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Reasons for assessments · Tax Break: South African tax for professionals

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  Welcome and thank you for joining me for Tax Break.
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  This is a podcast about South African tax for South African
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  tax professionals and practitioners.
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  My name is Peter Flanagan and in each episode I share my views
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  with you on a an aspect or a recent development in South
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  African tax. And I'll try to keep the episode
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  short enough that you can listen to them whenever you've got a
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  few minutes to spare. Today we are talking about the
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  tax dispute process. So if a tax payer is aggrieved
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  by a decision or certain decisions or an assessment
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  issued by SASH, then the first thing that many taxpayers do is
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  to fly out of the blocks and object to that decision and to
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  cease ament. But there's a key step between
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  receiving the decision and the OR the assessment that you are
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  aggrieved by 1 happy with and objecting, and that is to
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  request reasons for the assessment and the OR the
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  decision. And why do you need to ask for
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  reasons? So if we look at Rule 7 of the
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  dispute rules, it says that if you, if you object to an
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  assessment or a decision, you must include details, detailed
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  grounds of objection in your as part of your objection.
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  And you can only really do this if you properly understand the
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  grounds of the assessment or the decision.
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  So if you really understand why such how they got to the
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  assessment or the decision. Now in reality, at least my
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  experience is that often when you request reasons, Sash would
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  give very few reasons or or very, very short quick reason or
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  in some cases exactly the same explanation as the grounds of
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  assessment. So you could be in a position
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  where even though you've asked for reasons you haven't really
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  gotten what you were looking for to doing enable you to to
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  object. So the case that we are talking
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  about today is the Tax Court case where that was exactly the
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  taxpayers concern is that they requested reasons from SASH and
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  SASH didn't provide them with what the tax payer considered
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  adequate reasons. So if we look at the background
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  to the case, the case involved what I think seems like it's an
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  individual BCJ. So let's just call the person
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  Mr. B there there's a few references to personal income
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  tax returns that makes me think that it is an individual who
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  seems to have been a beneficiary of a trust.
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  And then seeing that the Tax Court judgments are done on an
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  anonymous basis, there's a lot of there's a few entities
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  involved in the transaction and all their names were changed to,
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  to, to musical names. I don't want to spend too much
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  time on the facts. I'm seeing that that's not
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  really what the what the judgment is about, but I do
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  think it is worthwhile maybe just giving a, a brief
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  indication of of what the facts were.
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  So the, the, the between all these different parties, they
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  were a number of loans and promissory notes.
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  And in a lot of cases they would be alone or a promissory note
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  that's then set off by another loan or promissory note or, or
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  transaction later on. And if you, if you, if you, if
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  you take all these cancelling elements out of the picture, the
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  ultimate effect of what happened here is that the trust, so there
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  was a, I would guess the family trust of Mr. B disposed off an
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  investment in a company for 160 million.
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  It seemed as if the money, the flow of the money was from the
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  company to the trust and Mr. B ended up with 157 million Rand
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  in cash. In essence, through all of these
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  different transactions, the, the capital gain was distributed to
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  what seems to me like a related entity to the purchaser of of
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  these shares. And the judgment also at some
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  point mentions that this entity was liquidated without any tax
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  returns being filed. So it seems like Mr. Big got the
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  distribution of trust capital that was not the capital gain.
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  So in other words, it is it was just trust capital that it was
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  distributed to to him and again, wasted in the capital gain
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  wasted in another party that seemingly didn't account for any
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  tax on it. Sasha issued the letter of
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  findings relating to the capital gain or again, presumably the
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  capital gain that that basted in Mr. B.
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  And in the alternative, they applied the general anti
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  avoidance rules. So the guitar and with this,
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  together with the later of findings, they issued a Section
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  80 J notice. So basically a notice saying
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  that we intend to apply the guard and that then gives the
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  tax payer an opportunity to respond to that intention to to
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  apply the guard. Now, the case only relates to
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  one element of the guitar, and that is the fact that Sash
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  applied an abnormality requirement that applies in the
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  context of a transaction that occurred in the context of
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  business. So Sasha conceded that it bears
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  the burden of proving that abnormality is present.
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  And the tax payer argued that if you look at all the
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  correspondence between the tax payer and Sarge, such didn't
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  provide adequate reasons or sufficient reasons as to why it
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  believes that this transaction happened in a business context.
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  And because the tax payer was of the view that Zach didn't
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  provide sufficient reasons, it instituted an application in
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  terms of Rule 52 to A to then asked the court to direct such
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  or to order search to provide adequate reasons.
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  So in considering whether Sasha's reasons were adequate,
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  the court looked or referred to a number of other cases.
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  Firstly, it referred to the Gavric case that and in that
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  case it was said that for reasons to be adequate, what
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  must be provided to a person is not just a conclusion.
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  So you need a bit more than the conclusion.
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  You need to understand the relevant facts, you need to
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  understand the law that was applied and the reasoning
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  process that resulted in the conclusions.
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  The court also referred to the Natalie States case where the
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  court at that point said that search cannot just inform the
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  tax payer offer of a decision. It needs to the reasons must
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  leave the tax payer in a position where the tax payer
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  doesn't have to speculate or assume how SAGE got to its
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  position. And lastly, the court also
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  referred to it's a non tax case, but it was quoted in the Spring
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  Investment 117 case, which is a tax case.
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  In that case, the guidance laid down by the court was that the
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  decision maker. So in our case in Sash must
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  explain his decision in a way that will enable the aggrieved
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  person, the tax payer to say I may not complete or I may not
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  agree with you, but at least I understand how you got to your
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  view, which now puts me in a position to assess whether I
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  believe you've got the facts wrong.
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  So you've got an unwarranted finding of fact or you've made
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  an error in the law that you've applied.
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  So this requires then the decision maker that the decision
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  maker must provide and ease understanding of the relevant
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  law, the findings that on which the conclusions, the paint and
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  the reasoning that led to these conclusions.
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  So those are the that's the standard for that that reasons
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  should comply with. So in this specific case, the
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  codeine said that the term business context as it is used
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  in the guard is not defined, which makes it all the more
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  important that Sash would then explain the facts, the legal
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  principles and the reasoning to conclude that the transaction
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  happened in the context of business.
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  So assessing the the reasons that Sash provided against these
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  criteria, the court found that the reasons were not
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  satisfactory. Importantly, the the court
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  specifically commented to say that if you look at in the
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  context of the Garway, Sash needs to prove the abnormality.
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  It's so much more important that the reasons meet these meet the
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  standard. So what can we learn from this
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  case? Is there anything to take home
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  from it? I think the first point is
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  probably the most obvious one. But remember to ask for reasons
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  if you don't fully understand how Sarge got to the assessment
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  or the decision. The second point that I think
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  other taxpayers can take from this case is that you need to be
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  specific as to what do you need reasons for, what are the
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  reasons that you're looking for and what, what are you looking
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  for? So be specific.
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  And the last one is that if you can't understand the, if you
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  still after you've received the reasons, don't understand the
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  factual or the legal basis for that decision, then Rule 52 may
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  be a route to explore to, to get clarity before you object to
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  that decision. All the assessment.
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  That's it for today's episode. If you've got any comments,
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  questions, please send me an e-mail.
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  My e-mail address is in the show notes.
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  If you like the podcast or you like this episode, please
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  forward it to to a friend or colleague that you think might
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  also be interested in it. I think that's a very good way
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  to to build the following base. And just reminder, as always,
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  nothing in the this podcast is intended to be tax advice or
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  replacement for for fact specific tax advice.
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  Until next time, goodbye.