Valid objection and appeal
In Commissioner for SARS v Candice-Jean Van der Merwe?the Supreme Court of Appeal (“SCA”) had to determine whether the tax court correctly dismissed Ms Van der Merwe’s (“taxpayer”) application. In it, the taxpayer sought:
? default judgment, against the South African Revenue Service (“SARS”) as a result of SARS’ alleged failure to file a statement disclosing its grounds for dismissing the taxpayer’s objection to SARS’ additional 2014 assessment raised in February 2016, under rule 56(2) of the tax court Rules;
? an order reducing the amount assessed thereunder to nil; and
? an order compelling SARS to repay the amount the taxpayer had paid on the assessment.
Background
The factual background is as follows:
? on 30 August 2013 SARS obtained an ex parte preservation order against the taxpayer’s father, the taxpayer and a number of associated entities. A curator bonis was appointed;
? the preservation order was to apply pending the outcome of an action, to be instituted by SARS, to declare that the respondents therein were liable for the various tax debts which SARS assessed;
? the taxpayer defended SARS’ action and delivered a counterclaim;
? the taxpayer’s tax return for the 2014 tax year reflected taxable income of R365 919 and declared a receipt of R142 901 673 as a ‘gift from her companion abroad’;
? in January 2015 SARS raised an original assessment in accordance with the taxpayer’s 2014 return. The foreign gift was not subjected to tax;
? in February 2015 SARS started a process of interrogating the tax return and the foreign gift;
? settlement was explored. SARS explained to the taxpayer’s attorneys that it could not consider a settlement offer that did not comply with the Tax Administration Act’s (“TAA”) settlement provisions;
? in December 2015 SARS’ attorneys wrote to the taxpayer’s attorneys enclosing draft audit findings to the effect that the ‘foreign gift’ was not a gratuitous donation and was subject to income tax;
? in January 2016 the taxpayer’s attorneys sent a final settlement proposal to SARS’ attorneys. The settlement proposed was to the following effect:
? in February 2016 SARS’ attorneys confirmed that it had approved the settlement proposal. The letter pointed out that once SARS’ attorneys received a letter from the taxpayer’s attorneys confirming that they held the R44,2 million ‘tax’ amount in trust and had irrevocable instructions to pay it to SARS in terms of the agreed assessment, SARS would apply for the discharge of the preservation order as against the taxpayer and would withdraw its action against her and she would simultaneously withdraw her counterclaim;
? SARS’ attorneys’ letter pointed out that, in terms of section 95(3) of the TAA, where SARS and a taxpayer agreed in writing for an assessment to be issued, such an assessment will not be subject to objection and appeal (in other words the agreed assessment will be final and conclusive). It further pointed out that the taxpayer’s attorneys’ settlement proposal, SARS’ attorneys’ written response (accepting such proposal) and the taxpayer’s attorneys’ further letter (in reply) confirming that the taxpayer’s attorneys have instructions on behalf of the taxpayer agreeing to the settlement terms would serve as the written agreement for purposes of section 95(3);
? SARS’ additional assessment (document number 23), dated 17 February 2016, accorded with the settlement correspondence above. The taxpayer’s attorneys, on that same day, e-mailed SARS’ attorneys attaching the taxpayer’s assessed income tax statement of account asking SARS if this was the assessment. The statement of account was not the assessment but reflected, on it, the 2014 additional assessment (identified as document 23 and) income tax payable in an amount of R44,2 million;
? on 7 March 2016 the taxpayer’s attorneys confirmed that SARS’ attorney’s letter correctly recorded the settlement of the issues referred to, that they held sufficient funds in trust to pay the tax, and held irrevocable instructions to pay same to SARS on discharge of the preservation order and that the parties would file withdrawal notices (in respect of their respective claims);
? on 10 March 2016 the preservation order was discharged, the withdrawal notices filed and the taxpayer’s attorneys sent proof of payment of the settlement consideration to SARS’ attorneys;
? on 10 September 2018 the taxpayer objected to the 2014 additional assessment, of 17 February 2016, on e-filing and applied for condonation for the late filing of her objection (setting in motion steps seeking to undo what her attorneys agreed on her behalf);
? in her 10 September 2018 objection the taxpayer alleged that?(i) the additional assessment was not provided to her, (ii) was seen for the first time when the assessment was accessed and printed on e-filing, (iii) that the additional assessment was allegedly raised on 17 February 2016 but was not provided to her for objection as provided in the TAA, (iv) tax was imposed on non-taxable income, and (v) paid on the basis of the ‘pay now, argue later’ principle;
? on 21 September 2018, SARS granted condonation sought by the taxpayer;
? on 14 December 2018 SARS advised the taxpayer that the decision to allow the late objection was under review because (i) no exceptional circumstances existed to allow an extension of more than 30 days, (ii) SARS disputed that the taxpayer only became aware of the assessment on 7 September 2018, and (iii) the 2014 additional assessment was not subject to objection and appeal having been raised in terms of section 95(3). SARS afforded the taxpayer the opportunity to make representations (despite not being obliged to) until 15 January 2019. This was communicated by letter posted to the postal address given by the taxpayer in her notice of objection and e-mailed to an e-mail address for her which SARS obtained from their attorney;
? on 20 February 2019 the taxpayer delivered a rule 56 notice putting SARS on terms for failing to respond to her objection in accordance with the Rules;
? on 22 February 2019 SARS withdrew its condonation of the taxpayer’s late objection (sent to the same addresses as above);
? on 25 February 2019 SARS issued, via the taxpayer’s e-filing profile, a notice of ‘invalid objection’ because the assessment in question was an agreed one in terms of section 95(3);
? on 4 March 2019 SARS’ attorneys addressed a letter to the taxpayer’s father per her request. The letter advised that condonation was withdrawn, there was no valid objection and that the assessment in question was not subject to objection and appeal. The letter also attached SARS’ letters of 14 December 2018 and 22 February 2019. The taxpayer’s father and the taxpayer alleged that that was when those letters came to their attention;
? on 5 March 2019 the taxpayer cause a notice of appeal to be filed asserting that SARS’ reliance on section 95(3) was rejected (on the basis that there was no estimation of assessment raised but rather an additional assessment on which tax was paid on the basis of the ‘pay now argue later’ principle;
? on 8 March 2019, SARS responded to the notice of appeal by communicating that the objection was invalid and hence the appeal was also invalid (as it did not comply with the TAA and the Rules thereunder) as a notice of appeal had to be preceded by a valid objection;
? on 11 March 2019 the taxpayer’s father disputed the invalidity of the notice of appeal. In response SARS advised that if the taxpayer was thereby aggrieved she could seek relief in terms of rule 52(2)(b);
? on 15 May 2019, the taxpayer delivered a rule 56 notice relating to SARS’ alleged failure to respond to the taxpayer’s notice of appeal by delivering grounds of assessment. SARS was advised that should it fail to respond with 15 days, the taxpayer would seek default judgment and final orders in terms of section 129(2) of the TAA;
? on 6 June 2019 the taxpayer delivered her application for default judgment;
? on 1 July 2019 SARS delivered its notice of opposition;
? on 10 July 2019 SARS’ attorneys wrote to the taxpayer advising her that, inter alia, in SARS’ view there was no basis in fact or law for the application and that the application was cynical, vexatious and an abuse of court procedures. The taxpayer was invited to withdraw it by 15 July 2019 (failing which SARS would file an answering affidavit and request a punitive costs order);
? on 15 July 2019 the taxpayer delivered a notice requesting the registrar to issue a hearing date;
? on 19 July 2019 SARS delivered its answering affidavit and the taxpayer’s replying affidavit was delivered on 29 July 2019;
? on 9 August 2019 supplementary affidavits by the taxpayer’s father and the taxpayer were e-mailed to SARS’ attorneys; and
? on 22 August 2019 SARS’ duplicating affidavit was delivered.
Relevant provision and application thereof
Section 95(3) of the TAA provides as follows:
“If the taxpayer is unable to submit an accurate return, a senior SARS official may agree in writing with the taxpayer as to the amount of tax chargeable and issue an assessment accordingly, which assessment is not subject to objection or appeal.”
Based on the facts of the matter (settlement pursuant to litigation and exchange of settlement correspondence between the parties) SARS contended that this provision was applicable. SARS further contended that the matter was settled on the basis that a portion of the ‘foreign gift’ was assessed for tax and that the tax paid, with ‘funds from a further foreign gift’ from the taxpayer’s benefactor, was not.??
The taxpayer’s attorneys expressly agreed to all of the terms, including, in particular, that section 95(3) of the TAA would apply and that the tax payment to be made would be irrevocable.
SCA
The SCA concluded that, taking into account all relevant facts, the inference was irresistible that the taxpayer paid the agreed amount pursuant to section 95(3) of the TAA - not on the basis of the pay now argue later principle (the taxpayer’s papers were terse on this aspect and did not disclose facts pertaining to the settlement correspondence).?
The SCA therefore concluded that section 95(3) of the TAA was the applicable section. The taxpayer’s 2014 additional assessment could therefore not be subject to any objection or appeal.?
The SCA further referred to the following sections of the TAA:
? section 106(1) obliges SARS to consider a valid objection in the manner and prescribed period under the TAA and the Rules thereunder;
? section 106(2) provides that SARS may disallow the objection in whole or in part.?
? section 106(4) and 106(5) provide respectively that SARS must, by notice, inform the taxpayer objecting of the decision allowing or disallowing the objection in whole or in part, and the basis for the decision and a summary of the procedures for the appeal.
The SCA, therefore, concluded as follows:
? SARS was correct in asserting that the taxpayer’s objection was invalid;
? rule 7(4) of the Rules entitled SARS to regard an objection as invalid, notify the taxpayer thereof, and state the ground for invalidity in such notice (which is what SARS did in essence);
? only after delivery of the notice of the decision referred to in section 106(4) of the TAA would a taxpayer, objecting to an assessment or a decision, be able, in terms of section 107(1), to appeal against the assessment or decision to the tax board or tax court;
? in terms of section 107(3), a notice of appeal that does not satisfy the requirements of section 107(3) is not valid;
? the right to appeal depends on whether a valid objection was filed and decided upon in terms of section 106. In the absence of one of those there can be no appeal;
? the taxpayer’s stumbling block was that she failed to show that she was entitled to lodge an appeal (notwithstanding SARS’ notice of the invalid objection);
? the taxpayer failed to meet the jurisdictional requirements warranting consideration of her application (which presupposes compliance with all the prerequisites);
? a court considering an application for default judgment is duty bound to determine whether a proper case has been made out on the papers (a default judgment application is only competent if preceded by a valid objection and valid notice of appeal);
? in order to obtain default judgment the taxpayer had to show that SARS was indeed in default of an obligation to file its statement of grounds of assessment;
? SARS’ obligation to file a statement of grounds of assessment only arises pursuant to a valid notice of appeal;
? the taxpayer’s proper recourse was to apply for an order that her objection was valid where SARS treated it as invalid (in terms of rule 52(2)(b);
? the taxpayer’s contention that SARS’ notice of invalid objection amounted to a constructive disallowance of her objection was rejected because that notice expressly stated that the agreed assessments were not subject to a notice of objection or notice of appeal i.e., the notice could not have been construed as a disallowance of the objection on the merits;
? the tax court was entitled to find, even on an unopposed basis, that the jurisdictional requirements for the lodging of an appeal had not been satisfied and to refuse to grant the order sought by the taxpayer;
? the high court did not engage with the tax court’s finding that a proper case was not made out on the basis of non-compliance with the provisions of the TAA;
? in terms of the common law it is not possible for a lay person to represent a natural person in a court of law as the taxpayer’s father sought to do (a specific pitfall being that the rules of the SCA would not oblige such a person to file a power of attorney enabling a party to later deny the authority of the representative to the detriment of the administration of justice).
The SCA, therefore, upheld SARS’ appeal (endorsing the order of the tax court per Rogers J).?