CHECKING SARS’ CONDUCT AND OBLIGATIONS WHEN AUDITING TAXPAYERS
South African taxpayers and companies have been alerted to expect more tax audits as a result of the increase in the SARS 2017/18 revenue budget. It is easy to see the connection: SARS needs to collect as much revenue as it can, and tax audits can have positive effects on revenue collection. However, what is the threshold which SARS must pass before it can select taxpayers for an audit and how is the process governed to ensure efficiency and fairness?
Power to select taxpayers for audits and request documents
“Audit” can mean a wide range of things:
- In terms of the Tax Administration Act, 2011, SARS may select a person for inspection, verification or audit on the basis of any consideration, including on a random or a risk assessment basis.
- Furthermore, in terms of the Customs and Excise Act, 1964, an officer may at any time require any person to produce any book, document or thing that is required to be kept or relates to – or is reasonably suspected of relating to – matters dealt with in terms of the Act.
- In a recent High Court judgment, the court held that an audit can be something as unobtrusive and simple as the verification of very basic information, such as medical expenses or travelling expenses.
This is highly relevant in the current Tax Season, when taxpayers may be selected for audit following the submission of their tax returns.
In selecting taxpayers and companies, and making allowances for the often invasive audit process, which may affect a business’s commercial confidentiality and an individual’s privacy, such consideration for selection purposes must be relevant for the proper administration of a Tax Act. An audit should not be used as a means of accomplishing something by improper motives and as a vehicle to target taxpayers for no good reason. Indeed, the decisions and processes involved in tax administration (including the decision to select a taxpayer for an audit) must be part of an overall fair process which is free from bias, ulterior purpose and corruption. To quote the High Court judge, “only the highest professional standards will do”.
The audit process: SARS’ conduct and obligations
In practice, when SARS gives taxpayers notice that they have been selected for an audit, the notice is usually accompanied by a request for “relevant” material. In this regard, it is common for SARS to request books of account and financial statements for a period of five years. However invasive and meddlesome this may appear to be, compliant taxpayers are expected to have such documents ready on demand. While not legislated, SARS may furthermore provide reasons for the audit.
Until recently, there have not been any known court cases challenging SARS’ selection of a taxpayer for audit. This may be so for an array of reasons, but perhaps the most apparent is this: the overwhelming awareness of SARS’ vast powers in administrating the Tax Acts and the lack of appetite of an aggrieved taxpayer to spend thousands of Rands on litigation costs.
Fortunately for taxpayers and tax practitioners, the High Court has pronounced its views on SARS’ conduct and obligations in relation to audits. This is especially significant in the absence of any established legislated obligations for SARS in selecting and conducting audits.
Of particular importance for taxpayers, when selected for audits, are the following points raised by the High Court:
- The audit notice is a formal notice, and the start of the use of statutory powers against a taxpayer, which requires some measure of caution. If it is proven that a SARS official is acting with malice, some relief may be granted, such as removing the individual from the audit process.
- The power to select taxpayers for audits and request documents remains an exercise of public power and therefore must comply with the principles of legality, which include the requirements of lawfulness, rationality and constitutional consistency.
- The threshold for SARS to pass before it can select taxpayers for an audit is extremely low; however, using legislation for ulterior purposes will always be unlawful and will be a serious breach of the mutual trust that should exist between a taxpayer and SARS. A finding that an action was not taken for purposes of the administration of a Tax Act would vitiate such action.
- Allegations about the mala fides of SARS in deciding to audit taxpayers cannot be rejected or found to be irrelevant by SARS or the courts. In this regard, it is generally accepted that the exercise of all public power is reviewable.
Inasmuch as taxpayers need to be aware of their obligations, SARS must be held to theirs, and be guided by its own values and principles, which include fairness, honesty, integrity, transparency and trust.
By partner Virusha Subban and associate Lee-Ann Annandale.