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

3.3.3.5 Arbitrary and capricious decision-making
Section 6(2)(e)(vi) provides for review ‘if action is ‘(taken)’ arbitrarily or capriciously’. 97 It is a long standing common law grounds for review,98 entrenched in the Constitution through the provisions of ss 33 and 195(1) of the Constitution. Public power exercised must be rationally connected to the  purpose for which it was given, and cannot be exercised in an irrational or arbitrary manner.99

In Johannesburg Liquor Licensing Board v Kuhn100, Holmes JA described arbitrariness as: ‘Arbitrariness connotes caprice, or the exercise of the will instead of reason or principle, without a consideration of the merits…’ (Emphasis supplied).

Arbitrariness denotes ‘absence of reason or at very least the absence of a justifiable reason’.101 The failure by SARS to comply with the preliminary measures spelt out in the SARS Internal Audit Manual102 would be an indication that the decision of SARS to conduct an inquiry or audit into the affairs of a taxpayer is arbitrary and capricious. The issue of randomness103 for SARS is a challenge to justify, as randomness in the true sense is an arbitrary act. The challenge for SARS is to justify overcoming the constitutional obligation of rational, reasonable and results orientated inquiries and audits, so as to ensure that SARS is utilising its resources efficiently as it is obliged to do in terms of s 195(1)(b) of the Constitution read with s 4(2) of the SARS Act, so as to successfully justify that an inquiry and audit is not based upon an arbitrary or capricious decision.

Next:  3.4 REASONABLENESS

In accordance with Circular 230 Disclosure

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Footnotes

97 Croome B & Olivier L Tax Administration 2010 (Juta) at page 52; The authors discuss the unlawfulness of IRS agents pursuing arbitrary set targets in tax audit results and quotas, as this was expected to affect the objectivity of the agents.
98 Beckingham v Boksburg Licensing Board 1931 TPD 280 at 282; JSE and Another v Witwatersrand Nigel Ltd and Another 1988(3) SA 132(A) 152 A – E; Hira v Booysen 1992 (4) SA 69 (A); Shidiack v Union Government (Minister
of the Interior) 1912 AD 642; Britten v Pope 1916 AD 150.
99 Pharmaceutical Manufacturers Association of South Africa and another: In Re: Ex Parte President of the Republic of South Africa and Others 2000 (2) SA 674 (CC) at para’s [20], [44], [45], [49] – [51], and [79] – [90].
100 1963 (4) SA 666 (A) at 67.
101 Woolworths (Pty) Ltd v Whitehead [2000] 6 BLLR 640 (LAC).
102 See section 3.2: The SARS Internal Audit Manual.
103 In Du Preez v Truth & Reconciliation Commission 1997 (3) SA 204 (A) the court held that the affected person should be made fully aware of the allegations against him or her. There is no definite rule on how much detail must be provided: this will depend on the circumstances of each case, and more particularly the seriousness of the case; this is authority for the submission that the ability for SARS to simply perform random inquiries and audits is limited without some preparatory work justifying its decision to do so; US v Third Northwestern National Bank 102 F Supp 879.