A high court decision concerns the ability of the South African Revenue Service (SARS) to gather information from taxpayers. Typically, SARS requests information from taxpayers via a request for relevant material pursuant to section 46 of the Tax Administration Act (TAA) No. 28 of 2011.
In this case, there were complex transactions undertaken by the taxpayer, and the court held that SARS had satisfied the jurisdictional requirements for enforcing requests for information.
SARS must determine that tax is collected in a manner that is both effective and efficient, and this is usually accomplished through the procedures contained in section 46 of the TAA. What is less well known is the authority that SARS has to invoke an inquiry into the affairs of the taxpayer, in terms of section 50 of the TAA.
An application to a court pursuant to section 50 is usually made in the form of an “unopposed motion” (i.e., the taxpayer may not challenge the application). In order for the court to grant such an order, SARS must demonstrate to the court’s satisfaction that there are “reasonable grounds” to believe that a taxpayer has failed to comply with an obligation imposed under a tax law or has committed a tax offence, and that it must be likely that relevant material will be revealed during the inquiry that proves the alleged misconduct.
SARS had previously investigated one of the taxpayer’s clients, and concluded that a structure had been designed and was implemented by the taxpayer solely for tax benefits. SARS extended its scope of the investigation pursuant to section 46, and obtained relevant material from third parties (including banks and external auditors). SARS was thus made aware of multiple other structures involving the taxpayer and its clients. On this basis, SARS submitted numerous section 46 requests for information from the taxpayer; however, the taxpayer refused to comply and provide information relating to other parties to the transactions.
SARS took the position that the information that had obtained as part of the information request procedure was not sufficient for its tax-investigation purposes, and proceeded to apply to the court for an order to allow an inquiry by SARS pursuant to section 50. SARS alleged that it had reasonable grounds to believe that there were structures that had tax avoidance features similar to those uncovered in the previous investigation. In addition, SARS alleged it was necessary to conduct an investigation into multiple taxpayer affairs, across group entities. For various reasons, the taxpayer alleged that SARS had failed to satisfy the jurisdictional requirements of an inquiry under the TAA.
The high court concluded that SARS had met the jurisdictional requirements of an inquiry under section 50 of the TAA and, thereby holding in favour of SARS, authorised the application for inquiry.
As this case demonstrates, requests for information from SARS must be carefully considered. Taxpayers can expect related parties to complex transactions also to be examined as part of SARS’ information-gathering authority.
Read a July 2018 report [PDF 93 KB] prepared by the KPMG member firm in South Africa
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