Unilateral extension of prescription – Tax assessment audits
21 Feb 2020
We have recently seen that the South African Revenue Service (“SARS”), in conducting audits in respect of taxpayer’s affairs, places reliance on section 99(4) of the Tax Administration Act, 2011 (“TAA”) to unilaterally extend the time period within which an assessment prescribes.
Section 99(1) of the TAA deals with the period of limitation in respect of the issuance of assessments. It provides that an assessment may not be made three years after the date of assessment of an original assessment by SARS. Exceptions to this general rule apply, for example, where SARS did not assess the full amount of tax as a result of the taxpayer’s non-disclosure of material facts, or if the parties agree to an extension.
Section 99(4), introduced in 2015, provides that the commissioner may, by prior notice of at least 60 days to the taxpayer, extend a period as contemplated in section 99(1), before expiry thereof, by three years in the case of an assessment by SARS (or two years in the case of self-assessment), where an audit or investigation under Chapter 5 relates to the application of the doctrine of substance over form, Part IIA of Chapter III of the Income Tax Act, 1962 (which contains the general anti tax-avoidance provisions) or the taxation of hybrid entities.
The commissioner’s decision in this regard is not expressly subject to objection or appeal. However, a decision by the commissioner in terms of section 99(4) should constitute an administrative action in the context of the Promotion of Administrative Justice Act, 2000 (“PAJA”) which must be lawful, reasonable and procedurally fair. In this context, it is important that a taxpayer ensure that all the relevant facts and circumstances are before the commissioner to enable it to exercise its power in such a manner. Should the taxpayer not agree with a decision in this regard, its remedy is to take such decision on review in terms of PAJA.
In notifying the taxpayer of its intention to extend the prescription period in terms of section 99(4) of the TAA, we generally do not see the commissioner inviting the taxpayer to make representations in respect of the extension of the prescription periods as contained in section 99 of the TAA. In this regard, it is noted that the Explanatory Memorandum on the Objects of Tax Administration Laws Amendment Bill, 2015 (“Explanatory Memorandum”) states as follows in paragraph 2.51 in respect of section 99(4) of the TAA:
“Furthermore, the Commissioner may also, by prior notice of at least 60 days to the taxpayer, extend prescription by three years in the case of an assessment by SARS…where the audit relates to:
- the application of the doctrine of substance over form;
- the application of the GAAR (Part IIA of Chapter III of the Income Tax Act, 1962…
The extension must take place before the existing prescription period has come to an end. The requirement of prior notice before extension of prescription is to allow the taxpayer to make representations why it should not be extended. The grounds for the extension will be included to demonstrate that the jurisdictional requirements for the extension have been met.” (our emphasis included)
While an Explanatory Memorandum does not constitute binding law, in our view, the requirement in section 99(4) of providing a taxpayer with a prior notice appears to acknowledge that a taxpayer must be given the opportunity to make representations to the commissioner, which it must consider, in order for its decision in this regard to be procedurally fair.
In our view, it is therefore important for a taxpayer to be aware of their rights in this regard and, despite the commissioner not requesting submissions, to make full and proper submissions as to why the taxpayer is of the view that the commissioner is not permitted to extend prescription on this basis.
See also:(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)