About SAFLII
Databases
Search
Terms of Use
RSS Feeds
South Africa: Supreme Court of Appeal
SAFLII
>>
Databases
>>
South Africa: Supreme Court of Appeal
>>
2019
>>
[2019] ZASCA 4
|
|
Purlish Holdings (Proprietary) Limited v The Commisioner For The South African Revenue Service (76/2018) [2019] ZASCA 4; 81 SATC 204 (26 February 2019)
THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Not
Reportable
Case
No: 76/2018
In the matter between:
PURLISH HOLDINGS
(PROPRIETARY) LIMITED
APPELLANT
and
THE COMMISSIONER FOR
THE SOUTH AFRICAN
REVENUE
SERVICE
RESPONDENT
Neutral
citation:
Purlish
Holdings v The Commissioner for the South African Revenue Service
(76/18)
[2019] ZASCA 04
(26 February 2019)
Coram:
Ponnan,
Van der Merwe and Molemela JJA
Heard:
13
November 2018
Delivered:
26
February 2019
Summary:
Appeal
against imposition of understatement penalties – the
appellant’s conduct fell within the category listed in items
(a)
to
(d)
of the definition of ‘understatement’ in s 221 of the Tax
Administration Act – SARS suffered prejudice –
no bona
fide or inadvertent error – the imposition of penalties was
justified – the increase of understatement penalties
by the Tax
Court incompetent and set aside.
ORDER
On
appeal from:
Tax
Court of South Africa, held in Gauteng (Nkosi-Thomas J) sitting as
court of first instance:
1.
The appeal is upheld to the limited extent set out in paragraph 2
below.
2.
Paragraphs 2, 3, 4 and 5 of the order of the Tax Court is set aside
and paragraph
6 is renumbered to read 2.
JUDGMENT
Molemela
JA (Ponnan and Van der Merwe JJA concurring)
Introduction
[1]
At issue in this appeal against the decision of the Tax Court sitting
in Gauteng (Nkosi-Thomas
AJ and two other members), is the South
African Revenue Services (SARS)’s entitlement to payment of
understatement penalties
by the appellant, in accordance with the
provisions of s 222 (1) of the Tax Administration Act 28 of 2011 (the
TAA), for the 2011,
2012, 2013 and 2014 years of assessment and, if
so, the quantum thereof.
Background
facts
[2]
The appellant, Purlish Holdings (Pty) Ltd, having paid provisional
income tax to SARS,
applied for a refund of the amount paid on the
basis that it had not yet commenced trading. At that stage, the
appellant had not
registered as a vendor in terms of the Value-Added
Tax Act 89 of 1981 and consequently did not submit VAT returns for
the period
in question. SARS decided to perform audits in respect of
both corporate income tax (CIT) and value added tax (VAT). SARS
proceeded
to issue assessments in respect of CIT and VAT and
thereafter levied understatement penalties. Aggrieved by those
decisions, the
appellant lodged objections as contemplated in the
TAA. The SARS committee that considered the objections confirmed the
imposition
of understatement penalties but applied lower rates,
thereby reducing the quantum of the understatement penalties. The
appellant
lodged appeals against those decisions to the Tax Court.
The Tax Court dismissed the appeals and increased the rate of the
understatement
penalties to 100 percent of the assessed tax in
respect of both CIT and VAT.
[3]
The Tax Court issued the following order:
‘
1.
The taxpayer’s appeal against the levying of understatement
penalties in respect
of income tax and VAT for the 2011-2014 years of
assessment is dismissed.
2.
The Commissioner’s understatement penalty of 25 per cent in
respect of
income tax is set aside.
3.
The understatement penalty of 100% is imposed in respect of income
tax for the
2011-2014 years of assessment.
4.
The Commissioner’s understatement penalty of 50 per cent in
respect of
VAT is set aside.
5.
The understatement penalty of 100 per cent is imposed in respect of
the understatement
of VAT payable in respect of 12/2010, 02/2011 and
12/2012.
6.
Each party is to pay its own costs.’
This appeal is with leave
of the Tax Court.
[4]
The only
viva voce
testimony adduced at the Tax Court was
presented by Mrs Porter, an operational specialist within the SARS
audit department. She
testified that the appellant’s income tax
return in respect of the 2011 year of assessment was submitted to
SARS on 19 April
2012, while the returns for the 2012 to 2014 years
of assessment were submitted on 29 January 2015. According to Mrs
Porter, the
returns submitted on behalf of the appellant in April
2012 declared no income or expenditure in respect of the 2011
financial year.
The returns for the 2012 to 2014 financial years
reflected the status of the company as dormant. The words ‘never
traded’
were printed in the space reserved for the details of
the company. According to Mrs Porter, tax returns that reflect that a
taxpayer
had neither received income nor incurred expenses are, in
tax parlance, referred to as ‘nil returns’. All the tax
returns
submitted by the appellant were thus considered to be ‘nil
returns’. At the time of the rendition of the ‘nil
returns’, the appellant had already paid provisional tax in the
amount of R13 777 347.74. The appellant’s
submission
of ‘nil returns’, if properly assessed as such, would
have resulted in this amount being reflected as a
credit in its tax
account.
[5]
Mrs Porter testified that the audit was essentially prompted by the
magnitude of the
refund sought by one Mr Tshepo Sekele (Sekele), who
claimed to be representing the director of the appellant. He claimed
a refund
of the entire amount paid as provisional tax on the basis
that the appellant had not traded in the tax years in question. Mrs
Porter’s
suspicions regarding the tax affairs of the appellant
became heightened when, during a telephonic interview, Sekele was
unable
to explain the basis for the substantial provisional income
tax paid by the appellant, given the claim that it had not yet
started
trading. He referred Mrs Porter to the director, Ms Magadla,
who did not deny that nil returns had been submitted and in fact said
that the appellant had no income as it had not yet commenced trading.
A few days later, Mrs Porter received a telephone call from
a Ms
Cuba, who subsequently sent tax computations explaining the basis on
which the provisional income tax was paid. About a week
later, she
received an e-mail from Sekele, to which the same documents
previously supplied by Ms Cuba were attached. Mrs Porter
then
requested Sekele to furnish her with a general power of attorney
authorising him to act on behalf of the appellant. She never
heard
from Sekele again.
[6]
SARS conducted a CIT audit for the period 2011 to 2014 and a VAT
audit for the period
2010 to 2012. During the audit processes that
followed, the appellant was requested to submit its tax computations
and financial
statements for the tax years in issue. Despite the
returns indicating that the appellant was not a party to a contract
of which
it had undertaken to conduct any activity, it was discovered
that the appellant had concluded consultancy agreements in terms of
which it had earned substantial income in the period 2011 to 2014.
Despite earning this income, the appellant had filed ‘nil
returns’. Furthermore, despite the consultancy agreements
clearly stipulating that the fees payable to the appellant were
inclusive of VAT, it had not rendered any VAT returns for the 2010 to
2012 years of assessment. According to Mrs Porter, the appellant
only
registered for VAT when the tax audit was already underway. Pursuant
to the tax audit, SARS issued assessments in respect
of both CIT and
VAT.
[7]
The assessments raised by SARS in respect of income tax were as
follows:
(i)
2011 year of assessment Income Tax payable
R43 053.64
Capital Gains Tax
payable
R1 287 356.84
(ii)
2012 year of assessment
Income Tax
payable
R5 508 366.92
(iii)
2013 year of assessment
Income Tax
payable
R4 426 492.88
(iv)
2014 year of assessment
Income Tax
payable
R147 617.40
[8]
In respect of the tax period 12/2010 for which the appellant received
R10 000 000.00
for the operational advisory services it
rendered, which was inclusive of VAT, its VAT liability on that
amount was calculated
as R1 228 070.18. In respect of the
R12 500 000.00 received in the 02/2011 tax period, the VAT
liability amounted
to R1 535 087.72. In respect of the tax
period 12/2012, for which the appellant had received the amount of
R17 207 160.00,
its VAT liability was a sum of
R2 113 160.00.
[9]
In addition to issuing the aforesaid assessments, SARS also levied
interest plus 100
per cent understatement penalties in respect of CIT
and VAT. It regarded the appellant’s declaration of a zero
income and
non-rendition of the correct income tax as constituting
gross negligence. Similarly, the appellant’s failure to
register
for VAT was considered to constitute gross negligence.
Accordingly, understatement penalties were levied in respect of both
CIT
and VAT at the applicable rate of 100 per cent in terms of s 223
of the TAA.
[10]
The appellant objected to the interest and understatement penalties.
On 18 February 2016, the
objection in respect of the interest was
allowed. The objection relating to the imposition of understatement
penalties was partially
allowed. The understatement penalties for
income tax were reduced from 100 per cent to 25 per cent, while those
relating to VAT
were reduced to 50 per cent. SARS proffered the
following reason for the reduction of penalties in respect of income
tax: ‘Based
on your grounds of objection submitted, the
behaviour with regards to the understatement penalty raised was
revised from “gross
negligence” (100%) to “reasonable
care not taken when completing the return” (25%)’. The
reason for the
reduction of the VAT understatement penalty was stated
as follows: ‘Based on your grounds of objection submitted, the
“behaviour”
with regards to the understatement penalty
raised was revised from “gross negligence” (100%) to “no
reasonable
grounds for tax position taken (50%)”.’
[11]
Although the appellant made various allegations in its statement of
grounds of appeal filed in
terms of Rule 32 of the South African
Revenue Services Rules
[1]
(Rule
32 Statement), the parties later agreed, as reflected in the
pre-trial minutes, that the only issue to be argued in the Tax
Court
was whether SARS was justified in levying understatement penalties
against the appellant. However, the Tax Court found that
the
appellant had been grossly negligent in its tax affairs and
accordingly increased the understatement penalties to 100 per cent.
[12]
The first issue in this appeal relates to whether or not SARS has
proven that it is entitled
to impose understatement penalties in
terms of s 222 of the TAA. Section 221 of the TAA defines the term
‘understatement’
as:
‘
any prejudice to SARS or the
fiscus
in respect of a tax period as a result of─
(a)
a default in rendering a return;
(b)
an omission from a return;
(c)
an incorrect statement in a return; or
(d)
if no return is required, the failure to pay the correct amount of
tax.’
[13]
Section 222(1) reads as follows:
‘
In the event of an
“understatement” by a taxpayer, the taxpayer must pay, in
addition to the “tax” payable
for the relevant tax
period, the understatement penalty determined under subsection (2)
unless the “understatement”
results from a bona fide
inadvertent error.’
[14]
Section 222(2) provides for the computation of the understatement
penalty. It reads thus:
‘
The understatement penalty is
the amount resulting from applying the highest applicable
understatement penalty percentage in accordance
with the table in
section 223 to each shortfall determined under subsections (3) and
(4) in relation to each understatement in
a return.’
[15]
The understatement penalty percentages are set out in the table
embodied in s 223(1) of the TAA.
They vary, depending on the
behaviour associated with the understatement. In instances where a
taxpayer is considered to fall under
the category referred to as a
‘standard case’, the following rates are prescribed in
the table. 10 per cent in respect
of conduct constituting
‘substantial understatement’; 25 per cent where it is
considered that reasonable care was not
taken in completing the tax
return; 50 per cent where there are no reasonable grounds for the
‘tax position’ taken
by the taxpayer; 75 per cent for
‘impermissible avoidance arrangement’; 100 per cent where
the taxpayer’s conduct
constitutes gross negligence; and 150
per cent in the event of intentional tax evasion.
[16]
It is evident from the definition of ‘understatement’ in
s 221 that for an understatement
to arise, any of the actions or
omissions referred to in item
(a)
to
(e)
of that
definition must result in some prejudice to SARS or the
fiscus
.
In this matter, it is common cause that the appellant did not render
VAT returns. The appellant’s admitted failure to submit
VAT
returns clearly falls within the category of conduct set out in item
(a)
of the definition of ‘understatement’.
[17]
SARS considered the appellant’s conduct in relation to the
income tax returns to fall within
the category of conduct described
in item
(c)
of the definition of ‘understatement’.
It is indeed so, that in its Rule 32 statement, the appellant denied
having
filed ‘nil returns’. The difficulty for the
appellant is that although it disputed having submitted ‘nil
returns’
and having ever been represented by Sekele, it did not
challenge Mrs Porter’s testimony that the ‘nil’
returns’
were submitted electronically using a username,
password and an electronic-file identity number that could only have
been known
by the appellant. That Sekele indeed purported to be
acting on behalf of the appellant in pursuing the refund is borne out
by the
e-mails exchanged between him and Mrs Porter, to which some
documents related to the financial affairs of the appellant were
attached.
Sekele’s assertion that the appellant was not a
trading company was advanced as his justification for seeking a
refund of
the provisional tax that the appellant had paid.
Significantly, Mrs Porter’s evidence that the sole director of
the appellant,
Ms Magadla, had re-iterated the earlier assertion made
by Sekele pertaining to the appellant allegedly being a non-trading
company,
was not challenged under cross-examination. Mrs Porter’s
evidence was not contradicted.
[18]
Considering that SARS had clearly stated in its statement of grounds
of assessment and opposing
appeal filed in terms of Rule 31 (Rule 31
Statement) that the ‘nil returns’ and the non-rendition
of the correct CIT
returns were the reasons why understatement
penalties were imposed, one would have expected the appellant to have
adduced some
evidence in refutation, especially in relation to the
alleged submission of ‘nil returns’. It is thus
inescapable that
the appellant indeed filed ‘nil returns’.
[19]
The submission of incorrect information in returns falls squarely
within the provisions of item
(c)
of the definition of
‘understatement’. I also agree with SARS’
submission that a failure to declare income constitutes
conduct
listed in item
(b)
of the definition of ‘understatement’.
Indeed, even on the acceptance of the appellant’s version that
it did
not submit tax returns to SARS, item
(a)
of the
definition would still have been triggered. What now remains is to
evaluate whether the aforesaid conduct, being conduct
envisaged in
items
(a)
,
(b)
and
(c)
of the ‘understatement’
definition stipulated in s 221 of the TAA, caused any prejudice to
SARS.
[20]
In terms of s 102(2) of the TAA, the burden of proving the facts on
which SARS based the imposition
of an understatement penalty rests on
SARS.
[2]
Furthermore, the Tax
Court is, in terms of s 129(3) of the TAA, enjoined to decide an
appeal against an understatement policy on
the basis that the burden
of proof is
upon
SARS.
[3]
Given the aforesaid
burden of proof, I am inclined to find merit in the appellant’s
contention that SARS must not only show
that the taxpayer committed
the conduct set out in items
(a)
to
(d)
of the definition of ‘understatement’ in s 221 of the
TAA, but also that such conduct caused it (SARS) or the
fiscus
to
suffer prejudice.
[21]
The appellant denies that SARS suffered any prejudice. It contends,
inter alia, that SARS was
precluded from relying on Mrs Porter’s
testimony regarding the prejudice allegedly suffered by SARS, as such
an averment
was not made in its Rule 31 Statement. It contends that
since Rule 34 of the SARS Rules confines the issues to be determined
in
an appeal to those stated in the Rule 31 and Rule 32 Statements,
the Tax Court erred in taking cognizance of Mrs Porter’s
testimony relating to prejudice suffered by SARS. This contention is
without any foundation and requires no further consideration,
because
SARS did indeed assert prejudice as is evident from the following
averment made in SARS’ Rule 31 Statement in relation
to CIT:
‘
When the “nil returns”
were processed, the result was a credit balance in favour of [the
appellant], which entitled
[the appellant] to a refund’
.
SARS further averred as
follows in relation to VAT:
‘
The fact that the vendor failed
to account for the output VAT, created a shortfall in its tax
liability resulting from the difference
between the tax properly
chargeable and the tax due resulting from the failure to account for
such output VAT, thus creating a
loss to the
fiscus
.’
[22]
Another point raised by the appellant was that, given the fact that
the appellant had indeed
paid provisional tax due to SARS in excess
of its assessed tax liability by about R1.3 million, it could simply
have been set off
against the amount standing to its credit in its
tax account, such payment meant that there was no prejudice to SARS.
[23]
I turn now to consider whether SARS showed that it suffered prejudice
as contemplated by s 221
of the TAA. Mrs Porter identified SARS’
prejudice as the time, resources and costs incurred in considering
the appellant’s
request for a refund. She explained that an
upfront payment of provisional tax is credited to the taxpayer’s
tax account.
It is only once the relevant tax returns are submitted
that SARS can do an assessment to determine whether there is an
amount owing
by or due to the taxpayer. She pointed out that the
submission of ‘nil returns’, if assessed as such, would
have had
the effect of conferring on the appellant an entitlement to
a refund. This would have resulted in all the funds paid in by the
appellant being reflected as a credit in the appellant’s
account with SARS, as a result of which SARS was unable to channel
such funds for the relevant governmental activities. This evidence
was not challenged under cross-examination. Mrs Porter further
stated
that SARS would have suffered substantial financial loss if it had
acceded to the appellant’s request for a refund
without
conducting an audit. It is also clear that had it not been for the
audit, the appellant’s liability to pay VAT would
not have been
exposed, as it had not registered for VAT. Further to that, Mrs
Porter testified that the resource allocation in
the form of
additional time and human capital necessitated by the extensive audit
also constituted prejudice to SARS, as such resources
could have
utilised for other matters. Given the circumstances of this matter, I
agree that the use of additional SARS resources
for purposes of
auditing the appellant’s tax affairs indeed prejudiced SARS. As
correctly conceded by counsel for the appellant
in argument before
this court, prejudice is not only determinable in financial terms.
[24]
I am accordingly satisfied that SARS has proven that there were
understatements as contemplated
by s 221. I am unable to find that
the understatements were as a result of a bona fide inadvertent
error, as the appellant did
not adduce any evidence to that effect.
There is nothing, in the evidence, that suggests an error of that
nature. It follows that
the Tax Court correctly found that SARS had
discharged its onus of proving the appellant’s ‘understatement’
of
its CIT and VAT within the contemplation of s 221 of the TAA.
[25]
The next question is whether the Tax Court was entitled to increase
the understatement penalties
levied by SARS. Section 129(3) of the
TAA empowers the Tax Court to increase an understatement penalty.
[4]
But, that only arises if the issue has been properly raised for
adjudication before that court. This is determined by Rule 34,
which
provides:
‘
The issues in an appeal to the
tax court will be those contained in the statement of the grounds of
assessment and opposing the
appeal read with the statement of the
grounds of appeal and, if any, the reply to the grounds of appeal.'
It was fairly conceded by
counsel for SARS, that SARS had never raised the issue of the
increase of the reduced penalties for adjudication
before the Tax
Court. In its Rule 31 statement, SARS only sought to justify the
reduced penalties. It follows that it was incompetent
for the Tax
Court to have increased the reduced penalties. To that extent the
appeal against the decision of the Tax Court must
succeed. It follows
that the understatement penalties of 100 per cent imposed by the Tax
Court in respect of both income tax and
VAT for the relevant periods
must be set aside and SARS’ understatement penalty of 25 per
cent in respect of income tax and
50 per cent in respect of VAT
reinstated. Accordingly paragraphs 2 to 5 of the order of the Tax
Court falls to be set aside.
Costs
[26]
Given that both parties have been partially successful in this
appeal, it is appropriate that
each party pay its own costs of the
appeal.
[27]
In the result, the following order is made:
1. The
appeal is upheld to the limited extent set out in paragraph 2 below.
2. Paragraphs
2, 3, 4 and 5 of the order of the Tax Court is set aside and
paragraph 6
is renumbered to read 2.
___________________
M
B Molemela
Judge
of Appeal
Counsel for
Appellant:
A Lewis
Instructed
by:
Weavind
& Weavind, Faerie Glen, Pretoria
Matsepes
Attorneys, Bloemfontein
Counsel for
Respondent:
Kameshni Pillay SC (with her
M Tjiana)
Instructed
by:
The
State Attorney, Pretoria
The
State Attorney, Bloemfontein
[1]
Rules promulgated under s 103 of the
TAA, published in Government Notice 37819 on 11 July 2014.
[2]
Section 102(2) of the TAA provides:
‘
The
burden of proving whether an estimate under section 95 is reasonable
or the facts on which SARS based the imposition of an
understatement
penalty under Chapter 16, is upon SARS.’
[3]
Section 129(3) of the
TAA provides that:
‘
In
the case of an appeal against an understatement penalty imposed by
SARS under a tax Act, the tax court must decide the matter
on the
basis that the burden of proof is upon SARS and may reduce, confirm
or increase the understatement penalty.’
[4]
Section 129(3) of the TAA provides:
‘in the case of an appeal against an understatement penalty
imposed by SARS under a
tax Act, the Tax Court must decide the
matter on the basis that the burden of proof is upon SARS and may
reduce, confirm or increase
the understatement penalty so imposed’.