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

3.4.1 Rationality
A decision of SARS under ss 74A and 74B is open to challenge on the grounds of irrationality111 where the decision is ‘so outrageous in its defiance of logic or of accepted moral standards that no sensible person who had applied his mind to the question to be decided could have arrived at it’.112  This ground is also codified in s 6(2)(e)(h) of PAJA. This in practice is a difficult ground to prove.

The Commissioner in Drs Du Buisson, Bruinette & Kramer Inc. v C:SARS113 attempted to justify the random basis on which they selected the taxpayer for audit, under circumstances where the same taxpayer had just undergone a major tax audit a few month earlier by another SARS branch. He stated that: (1) taxpayers report their tax affairs on a self-disclosure basis; (2) historically, tax morality has been very low in South Africa and many taxpayers have not reported their tax affairs honestly; (3) for this reason, it was important that SARS as a regulator inquired into and investigated the tax affairs of taxpayers; (4) because SARS did not have sufficient resources to do this in the case of all taxpayers, it had to do so randomly.114 The question is: is this so outrageous as to defy logic or accepted moral standards? Probably not.

But then the objection by the taxpayer to this justification can be found in insisting that SARS complies with its constitutional obligations: s 4(2) of the SARS Act read with s 195(1)(b) of the Constitution. Does non-compliance by SARS with these constitutional obligations defy logic? The justification by SARS to randomly audit taxpayers, without complying with these obligations becomes more problematical for them. SARS will need to communicate more comprehensive reasons for their actions, other than a mere random selective – especially in a case such as Drs Du Buisson, Bruinette & Kramer Inc. Furthermore, the issue of proportionality (which follows this section) will also require SARS to exercise its powers in the least intrusive manner.115 In this regard the SARS Internal Audit Manual116 clearly demonstrates an internal methodology developed at SARS to administer tax legislation in an efficient and cost-effective manner, and in compliance with its duties under s 195(1) of the Constitution. There are a number of very good reasons in their internal guidelines why SARS should conduct a preliminary internal investigation into the affairs of a taxpayer they wish to audit, before taking the next steps in doing so. For instance, SARS should not unnecessarily on a random basis be auditing taxpayers who have already been audited in respect of specific tax returns, unless new material facts have come to light, justifying an additional inquiry or investigation. In this manner, SARS will not be criticised for the using its powers and resources in an unjustified and illogical manner, and contrary to its constitutional obligations. It will also limit any intrusion into the private affairs of a taxpayers.117

In considering the provisions of s 6(2)(f)(ii)(aa) to (dd) of PAJA the:

‘action itself … (must be) … rationally connected to –
(aa) the purpose with which it was taken;
(bb) the purpose of the empowering provision;
(cc) the information before the administrator; or
(dd) the reasons given for it by the administrator’.

Hoexter118 states that these provisions cover much of the same territory as pre-existing common-law grounds, such as ulterior purposes, failure to apply the mind and arbitrariness.119 In light of the Constitution, a rational connection is merely required by SARS to overcome this ground of review, rather than the court having to substitute the decision because it is substantively incorrect.120Again, in practice this may be difficult for
taxpayers to prove.

Taxpayers may question SARS as to the application of its internal guidelines in determining the suitability of the taxpayer for an inquiry and audit. SARS, through its obligation to share information and be transparent, would be obliged to share this information with inquiring taxpayers.121Failure by SARS to provide the information requested by the taxpayers, would entitle these taxpayers not to participate in the inquiry and audit (on the basis of ‘just cause’ shown), and to consider launching review proceedings on the basis that SARS’ cannot show a rational connection between its decision to invoke ss 74A and 74B and an inquiry and audit of a named taxpayer, other than it being a random selection. The justification of the Commissioner in Drs Du Buisson, Bruinette & Kramer Inc. above, it is submitted, would not be sufficient where the taxpayer seeks compliance by SARS with its broader constitutional obligations. Where the taxpayer can demonstrate that there is no material reason for SARS to pursue another audit of the taxpayer, a logical and rational connection envisaged ins 6(2)(f)(ii)(aa) to (dd) of PAJA.

Next:  3.4.2 Proportionality

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