legislation. Furthermore, these inspections of a regulatory nature could lead to a violation of the security officers’ rights to a fair trial. Unless safeguards were built into the regulations, they could result in a failure to meet the test of constitutionality. Satchwell, J was of the view that serious questions for consideration had been raised, which would be considered in a later review application. In this case, in conclusion, while the balance of convenience demanded protection for the applicant, the court refused to grant a temporary interdict holding that, while the inspection could take place, the fruits of such inspections could not be used in the procurement of or in the course of any criminal proceedings against the applicant.70

The effect of this judgment is resonated in the more detailed judgment of the Canadian Supreme Court in R v Jarvis,71 where the court held that the nature and scope of a preliminary investigation by a tax authority impacts on the powers that the tax authority can use, and the later use of any evidence obtained from the taxpayer. If a criminal investigation is being conducted under the auspices of a routine verification audit, the conduct by SARS would be an abuse of power with an improper or ulterior purpose or motive. Furthermore, any direct or indirect evidence obtained from the taxpayer under compulsion whilst conducting a verification audit would be inadmissible as evidence in any subsequent criminal investigation against the taxpayer.72

It is likely that a similar conclusion would be reached by the courts in relation to powers exercised in terms of ss 74A and 74B. The audit and inquiry would be allowed to continue, provided that the ‘fruits of the inspections’ were not used in the procurement of or in the course of any criminal proceedings against the taxpayer.

Furthermore, if the taxpayer suspects that the information, documents or things are required for the ulterior purpose or motive of gathering evidence in a move towards prosecuting the taxpayer for any criminal transgression in terms of any tax legislation or at common law, the taxpayer can show ‘just cause’ why it should not allow SARS to access any such information, documents or things as required under ss 74A and 74B, and raise a successful defence to SARS’ attempt to compel the taxpayer to do so in terms of s 75(1)(b) of the Income Tax Act.

If SARS is in fact conducting a criminal investigation, SARS will not be able to avail itself of the broad inquiry and audit provisions73 in terms of 74A and 74B, but will be required to pursue the matter against the taxpayer in terms of the provisions of ss 74C and 74D74 of the Income Tax Act, or in terms of the Criminal Procedure Act.75

Because the definition of ‘administration of this Act’ in s 74(1) includes the power to investigate an offence committed by the taxpayer, that part of s 74(1) is arguably law contrary to the guarantee against the self-incrimination clause s35(3)(j) of the Constitution. A taxpayer would be entitled to request SARS whether or not the inquiry or audit involves such a criminal investigation or inquiry, particularly where the inquiry and audit pertains to taxes such as Value-Added Tax and ‘Pay-As-You-Earn’, where it is not uncommon for taxpayers to use the money collected on behalf of the fiscus, thereby prima facie committing fraud. If SARS refuses to answer, or answers ‘yes’, the inquiry or audit would be contrary s 35(3)(j) of the Constitution. The ‘just cause’ defence in s 75(1)(b) of the Income Tax Act will also be available to the taxpayer.

Next:  3.3.3.2 Mala fides or bad faith

In accordance with Circular 230 Disclosure

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Footnotes:

67 Croome B & Olivier L Tax Administration 2010 (Juta) at page 53; Orangezicht Estates Ltd v Cape Town Town Council (1906) 23 SC 297, 308; Fernwood Estates Ltd v Cape Town Municipal Council 1933 CPD 339, 403; Sinovich v Hercules Municipal Council 1946 AD 783, 792; Van Eck NO & Van Rensburg NO v Etna Stores 1947(2) SA 984 A; Oos-Randse Administrasieraad v Rikhoto 1983 (3) SA 595 (A); and University of Cape Town v Ministers of Education and Culture (House of Assembly and House of Representatives)1988 (3) SA 203 (C).
68 98 JER 0849 (W).
69 See section 3.4: Reasonableness infra; LAWSA Volume 5(3) 2nd ed at para 165; Commissioner of Taxes v CW (Pvt) Ltd 1989 (3) ZLR 361 (S) at 370F-372C; Union Government (Minister of Mines and Industries) v Union Steel Corporation (South Africa) Limited 1928 AD 220, pages 236-7; and National Transport Commission v Chetty’s Motor Transport (Pty) Ltd 1972 (3) SA 726 (A); Local 174 International Brotherhood of Teamsters v US, 240 F.2d 387.
70 Jazbhay S A Recent Constitutional Cases (1999) De Rebus (373) February at page 44.
71 2002 (3) SCR 757; This is similar to the comparative jurisprudence in the United States of America: Hale v Hinkle 201 US; Murdock v Pa 319 US 105;Couch v US 409 US 322 where the US Supreme Court held (quoted from the headnote): ‘(c)ompulsion upon person asserting it is an important element of the privilege against self-incrimination and prohibition of compelling a man to be a witness against himself is a prohibition of use of physical or moral compulsion to extort communication; it is the extortion of information from accused himself that offends our sense of justice’; Miranda v Arizona 384 US 436 (1966) at page 460, where it was held that (quoted from the headnote): ‘prosecution may not use statements, whether exculpatory or inculpatory, stemming from custodial interrogation of a defendant unless it demonstrates use of procedural safeguards effective to secure privilege against self-incrimination.’; US v LaSalle Bank 437 US 298 where ‘summons authority does not exist to aid criminal investigations solely’ and ‘(p)rior to recommendation for prosecution to Department of Justice, Internal Revenue Service must use its summons authority in good faith’.
72 Ferreira v Levin NO and Others; Vryenhoek and Others v Powell NO and Others 1996 (1) BCLR 1 (CC) at para’s [165] – [166].
73 R v Jarvis 2002 (3) SCR 757 also discussed in this thesis at page 88 below; Ferreira v Levin NO and Others; Vryenhoek and Others v Powell NO and Others 1996 (1) BCLR 1 (CC) at para’s [165] – [166]; see also US v LaSalle Bank 437 US; Hale v Hinkle 201 US; Murdock v Pa 319 US 105.
74 Williams R C et alSilke on Tax Administration (April 2009) Lexis Nexis at para 8.12 generally; Pullen NO Bartman NO & Orr NO v Waja 1929 TPD 838; Haynes v Commissioner for Inland Revenue 2000 (6) BCLR 596 (T); See also Hunter et al v Southam Inc (1984) 2 SCR 184, (1984) 11 DLR (4th) 641 (SCC).
75 Act 51 of 1977.