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Part 3 – THE NICHES OF TAX PROCEDURAL LAW: A BIOPSY OF L’AVENIR WINE ESTATE (PTY) LTD V C:SARS

PART 3 OF 4: THE 2018 DISPUTE AND 2010 REDUCED ASSESSMENT REQUEST

As evident from part 1 of this series of articles, the history of the dispute between the taxpayer and SARS in the case of L’Avenir Wine Estate (Pty) Ltd v C:SARS (16112/2021) [2022] ZAWCHC 28 (11 March 2022) shows that several procedures were unsuccessfully followed by the taxpayer in an attempt to resolve a simple dispute between the taxpayer and SARS.

In this third instalment, we explore the third and fourth procedure followed by the taxpayer:

  • requesting a reduced assessment in respect of the assessment for 2010; and
  • objecting against the 2018 assessment.

To refresh your memory: the taxpayer wanted a loss incurred by it for the period 1 April 2009 to 31 December 2009 to be assessed by SARS so that that loss could be used to reduce the taxable income for the taxpayer in the 2018 year of assessment.

Before following the procedures discussed herein in an attempt to achieve that result it is worth mentioning again that the taxpayer had already unsuccessfully objected to the assessments for 2009 and 2010 and failed in an attempt to secure a reduced assessment for 2009 in terms of section 93(1)(d) and 93(1)(e) of the TAA.

The 2010 reduced assessment request:

Those familiar with the dispute resolution processes will know that if an objection has been disallowed by SARS, the taxpayer can proceed with the dispute on appeal. An appeal here is not an appeal against the decision by SARS on objection – it as further challenge against the same assessment/decision that was placed under objection but this time that challenge will be dealt with in a different “forum”.

When on appeal following a decision to disallow an objection, the taxpayer and SARS can agree that an attempt be made for the dispute to be resolved through processes similar to mediation (a process referred to as alternative dispute resolution (“ADR”)) and/or through something that, at a high level, can be likened to arbitration (in the Tax Board and subject to monetary threshold not relevant here) before going to the Tax Court.

As may be recalled from earlier articles in this series, the taxpayer objected to the 2018 assessment in an attempt to secure the reduction of the loss for the period April 2009 to December 2009 included therein (that process is discussed in more detail below). When that objection was disallowed, the taxpayer appealed and agreed with SARS to try and resolve the dispute through ADR. During that process (which was ultimately unsuccessful), SARS suggested that the taxpayer should be seeking a reduction of the 2010 assessment on the basis that the change in year end from March to December happened during the 2010 year of assessment. In addition to pursuing its appeal further in the tax court on the 2018 year of assessment, the taxpayer also submitted a reduced assessment request in relation to the assessment issued by SARS for 2010 year of assessment in terms of section 93(1)(d) and (e).  

In light of our conclusions in part 2 of this series, one can fairly confidently conclude that the assessment issued by SARS for 2010 contains an error, caused by the taxpayer’s omission of the income and expenses for the period April 2009 to December 2009 in the return for 2010.

Is it a readily apparent undisputed error that would warrant the issue of a reduced assessment for 2010 under section 93(1)(d) of the TAA?

We would argue that it is and further, that section 99(2)(d)(iii) would operate to overcome the hurdle of prescription in respect of 2010.

Section 99(2)(d)(iii)

Section 99(2)(d)(iii) of the TAA provides that SARS can alter an assessment, despite the fact that the assessment prescribed, if SARS became aware of the error as contemplated in section 93(1)(d) before the assessment has prescribed. What exactly does that mean though:  for SARS to become aware of the error? Let’s consider that in the context of section 99(2) of the TAA.

Section 99(2)(d)(iii) is very similar to section 99(2)(d)(i) of the TAA. The later allows for SARS to alter an assessment despite the fact that it is has prescribed in order to give effect to a dispute resolved under chapter 9. Chapter 9 deals with objections and appeals. So, if the taxpayer objected to an assessment (before it became prescribed) and eventually, after the assessment prescribes, wins a dispute against SARS, say in the Tax Court or higher courts, SARS may give effect to that judgment by issuing a reduced assessment despite that assessment having become prescribed under section 99(1) of the TAA.  The procedures for commencing with a dispute under chapter 9 are very clearly defined. There can be no question of whether a dispute under chapter 9 has been instituted to determine if section 99(2)(d)(i) applies.  

It appears SARS’ interpretation of section 99(2)(d)(iii) (in this case and in our experience generally in other matters) appears to follow a similar approach to section 99(2)(d)(i) in that for section 99(2)(d)(iii) to apply, it seems SARS’ view is that the taxpayer must have submitted a formal request for a reduced assessment in terms of section 93(1)(d) before the assessment in question prescribed. This approach seems to be in line with what we submit the purpose of 99(2)(d)(i) is as set out above.

Firstly, however, the plain wording of section 92(2)(d)(iii) does not support that interpretation. The section does not say the taxpayer must have requested a reduced assessment in terms of section 93(1)(d) before SARS can operate under section 99(2)(d)(iii) to lift the veil of prescription. The section simply provides that SARS must have become aware of the error as contemplated in section 93(1)(d) before the assessment prescribes.

Secondly, it is worth noting that SARS can act under section 93(1)(d) to reduce an assessment despite the fact that no request has been made by the taxpayer for a reduced assessment under section 93(1)(d) (see Rampersahd and Another v CSARS [2018] ZAKZPHC ).  

Thirdly, unlike the case of Chapter 9 procedures, there is no set procedure for section 93(1)(d) reduced assessment requests.

Granted, section 99(2)(d)(iii) does say that SARS must become aware of an error as contemplated in section 93(1)(d) – i.e. a readily apparent undisputed error.

So then, how must SARS become aware of the readily apparent undisputed error in order to operate under section 99(2)(d)(iii)? It is submitted that this can be in any form.

By the time the taxpayer requested a reduced assessment in relation to 2010 it had already submitted an objection in relation to both 2009 and 2010 (see part 2 of this series). This objection, as far as we can tell, was submitted before the 2010 assessment prescribed. In that objection the taxpayer informed SARS about the error. Indeed, the taxpayer may have suggested the error relates to the 2009 assessment but, given that:

  • SARS was aware of the change in the year end by that time and had in fact by that time already updated its system to reflect the change in the year;
  • one would expect SARS to know what the definition of “year of assessment” and “financial year” is; and
  • that SARS can act under section 93(1)(d) despite no formal request having been made by the taxpayer,

it is difficult to see how SARS could not at that stage have been aware of the error in relation to 2010. Since the objection on 2009 and 2010 was submitted before the 2010 assessment prescribed, it is submitted that SARS became aware of the error. SARS can therefore arguably act under section 99(2)(d)(iii) to lift the veil of prescription in the circumstances.

From the above, it appears the prospects of the reduced assessment request in relation to the 2010 year of assessment may be good. At the time of the High Court application though, it seems SARS has not yet made a decision in relation to the taxpayer’s reduced assessment request on 2010 but appears to suggest an intention to decline it.

The 2018 Dispute:

The aim of the 2018 dispute, which seems to be pending in the Tax Court, appears to be to get a reduction to the 2018 assessment by including the loss for the period April 2009 to December 2009 in the assessment for the 2018 year of assessment.

Let’s explore how assessed losses and assessments work to determine the prospects of success of the 2018 dispute:

Section 20 of the Income Tax Act, 58 of 1962 (“the ITA”) allows for something called a “balance of assessed loss” to carry forward from one year of assessment to the next and to be set off against taxable income in the year of assessment to which it carried forward.

The word “balance of assessed loss” is not defined in the ITA. It is submitted that a balance of assessed loss is the sum of assessed losses incurred by a taxpayer in previous years of assessment, less any reductions thereto in previous years of assessment (see CIR v Louis Zinn Organization (Pty) Ltd 1958 (4) SA 477 (A), 22 SATC 85).

The term “assessed loss” is defined in section 20(2) of the ITA as meaning, and we paraphrase, the amount by which permissible expenses exceed income for that year of assessment.

The taxpayer’s expenses in the L’Avenir Wine Estate (Pty) Ltd case exceeded its income in the period spanning April 2009 to December 2009. However, as has already been concluded, the period 1 April 2009 to 31 December 2009 is not a year of assessment. The loss for what period falls in the 2010 year of assessment for the 20 month period April 2009 to December 2010. Since financial statements were not prepared for this period one would need to establish whether in that period there is in fact an assessed loss.  

Assuming however that there is an assessed loss for the year of assessment ending December 2010 the fact remains that any such assessed loss has not been assessed by SARS. Stated differently, SARS has not issued any assessment indicating any such loss.

The question that arises then is this: can an assessed loss for the period 1 April 2009 to 31 December 2010 be set off against income in 2018 if that loss has never been assessed by SARS?

Enter the definition of “assessment” in section 1 of the ITA. It reads as follows:

assessment” has the meaning assigned in section 1 of the Tax Administration Act, and includes a determination by the Commissioner-

(a)…

(b)…

(c) of any loss ranking for set off;” (My underlining).

Evident from this definition is that a determination must be made by SARS of any loss ranking for set-off. Stated differently, SARS must make a determination of an assessed loss before it can be set off under section 20 of the ITA. So then, even though the word “assessed loss” is defined simply as the amount by which expenses exceed income, it has to be assessed in an assessment before it can be added to the balance of assessed loss and set off under section 20 of the ITA.

One might be inclined to think that nothing prevents SARS from making such assessment of the assessed loss in the 2018 year of assessment. On that argument then, SARS can make the determination and set it off against income for 2018 in the 2018 assessment.  

It is submitted, however, that it is not open to SARS to make a determination for an earlier year of assessment in a later year of assessment.  Determinations are made per year of assessment. SARS cannot make a determination for the 2010 year of assessment in the 2018 year of assessment. Whilst it is true that balances of assessed losses carry forward to assessments all the time in practice, suffice it to say that that is simply to give effect to section 20 of the ITA when the determination/assessment of the assessed losses making up that balance of assessed loss had already been made in previous assessments (See in this regard also First South African Holdings (Pty) Ltd v CSARS, 73 STC 221).  

Further still, if it were competent for SARS to make a determination in an assessment for an altogether different year of assessments, anomalies are likely to arise. For example, SARS should then be allowed to allow a deduction on a determination in year five when in fact the deduction actually ranked for deduction in year one. This in turn is likely to undermine the rules of prescription, to name but one anomaly.  

In the result, it is our view that absent an assessment for any assessed loss for the year of assessment ending December 2010, it cannot be set off against income in the 2018 year of assessment.

The issue of whether the loss for the period April 2009 to December 2009 can be set off against the 2018 loss appears to be pending in the Tax Court and one would have to wait and see what the outcome of that litigation would be. It is worth noting, however, that it is arguably not competent for the tax court to make a determination of the loss for the 2010 year of assessment.  The Tax Court only has jurisdiction to decide disputes relating to assessments placed under objection and certain decisions by SARS (Section 117 of the TAA ). The assessment placed under objection was the 2018 assessment, not the 2010 assessment.    

In the next and final part, we explore the judgment of the High Court.

Authors – N Theron & W Swart (Unicus Tax Specialists SA)