Tax disputes and onus of proof: a rotten apple analogy

Tax disputes and onus of proof: a rotten apple analogy

• 06 September 2023
• Tax Administration
• Nico Theron

If one apple in a bag of apples is rotten, does that always mean all the others in the bag are rotten too? Of course not!

Why is it then that so often, one or two invalid tax invoices/one or two incorrect expense claims on a tax return/one misstep by the taxpayer is extrapolated across multiple tax years or periods?

To answer that, let’s go back to this rotten apple analogy I have going here. For many of us, experience has taught us that if there is one rotten apple in a bag, chances are good there will be others, right? We assume, based on experience/trends, there will, more probably than not, be others that are rotten too.

The same can be said of, for example, a finding that there is one supplier invoice that is not valid so other invoices from that supplier are probably also invalid. Extrapolation is based on the same premise as in the rotten apple analogy – assumption based on experience/trends without knowing for sure – in fact, that’s pretty much the meaning of “extrapolate”.

But is it fair for SARS to assume, for example, that other invoices from that supplier are invalid and just raise an assessment based on that assumption? Perhaps, if one could take care of the problem by applying the same logic in reverse, so to speak, by showing one other invoice from that supplier that is valid. But more often than not, that won’t cut it. This is often perceived as unfair. Indeed, one could argue it is unfair but don’t be surprised if that sort of argument is eventually met with a “noted” somewhere down the line in the dispute (for those of you that don’t know, “noted” is often used as a more formal way of saying “whatever”, or funnier still, “so what”).

Why? Because SARS does not have to prove that the other invoices are invalid. They must simply form a subjective opinion, based on reasonable grounds that the other invoices are non-compliant in order for them to raise the assessment. Extrapolation often (but not always) meets this relatively low criteria for raising an assessment.

As a taxpayer, you don’t have it that easy because, for the most part, you carry the onus of proof in a tax dispute. By producing one valid invoice you have by no means proven that all the other invoices SARS disallowed are compliant. At best, it suggests that SARS might not be right with their assumption that the other invoices are invalid. Unfortunately, a mere suggestion does not discharge the onus of proof. (Not even on a balance of probabilities for those of you about to jump up and down about the burden of proof. Also, yes, I know, there is an argument to be made about such an assessment being an estimated assessment where SARS carries the burden of proof. Still, I am trying to explain onus of proof in as simple a way as possible and rotten apples came to mind, so relax, I am clearly not being technical).

So then, SARS can, by way of analogy, decide that there are other rotten apples in the bag based on having found one rotten apple. You, on the other hand, can’t prove that the others are not rotten by showing them one that’s not rotten. You have to show them every single one of the other that is not rotten. That, at a very basic principle level, is onus of proof. It sucks, I know, but it is what it is.

In my experience, I have found that a lot of people don’t take the issue of onus of proof seriously enough – especially in the early stages of a dispute (even before the assessment is even raised). I have dealt with many cases that could have been resolved much sooner (sometimes years sooner or, better still, not even have existed), if this concept of onus of proof was taken seriously and given the attention it needed earlier on in the dispute. I know that dealing with this onus early on in the dispute is often seen as this massive mountain to climb, and the reality is that, sometimes, it is unfortunately exactly that. But believe me, when I say, it will serve you very well if you deal with it head-on as soon as possible and do not try to avoid having to go through the trouble. Eventually, you are likely going to have to deal with it, so get it done asap.

A typical example of where I often see this is where SARS decides to raise an assessment based on amounts deposited into a bank account or where SARS decides that there are unexplained sources of income that ought to be taxed (typically following a “lifestyle audit”). Protestations such as “those deposits are not mine” or “I funded that asset with an inheritance from my long-lost, unlikely uncle in Nigeria” on their own, even though they may be very true, means very little without the evidence to back it up. Reconcile the bank accounts (insofar as possible, use the same information SARS worked with and make sure you are showing them you are using the same point of departure they did – I always say, you can’t change someone’s mind if you don’t understand their understanding), show the will (or the email and phone call in the case of the unlikely uncle in Nigeria) etc.

Some of you might say that you do this, and it doesn’t work. If it is done properly, it should work most of the time (and works well in our experience) and even if you did it properly and it still doesn’t seem to work (which also happens from time to time, unfortunately), chances are you don’t know how to use the fact that you did it properly as a (very powerful) defence. In my experience, it always makes sense to get into this onus of proof thing as soon as possible, even if it might seem like overkill at first.

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