SARS can claim audit costs

FOR those who have been subjected to a SARS audit, it may be hard to imagine that the experience can be any more agonising.

If this resonates with you, consider a world where SARS makes you pay for the resources it had to use putting you through this ordeal.

The truth is, it can.

The Supreme Court of Appeal (SCA), in the recent matter of Purlish Holdings (Pty) Ltd v The Commissioner for the South African Revenue Service, confirmed that taxpayers may be held liable for the additional time and human capital employed by SARS to conduct an audit.

Facts

During the 2011 to 2014 tax periods, the taxpayer in question paid provisional income tax to SARS.

Subsequently, the taxpayer filed returns for these periods and stated that no income was received, resulting in a refund due by SARS.

This prompted SARS to audit the taxpayer, which revealed that the company had in fact earned income during these periods.

Pursuant to the audit, SARS imposed additional tax and understatement penalties.

The assessed tax liability, however, was still less than the provisional tax already paid.

One of the key issues before the court was SARS’ entitlement to payment of understatement penalties in accordance with section 222(1) of the Tax Administration Act No. 28 of 2011 (the TAA).

Broadly speaking, SARS may impose understatement penalties if the taxpayer’s conduct, within certain parameters, results in prejudice to SARS or the fiscus.

The taxpayer contended that SARS did not suffer any prejudice, as the taxpayer had in fact paid provisional tax due to SARS in excess of its assessed tax liability, which could have been set off against the amount standing to its credit.

Manpower used

SARS, however, held a different view and argued that the prejudice in question resulted from the fact that it had to allocate additional time and human capital to audit the taxpayer’s affairs, to ascertain if the taxpayer’s request for a refund ought to be allowed.

The court confirmed that prejudice is not only determinable in financial terms and ruled as follows:

‘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.’

On this basis, the SCA found that SARS was entitled to impose understatement penalties, as contemplated by section 222 of the TAA.

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