Tax disputes: Pre-litigation and litigation burdens of proof

Tax disputes: Pre-litigation and litigation burdens of proof

• 13 February 2023
• Tax Administration
• Nico Theron

In a tax dispute, taxpayers must discharge their onus of proof on a balance of probabilities. Lots of people know that. However, in our experience, the evidence submitted during pre-litigation phase of a tax dispute that would most likely constitute “proof on a balance of probabilities” is not accepted by SARS.

A classic example of this is a 2016 tax court judgment in which a taxpayer claimed an income tax deduction for casual wages which was disallowed by SARS. When the case eventually reached litigation, the only evidence in support of the expense was the testimony of one of the erstwhile directors of the taxpayer.

Stated differently, the director told the court that the company incurred these expenses and what they were incurred for. The director’s “say so” was enough to substantiate the expense, and it was accordingly allowed by the court. Whilst we were not involved in that case, I think it is safe to assume that the taxpayer told SARS, long before the case went to trial, that it really did incur the expenses but that was obviously not good enough for SARS.  

Why is it that evidence can be good enough for a court but not good enough for SARS? In our experience, part of the reason may be that in the pre-litigation phase of a tax dispute, taxpayers are, in some cases, effectively held to a slightly higher burden of proof.  

If this is indeed the case, then on the one hand, it is understandable – SARS holds the public purse, and so to rather be double sure is better than wasting money. On the other hand, it is unfair for taxpayers to be forced into further processes (all the way to litigation in the abovementioned case) just to discharge the onus of proof.

In the end, the debate on whether SARS holds taxpayers to a higher burden in the pre-litigation phase of a dispute from time to time and whether doing so is correct or not can quickly become a philosophical and academic debate. Let’s not go down that road any further.

I think most people will agree that litigation with SARS is best avoided in most cases. So, one can decide to either be headstrong about what the burden actually is and then eventually, when you win in court (often years later), get the chance to say: “I told you so!” Or one can take the fact that the taxpayer is held to a higher burden of proof on the chin, so to speak, and deal with it. If in doing so, litigation is avoided, that is surely to be preferred?

So how do you deal with this “higher” burden? This is very much fact dependent and there is certainly no one-size-fits-all answer. Still, we have found that having a particular mindset when compiling evidence is very helpful: When you start compiling evidence in support of your objection/in response to audit findings, for example, assume the following:

• Nothing you say will be accepted at face value; and
• Every document you provide will be questioned.

I am not suggesting here that this is the way SARS looks at all taxpayers. I am simply suggesting a type of mindset one can use to guide you in the compilation of evidence and which is likely to serve you well.  

One must remember, SARS is not in your office/workshop/construction site/other places of business every day as you are. They don’t get to see what you see and live every day in your business. As a taxpayer, it is often difficult to understand how SARS can, for argument’s sake, doubt the casual wage expense. After all, you see the guys pitch up for work, you see them work, and you know you are paying them, so it is easy to get frustrated if someone questions that reality. It is often precisely at that point where the frustration kicks in where taxpayers start providing evidence that really when objectively considered, is way too thin to get you over the line.

Of course, it is not always possible to meet this higher burden in the pre-litigation phase of a dispute. Unfortunately, in cases like these, you may have no choice but to press ahead into more advanced processes of dispute resolution. What is important to remember, in these cases, is that whilst you may not be able to discharge the pre-litigation burden of proof, you may very well be able to convince a court (as did the taxpayer in the case above).

Join Nico Theron for his upcoming webinar on SARS Dispute Resolution: A Focus on Objections and Appeals. Read more, https://taxfaculty.ac.za/events/sars-dispute-resolution-a-focus-on-objections-appeals

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