Most of us associate the Spur Steak Ranches with beef burgers, steaks and special sauces. Not tax! However, in October last year (2021) a judgment was issued by the Supreme Court of Appeal (“SCA”) that showed that one’s ‘taste for life’ can be severely inhibited if your tax return is not completed fully and honestly.
What am I talking about? Although the case largely dealt with whether the amounts (R48mn in total) were deductible for tax purposes, the part of the case that perhaps provides a more universally pertinent lesson is the part that related to “prescription”.
The rules of prescription state that the South African Revenue Service (“SARS”) may not raise an additional tax assessment (i.e. for more tax) more than three years after an original assessment has been issued by it. This provision is designed to provide taxpayers with certainty that their tax returns are, at a point in time, final and not subject to further review or audit by SARS. As most taxpayers will have experienced, these days most assessments are issued almost immediately (and automatically) after the tax return is submitted. Thus, everyone can be comfortable that SARS then has three years, but no more, to decide whether it is happy or not with anything on the return. However, this does not apply if an amount has not been taxed due to “fraud; misrepresentation; or non-disclosure of material facts”.
The income tax returns in dispute in the Spur case were for the 2005 to 2009 tax years. Spur contended that, because SARS only raised the revised assessments in 2015 i.e. more than three years after the original assessments were issued (the last one, for the 2009 year, was issued in January 2010), SARS should be prohibited from raising those assessments on the basis of “prescription”.
SARS argued that it should be able to issue the additional assessments because Spur’s tax returns had not been completed properly and did not, earlier, reflect the items SARS needed to “make a full and proper consideration” of the matters later assessed. Thus, since there had been “misrepresentation and non-disclosure of material facts”, it should be allowed to assess Spur on the additional amounts.
So, what exactly did Spur do wrong? Firstly, it answered “no” to a number of questions in the tax return that should have been answered “yes”. In many respects it is lucky that SARS did not allege that there had been fraud (with potentially criminal consequences), as the answer ‘no’ was clearly a false statement. In addition, in all but the 2009 tax return, Spur placed the later disputed deduction into the space labelled ‘other deductible items’ and not in the space which existed on the tax return for that specific claim (one which might have triggered SARS to have a closer look at the time the return was submitted due to its computerized risk assessment programs).
Thus, as the Judge did, one could quite rightly conclude that the way the tax return was completed was intended to ensure that SARS did not have a proper look at the deduction in question. This fact alone could have been enough for the Judges (all in the SCA agreed) to decide that an example needed to be made of Spur, regardless of the merits of the case regarding the tax deduction. (The ultimate finding regarding the tax deduction has led to a lot of controversy and discussion amongst tax practitioners, especially since the two lower courts found in favour of Spur on that point).
However, Spur argued that it had no intention to mislead SARS and that a new accountant had completed the tax returns, who knew little of the transaction in dispute. Judge Mbha countered with, “It simply boggles the mind that Spur answered ‘no’ to the relevant question for each and every subsequent year from 2005 to 2009”…. “It simply could not, by any stretch of imagination, be ascribed to any inadvertent error”. It was also pointed out that the public officer (who was also the financial director), a Ms van Dyk, who benefited from the share scheme in respect of which the disputed deduction arose and thus clearly knew what it involved, had signed the tax returns as being correct.
The Judge ended by saying “I should also add that as a matter of policy, a court would be loath to come to the assistance of a taxpayer that has made improper or untruthful disclosures in a return. Clearly, this would offend against the statutory imperative of having to make a full and proper disclosure in a tax return”.
It would, thus, seem that the case was ‘lost’ by Spur, due the fact that its public officer did not take the responsibility to complete the return accurately seriously, rather than being ‘won’ by SARS purely on the merits of the (very controversial) technical aspects of the tax deduction claimed.
The lesson now (going up to 31 January – the deadline for provisional taxpayers to complete their 2021 income tax returns), and going forward is that all taxpayers (public officers for companies) should make sure their tax returns are completed properly and the answers are answered correctly (even if someone else physically completes the return). That way one can continue to have a good “taste for life” and not endure the stress of being hounded by SARS forever into the future due to there being no prescription.
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