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

3.7 MULTI-STAGED DECISION-MAKING187

Although administrative decisions are sometimes made in various stages, Hoexter makes the point that fairness should be applied at every stage of a multi-staged decision, and not only at the final stage where in the pre-Constitutional era, the rights of an individual had to be prejudicially affected,188 giving rise to quasi-judicial decisions, before the laws of natural justice applied. The courts in the pre-Constitutional era were loath to bury administrators in a flurry of hearings that would hinder practical expediency in dealing with administrative matters. Although hearings may be the fairest way of reaching decisions, they are not the most practical or the least expensive or time consuming.

In the English case of Re Pergamon Press Ltd,189 where the court was concerned with an inquiry in terms of the Companies Act, where inspectors were expected to investigate and report, Lord Denning offered a warning against underestimating the importance of the inspector’s task:

They have to make a report which may have wide repercussions. They may, if they think fit, make findings of fact which are very damaging to those whom they name. They may accuse some; they may condemn others; they may ruin reputations or careers. Their report may lead to judicial proceedings. It may expose persons to criminal proceedings or to civil actions…Seeing that their work and their report may lead to such consequences, I am clearly of opinion that the inspectors must act fairly.190

However, notwithstanding the view of Lord Denning, Baxter191 states that the right balance must be struck, ‘continually modifying the actual requirements of natural justice in accordance with the importance of accurate and objective decision-making and in the light of administrative practicality.’

In counter-balancing the pre-Constitutional era when natural justice applied only to quasijudicial proceedings where individual rights were affected, the Supreme Court of Appeal in Director: Mineral Development, Gauteng Region v Save the Vaal Environment192 rejected the application of the audi alteram principle, since the audi alteram principle would be applied at a later stage in the process under scrutiny. There was no need to apply it in the first stage. However, the court did reject an argument that no rights were violated in the first stage. The court held:

It is settled law that a mere preliminary decision can have serious consequences in particular cases, inter alia, where it lays ‘…the necessary foundation for a possible decision…’ which may have grave results. In such cases the audi rule applies to the consideration of the preliminary decision…193. (Emphasis supplied)

Furthermore, in Nomala v Permanent Secretary, Department of Welfare and Another,194 the court held that a matter was ripe for adjudication in relation to the lawfulness of administrative action where prejudice was inevitable even though the action had not yet occurred.

A decision by SARS in terms of ss 74A and 74B definitely ‘lays…the necessary foundation for a possible decision…which may have grave results…’ (emphasis supplied). The grave results referred to is the issuance by SARS of a revised assessment, with penalties and interest.

In the Grey’s Marine case195 the Supreme Court of Appeal, obiter, stated that a capacity to affect rights is all that s 1 of PAJA and the definition of administrative action requires in relation to the elements of ‘adversely affected rights’ and ‘direct, external legal effect’ which in tandem merely serve to emphasise that administrative action impacts directly and immediately on individuals.

Supporting the decision in the Grey’s Marine case, Fabricius AJ in Oosthuizen’s Transport (Pty) Ltd v MEC, Road Traffic Matters, Mpumalanga196 held that a decision to investigate whether or not to suspend operator of a fleet of vehicles was administrative action; attracting procedural fairness in terms of s 3 of PAJA; and, that representations should have been allowed during the deliberative stage of the investigation. This is analogous to an investigation commenced by SARS under ss 74A and 74B.

In the Constitutional Court case of Viking Pony Africa Pumps (Pty) Ltd t/a Tricom Africa v Hidro-Tech Systems (Pty) Ltd & Another197 the court held that:

[37] PAJA defines administrative action as a decision or failure to take a decision that adversely affects the rights of any person, which has a direct, external legal effect. This includes “action that has the capacity to affect legal rights”. Whether or not administrative action, which would make PAJA applicable, has been taken cannot be determined in the abstract.
Regard must always be had to the facts of each case.

[38] Detecting a reasonable possibility of a fraudulent misrepresentation of facts, as in this case, could hardly be said to constitute an administrative action. It is what the organ of state decides to do and actually does with the information it has become aware of which could potentially trigger the applicability of PAJA. It is unlikely that a decision to investigate and the process of investigation, which excludes a determination of culpability could itself adversely affect the rights of any person, in a manner that has a direct and external legal effect.

Sections 74A and 74B results in a decision to investigate that includes a determination of culpability that could adversely affect the rights of the taxpayer, in a manner that has a direct and external legal effect, in that revised assessments may likely ensue, triggering the applicability of PAJA.

In conclusion, the analysis above shows that the exercise by SARS of its public powers in terms of ss 74A and 74B is part of a multi-staged investigative process, where a determination of culpability that could adversely affect the rights of the taxpayer, in a manner that has a direct and external legal effect, may be inevitable through the issuing of revised assessments at the end of the process. Therefore, SARS must ensure that every step in its decision-making process is not unlawful, unreasonable or procedurally unfair, and that it complies with all its constitutional obligations in terms of ss 41(1), 195(1) and 237 of the Constitution. The fact that it is multi-staged does not justify a deviation by SARS from these constitutional obligations.

Where SARS fails to comply with these constitutional obligations, the courts  through s 172(1) of the Constitution will come to the aid of aggrieved taxpayers on the basis that non-compliance by SARS will result in an unconstitutional and ‘invalid’ decision – entitling taxpayers to invoke the grounds of review in s 6(2) of PAJA, or by virtue of the principle of legality.

Next:  3.8 ‘JUST CAUSE’ DEFENCE

In accordance with Circular 230 Disclosure

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Footnotes:

187Hoexter (2012) at page 441; Hoexter C & Lyster R The New Constitutional & Administrative Law (2002) Juta at pages 206-8 and pages 222-6.
188 R v Ngwevela 1954 (1) SA 123 (A), followed by the decisions in Cassem v Oos-Kaapse Komittee van die Groepsgebiederaad 1959 (3) SA 651 (A) and South African Defence and Aid Fund v Minister of Justice 1967 (1) SA 263 (A).
189 [1970] 3 All ER 535 (CA).
190 Re Pergamon Press Ltd [1970] 3 All ER 535 (CA)at page 539d-f, cited with approval in Du Preez v TRC 1997 (3) SA 204 (A) at pages 232H-233B.
191 Baxter L Administrative law (1984) Juta at page 583.
192 1999 (2) SA 709 (SCA).
193 Director: Mineral Development, Gauteng Region v Save the Vaal Environment 1999 (2) SA 709 (SCA)at para [17].
194 2001 (8) BCLR 844 (E).
195 Grey’s Marine Hout Bay (Pty) Ltd and Othersv Minister of Public Works and Others2005 (6) SA 313 (SCA) at para [23]; Hoexter (2012) at page 225.
196 2008 (2) SA 570 (T); Hoexter (2012) at page 232.
197 2011 (1) SA 327 (CC) at para’s [37] and [38], footnotes excluded.