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Taxpayers’ rights, the Tax Administration Act (TAA) and the Constitution

09 May 2013 Fiona Zerbst
Fiona Zerbst, FAnews Online Editor

Fiona Zerbst, FAnews Online Editor

The Tax Administration Act (TAA) brings momentous changes to the South African tax regime, extending the powers of SARS but also indirectly emphasising taxpayer rights. It is crucial that tax practitioners understand what this means, because it will enabl

FAnews recently chatted to tax expert Professor Daniel Erasmus about empowering tax practitioners in terms of the knowledge of their rights, and what constitutional supremacy means vis-à-vis the Tax Administration Act.

What does constitutional supremacy mean?

Professor Erasmus says that our Constitution takes precedence over parliamentary supremacy and all law – past, present and future – must be taken into consideration with this in mind. The Rule of Law is particularly relevant in section 1(c). Section 2 of the Constitution also points out that any conduct that is inconsistent with the Constitution is invalid.

When it comes to SARS’s conduct, our frame of reference would be the TAA. Legislation gives many different powers to SARS in discretionary form and SARS makes the decisions on this basis. Then one has to enquire whether such conduct is consistent or inconsistent with the constitution. If not, one has recourse to the courts.

So, for example, when it comes to the right to privacy, if SARS were to justify its reason for investigating whether or not you have complied with tax laws, it is likely the courts would think SARS had every right to ensure compliance and an ‘invasion of privacy’ objection wouldn’t be met with great sympathy. When it comes to the rights of an accused in a criminal investigation (as opposed to a civil or regulatory investigation), the issue may not be quite as clear-cut.

Constitutionality of Section 72?

Section 72 of the TAA says you cannot raise the self-incrimination defence in terms of documents you divulge to SARS. SARS compels us to provide the relevant information (including documents) or we may face criminal charges, but that information may lead to incrimination and not just be used for regulatory purposes.

The Constitutional Court has held that, in similar circumstances, where you do need to provide the information, it cannot be used against you in future criminal prosecutions. However, this isn’t what Section 72 says – rather cleverly, the clause “unless a Court orders otherwise” has been added. This means that the taxpayer is entitled to approach the Court to issue an appropriate order to prevent SARS using this incriminating evidence given under compulsion.

Most tax administrators do not know what is possible in terms of Section 72 if read with the Constitution. Section 72 read at face value will mean to most people that SARS can use any documents under compulsion, then commence with criminal proceedings against a taxpayer. This is not the case in terms of the Constitution, and in particular section 35(3)(j).

What about an audit?

Erasmus says SARS needs to tread carefully between regulatory inspections and criminal prosecutions. Its conduct would be inconsistent if it were to overstep the boundary. Let’s look at an audit, for example.

If SARS chooses to audit a taxpayer, the taxpayer is within his or her rights to request that the audit is lawful, reasonable, procedurally fair, and there are adequate reasons given for the audit. Section 33 of the Constitution promoted the promulgation of the Promotion of Administrative Justice Act 2000. The problem with this Act though, is that ‘administrative action’ is narrowly defined. What constitutes ‘administrative action’? Erasmus argues that the decision to audit itself actually fits the definition, so SARS needs to give adequate reasons for conducting an audit. SARS may argue otherwise.

“Embarking on a process that could potentially and realistically lead to patrimonial loss on the part of the taxpayer means that the full suite of rights needs to kick in the moment an audit starts,” he says. “It entitles the taxpayer to ask for adequate reasons for the audit.”

The Supreme Court of Appeal has interpreted ‘adequate reasons’ to mean that there needs to be sufficient transparency and SARS must therefore share with the taxpayer what the scope, purpose and extent of the audit will be. Even if one argues that an audit does not fall within the ambit of ‘administrative action’ the Constitutional court has developed the principle of legality where public power always has to be lawful, reasonable, procedurally fair and supported by adequate reasons in some cases.

If SARS fails to follow these principles

SARS must adhere to its constitutional obligations in terms of Section 237 of the Constitution. In addition, Section 195(1) sets out what public administrators must do – by stipulating ‘must’, they have created obligations, which SARS cannot shirk. The SARS Act at section 4(2) specifically mentions this and indicates SARS must: ‘act with a high degree of professional ethics, impartially, fairly, without bias, in an accountable and transparent manner.’

Does SARS adhere to this standard? Not if one is listening to an automated voice message and cannot get through to an agent, which is something tax practitioners complain about; similarly, when SARS performs an audit without issuing letters of findings at the end of the audit (unless special circumstances exist), this is an omission that is reviewable by the courts. The taxpayer is expected to be honest and act properly, but what is the penalty when SARS fails to comply with professional ethics and its other constitutional obligations? This behaviour is unconstitutional and therefore, says Erasmus, invalid – it means that taxpayers can through section 172 of the Constitution have this invalid conduct set aside.

What do tax practitioners need to know?

When an audit commences, practitioners should understand the scope, purpose and extent of the audit and not accept bland reasons at face value. Is SARS acting on a tip-off? Then it should indicate as much, though there is no need to reveal the source in question. Does the audit emanate from a risk analysis? If so, SARS should be prepared to explain its reasoning. If it finds something untoward, however, it is in its rights to expand the audit in question.

Tax practitioners have a right to query what the audit is about. Is SARS conducting a parallel criminal investigation? If so, understand your limits if you are not a tax attorney because a tax advisor can be called as a State witness. It is preferable, then, to handle this audit through the offices of a tax attorney with an accountant’s participation. For example, a business struggling with cash-flow may use money it has collected for PAYE or VAT purposes, which is fraudulent practice – the audit could then become a criminal investigation.

This area of law is tricky and advisors may face frustration in a case like this, since the matter may be considered too small to hire a specialist to represent the client. But practitioners should know what the consequences may be if they forge ahead regardless.

Editor’s thoughts: It is worth noting that insurance cover is available to clients who perhaps cannot afford to hire professionals to represent them. Fairly cheap policies exist that protect a taxpayer’s full suite of rights should they be audited. Do you know what your client’s rights are and can you advise them accordingly? Comment below or email fiona@fanews.co.za.

  • Professor Erasmus will be speaking at the 4th SAIT National Tax Conference: Tax Administration Act, 2011, which will be held on 15, 16 and 17 May 2013 at the Sandton Convention Centre.

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