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

3.6.2 Limitation to the Legitimate Expectation Doctrine

An immediate potential limitation which appears in the Income Tax Act viz-a-viz the application of the legitimate expectations doctrine is s 3(2) of the Income Tax Act:

Any decision made and any notice or communication issued or signed by any such officer [engaged in carrying out the provisions of the Act under the control, direction or supervision of the Commissioner] may be withdrawn or amended by the Commissioner…

The application of the legitimate expectation doctrine is not ousted by this section in matters of tax. The doctrine applies notwithstanding the existence of various prescribed statutory powers such as in ss 74A and 74B, where these provisions must pass constitutional scrutiny in respect of the just administrative action provisions of s 33 of the Constitution, expanded by the provisions of PAJA, and the rule of law in s 1(c) of the Constitution and the constitutional principle of legality. SARS must display lawfulness, reasonableness and procedural fairness in its decision-making process to withdraw or amend a previous decision. Should SARS wish to withdraw a decision made as prescribed in s 3 of the Income Tax Act, an opportunity must be afforded to the taxpayer to state its case, in accordance with the audi alteram partem principle.

Support for this submission can be found in Everett v Minister of the Interior177 case. The applicant had received no prior notification from the Minister that her temporary residence permit would be revoked and she applied to the Supreme Court for an order setting aside the notice purporting to withdraw her temporary residence permit on the ground, inter alia, that it was contrary to natural justice that she had not been afforded an opportunity of making representations to the Minister. The court held that there had been a breach of natural justice, and that the Minister’s notice should be set aside. This applies equally to SARS is deciding to change or amend its decision in terms of s 3(2) of the Income Tax Act.

Once the opportunity to be heard has been afforded to the taxpayer, may SARS simply change or amend its previous decision, retrospectively and retroactively? In other words, if a legitimate expectation has been created to provide a letter of findings at the conclusion of an audit, can SARS simply withdraw the requirement to produce a letter of findings at the conclusion of the audit?

The answer partially lies in the applicability of the substantive protection of the legitimate expectation, which as summarised by Hoexter,178 has been cautiously approached by all South African courts, including the Constitutional Court. In essence, in the case of SARS back tracking on a legitimate expectation created in favour of a taxpayer, SARS would have to begin with procedural enforcement, where SARS will first hear the taxpayer affected, and then SARS would reach its decision taking into account all the relevant considerations, including the legitimate expectations, giving the latter sufficient weight. A decision that denies the legitimate expectations would be reviewable in terms of one of the grounds of review in s 6(2) of PAJA, and in particular on the basis of lack of rationality. If found to be irrational by the court, in exceptional circumstances (such as bias, incompetence or unjustifiable prejudice), the court may substitute its decision for that of the administrator.179

Bias and incompetence is difficult to establish in practice in a matter against SARS. Therefore, unjustifiable prejudice caused to the taxpayer would be one appropriate ground of review to pursue, on the basis that the administrative action of SARS is ‘otherwise unconstitutional or unlawful’. This enquiry plays into the functus officio doctrine.180

Any public power to revoke or amend a previous decision would at the minimum have to be exercised in accordance with PAJA if administrative action, and comply with the principle of legality and the rule of law.181 In line with the preferred interpretation to a similar provision in s 10(1) of the Interpretation Act 33 of 1957, the power to revoke and amend existing ‘rules, regulations or by-laws’ enables administrators to exercise their powers anew in different situations, and not to revoke or amend existing decisions whenever they like.182 Hoexter summarises the law aptly: ‘The rule of law holds that individuals should be entitled to rely on … decisions, and to be able to plan their lives around such decisions, insulated at least to some degree from the injustice that would result from a sudden change of mind on the administrator’s part. There is also the fundamental principle that administrators must have lawful authority for everything they do – or undo. These considerations of certainty, fairness and legality help to explain why official decision-makers are said at common law to be functus officio once a decision has been made.’183

The functus officio doctrine would arguably not apply to the Commissioner exercising his power to revoke or amend a legitimate expectation created by a SARS official in terms of s 3(2) of the Income Tax Act in line with the decision in Carlson Investments Share Block (Pty) Ltd v CSARS184 because an express legislated provision entitles him to do so, but the considerations of certainty, fairness and legality would come into play, with his lawful authority to do so, limiting his power to do so retrospectively where a ‘new determination does not affect completed transactions.’185 This is in line with the rule of law, that certainty with regard to existing rights of taxpayers should not alter in the past, where loss of those rights retrospectively would unjustifiably prejudice the taxpayer. That would be contrary to the rule of law.

It is submitted that a justifiable basis for the Commissioner to alter existing rights or expectations would be where, for instance, the legitimate expectation created in favour of the taxpayer was done so under false pretenses on the part of the taxpayer. Otherwise the legitimate expectation may give rise to both procedural and substantive expectations being protected, as quoted from Corbett CJ’s judgment in Administrator, Transvaal & Others v Traub & Others 1989 (4) SA 731 (A) 758 in the Carlson Investments Share Block case.186 The taxpayer in the Carlson Investments Share Block case argued that the Commissioner was functus officio after reassessing it to tax, and could not apply the express provisions of s 79 of the Income Tax Act to do so. The court held that in light of the express statutory provision, the Commissioner could reassess the taxpayer to tax again, provided it complied fully with the jurisdictional facts of that section, which in itself was a protection mechanism against arbitrary power. Furthermore, any harassment, malicious conduct or other unlawful conduct in applying that section would also be subject to review. None could be proven in that case. The taxpayer then attempted to rely on the legitimate expectations doctrine to uphold the previous reassessment by SARS, where the taxpayer would obtain substantive protection against SARS raising a revised assessment again within 3 years. The court found no evidence of a practice or communication that SARS would not revisit a previous decision to tax under these circumstances, so the doctrine was not applied in favour of the taxpayer.

A transgression by the Commissioner of the principles set out above and applicable to revoking or altering a decision previously taken by a SARS official (within 3 years of that decision being taken unless all material facts were not placed before the SARS official when making the original decision), would be subject to review if the Commissioner acted outside the scope of the jurisdictional facts of s 3(2) of the Income Tax Act, or acted unlawfully in doing so. The discussion in this section is around an audit and inquiry, where SARS has created a practice to issue a letter of findings, where a legitimate expectation exists in favour of the taxpayer. If the Commissioner invokes his power to change the decision in terms of section 3(2), attempting to argue that he is acting unlawfully because the doctrine of functus officio applies, will most probably be met with no success in court. But arguing that the Commissioner is acting unlawfully because he does not comply with the legitimate expectation clearly created, would most probably be met with success. Unless he has transgressed some statutory duty in creating the legitimate expectation in the first place. Under these circumstances, that it is highly unlikely.

The grounds of review in s 6(2) of PAJA, or, the constitutional principle of legality – for failure to act lawfully, reasonably or in a procedurally fair manner – would be applicable.

Next:  3.7 MULTI-STAGED DECISION-MAKING

In accordance with Circular 230 Disclosure

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Footnotes:

177 1981 (2) SA 453 (C) at pages 458 – 459. The legitimate expectations doctrine first emerged in South Africa in Everrett v Minister of the Interior 1981 (2) SA 453 (C) which was the first South African case in administrative law that adopted the English doctrine of legitimate expectations. The court held that there had been a breach of natural justice, and that the Minister’s notice should be set aside.
178 Hoexter (2012) at pages 432-6, quoting extensively from Campbell J Legitimate Expectations: The Potential and Limits of Substantive Protection in South Africa (2003) 12 South African Law Journal at page 292.
179 Ibid. at page 434, read with pages 552-7.
180 Ibid. at pages 276-7 generally.
181 Ibid. at page 276.
182 Ibid. at page 277.
183 Ibid. with reference to Pretorius D M The Functus Officio Doctrine in South African Administrative Law, with Reference to Analogous Principles in the Administrative Law of Other Commonwealth Jurisdictions (unpublished PhD thesis, University of the Witwatersrand, 2004) especially at page 420ff.
184 63 SATC 295 at page 318.
185 3M South Africa (Pty) Ltd v CSARS [2010] ZASCA 20 at para [36] where in relation to similar provisions in the Customs and Excise Act 91 of 1964 granting the Commissioner the power to withdraw and amend previous determinations, the Supreme Court of Appeal held: ‘Having said that, however, it needs to be emphasised that the retrospective effect of the new determination does not affect completed transactions, but only applies in respect of uncompleted transactions…’.
186 At page 322 footnote 194 of the Carlson Investment case footnote 191 supra.