Yes, You Really Can Mess Up A SARS Objection

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Yes, You Really Can Mess Up A SARS Objection

• 07 February 2025
• SARS Dispute Resolution
• Nico Theron

The judgment of the Western Cape Tax Court in the matter of DR X and Dr X Inc v CSARS[1] (“the Dr X case”) appears to be a good example to explain how it is possible to screw up an objection.[2]

But, before I delve into the details of the judgment, let me first explain upfront and in simple terms the common practice which this judgment suggests must be stopped in its tracks: the submission of vague and unsupported objections.[3]

According to the Dr X case, vague and unsupported objections are invalid! Not disallowed. Invalid!

Vague and Unsupported objections?

But what is a vague and unsupported objection then? Let me explain by way of examples from the facts in the Dr X case as I read it:

• SARS raised assessments to donations tax in respect of certain payments made. The taxpayer’s objection: the donations are exempt under section 56(2)(c) of the Income Tax Act because they relate to payments made to the taxpayer’s son who is a full-time student. No evidence was provided (“the donations tax issue”).

• SARS raised income tax assessments in respect of unexplained deposits into the taxpayer’s bank account. The taxpayer’s objection: the deposits were previously declared. Evidence was not provided (“the income tax deposit issue”).

• SARS raised VAT assessments based on amounts received and imposed understatement penalties (USP’s). The taxpayer’s objection: these are amounts paid on old invoices and the VAT was previously declared. The evidence provided was a payment summary and debtors age analysis which contained aggregated numbers that did not reconcile to the amounts SARS raised the VAT assessments on (“the VAT deposits issues”).

I have often previously said (see for example: here), there is a difference between making a factual statement and proving it. Equally, there is a difference between making a legally sound argument based on the facts and making statements about the law. The examples above are of the former kind and in the result, the taxpayer’s objection was held by the court to have been correctly declared invalid by SARS.  But what then is a properly supported and argued objection? Let’s use the Dr X case as a base model for trying to explain:[4]

• The donations tax issue:

A copy of the son’s proof of enrolment as a full-time student at the relevant institution and a reconciliation of the use of the allegedly donated funds in the son’s bank account indicating the amounts are indeed maintenance related (“Massive Effort One”).

• The income tax deposit issue:

As an example: For each deposit (i.e. each one of the deposits SARS sought to tax), a copy of the invoice/(s) to which it relates that reconciles to a breakdown of turnover for accounting purposes of the relevant year, which reconciles to financial statements (ideally audited), that reconciles to the income tax return filed and the assessment raised. For each and every single deposit (“Massive Effort Two”).  

• The VAT deposit issue:

As an example: The tax invoice to which the deposit relates together with the VAT report for the period in which the taxpayer alleges the VAT was declared clearly showing the invoice that was paid (being the one SARS has now raised VAT on) is included in the breakdown of output VAT for that period (ideally together with a recon back to financial statements to bolster the veracity of the VAT report as evidence) (“Massive Effort Three”).

Why are Taxpayers not objecting properly?

Why do taxpayers file vague and unsupported objections?  In my experience, there seems to be a couple of reasons for this:

• A lack of understanding that the legislature made it easier for SARS to raise an assessment than for a taxpayer to prove it wrong.[5] It sucks, but so what. It is what it is. Deal with it (see a related article here).

• An unwillingness to go through the effort that it takes to put together a properly substantiated objection. Whilst I appreciate that Massive Effort One to Three above are, indeed, massive efforts, they are not avoidable. The mistaken belief that they are avoidable probably stems from:

• The fact that there appears to be a lack of consistency from SARS’ side (which, to be fair, has recently improved in my experience): what is good enough as evidence in one case is not neccsarily the same for another. Taxpayers then, understandably so, may be reluctant to put in the massive effort lest the official in their case is not too “pedantic” about evidence and detail and the case can be either allowed or go through to appeal.

• SARS has only recently, in our experience, been clamping down on these vague and unsupported objections. In fact, it was a common practice for many years where taxpayers would take a “light” approach in objections and then remedy any shortcomings in details and evidence in appeal because SARS would typically (historically) disallow those “light” objections and allow the taxpayer to appeal as opposed to invalidating it.

• Perhaps, however, the most important reason is a lack of understanding of the meaning of the word “assessment” (probably one of the best examples of such a misunderstanding can be seen in the judgment of the SCA in The Commissioner for the South African Revenue Service v Airports Company for South Africa (Case no 785/2021) [2022] ZASCA 132 (7 October 2022) (see my earlier article here).

Is there a legal basis for all of this?

The Tax Court Rules

Rule 7(2) of the Tax Court rules require of taxpayer to, amongst other things, specify in detail the assessment[6] which they are disputing and to (a) specify in detail their grounds for objection and to (b) provide the documents required to substantiate the grounds for objection. Rule 7(4), in turn, states that SARS has the right to invalidate the objection for want of compliance by the taxpayer with subrule 2.

As to (a) above: grounds for objection can only mean the facts and the law[7] on which the taxpayer relies to show SARS’ assessment is incorrect. Too often, when we are asked to review objections, we see objections that are either heavy on facts (or at least factual statements) and have nothing on law or too heavy on law and too light on facts.  The detail that goes into an objection (or at least the ones we do) is not there to look impressive – it is there to protect the taxpayer’s rights and to avoid a fate similar to the one suffered by Dr X and his/her practice.  In the Dr X case, the court held that the grounds for objection were not specified in detail. Having read only the judgment, I am in respectful agreement with the court’s observation that the grounds are not detailed enough.[8]

As to (b) above: In the Dr X case, the court held that the documents required to substantiate the objection are those that, objectively considered, substantiate the taxpayer’s grounds for objection and that it is not a matter of what documents the taxpayer subjectively believes substantives its grounds for objection. Whilst I, respectfully, have reservations about that approach to the interpretation of rule 7(2)(b)(iii),[9] it is largely academic in the circumstances because if no evidence is provided (as was the case in respect of donations tax issue and the income tax deposits issues), the question of whether it is a subjective or objective test in Rule 7(2)(b)(iii) is irrelevant. [10]

SARS’ onus?

It seems the income tax assessments, insofar as they were based on unexplained deposits in the taxpayer’s bank account were Section 95 estimates.  Indeed, SARS also imposed understatement penalties. In addition, it seems the taxpayer raised a defence on the basis of prescription in the objection.

Section 102 places the burden of proving estimated assessments are reasonable and the facts upon which SARS rely to impose an understatement penalty upon SARS.  It is also trite that SARS carries the burden of proving they were entitled to lift the veil of prescription

So then, on the court’s interpretation of Rule 7(2)(b)(i) and (iii) in the Dr X case, it seems taxpayers are required to show in detail (in their objections) the basis for SARS’ estimated assessment incorrect, failing which, no one can ultimately determine if SARS can actually discharge their onus of proving the estimate reasonable and the facts upon which they rely for imposing a USP and whether they could have lifted the veil of prescription?[11] That is obviously incorrect.

Or perhaps the answer to that problem lies in the fact that the taxpayer can launch an application for the court to determine whether an objection was correctly invalidated and, in that process, the SARS’ ability to discharge their onus of proof can be determined in that process? But that too, cannot be correct as that would effectively render the court the trial court when it is not when hearing a Rule 52 application.

Or am I taking it too far to say that taxpayer’s must prove their case in objection despite the onus of proof being on SARS and that rather, all that is required is at least some level of detail?

An example:

Assume the following facts: SARS assesses taxpayer A by way of estimate under Section 95 in terms of which SARS assess deposits across several bank accounts as taxable income despite those deposits clearly being the same amount moved from one bank to another.[12] The taxpayer files an objection[13] and takes the proverbial “guilty man’s defence” by stating simply: “SARS is put to proof”. No documents are attached to the objection. On the basis of the judgment in the Dr X case (or at least my reading thereof), SARS can invalidate that objection for want of compliance with Rule 7(2)(b)(i) and (iii) despite SARS never being called to prove its case and indeed not actually being able to prove the reasonableness of the assessment? I seem to recall that interpretations that result in absurd conclusions are to be avoided?

For these reasons and to the extent the onus of proof in the dispute between Dr X and SARS was upon SARS, I respectfully disagree with the court’s conclusion.   

In the end

It is becoming easier and easier to make a mistake with objections as the courts (and indeed SARS) seem to be taking a more rigid approach to the rules and processes that govern tax dispute resolution.

It is crucially important to ensure compliance with Rule 7(2) as SARS can invalidate objections that are vague and unsupported, especially, in my view, where taxpayers carry the burden of proof in an objection.  Ensuring compliance with Rule 7(2) in an objection requires at least a comprehensive understanding of:

• the substantive law that forms the subject matter of a dispute;
• when SARS or the taxpayer carries the burden of proof and what it means;
• the facts relevant to the issues in dispute;  
• what exactly it is that must be proven (known as the facta probanda);
• what a piece of evidence actually proves;
• the ability to present that evidence in a cogent and coherent fashion;
• the ability to write cogent and comprehensive arguments; and
• the procedural law that governs tax dispute resolution.

Really, the judgment in the Dr X goes to show yet again that tax dispute resolution is not only a speciality area when disputes reach appeal or litigation but is already one at objection level where getting it wrong can spell disaster for a taxpayer.

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[1] 52/2023.

[2] With respect to “Dr Austin” and his team. I don’t mean to say the objection was in fact messed up in this case but only to use it to illustrate a point. 

[3] One would have thought that the judgment of the High Court in Commissioner For the South African Revenue Services v M (A5036/2022) [2023] ZAGPJHC 789 (6 July 2023) already made that clear.

[4] I accept that there may be gaps even in my suggested approach, but the suggested approach serves more as an example to illustrate a point than it builds the actual case.

[5] This does not, however, mean SARS can do whatever they like and leave it to the taxpayer to prove them wrong in due course even where the taxpayer carries the burden of proof – see Commissioner South African Revenue Services v Pretoria East Motors (Pty) Ltd (291/12) [2014] ZASCA 91; [2014] 3 All SA 266 (SCA); 2014 (5) SA 231 (SCA); 76 SATC 293 (12 June 2014) where the court held that SARS must have proper grounds for their assessment despite the onus of proof being on the taxpayer.

[6] As to people not understanding what an assessment is, see my comments above).

[7] See for example the case of Trustees of the CC Share Trust and Others v Commissioner for the South African Revenue Service (38211/21) [2023] ZAGPPHC 597 (24 July 2023) where it was held that “grounds for assessment” in a letter of audit findings means the facts and the law (see also my related article on that issue here).

[8] See however my comments on onus of proof.

[9] For pretty much the same reasons advanced by counsel for the taxpayer and as also stated in my book: here.

[10] Insofar as the evidence provided on the VAT deposits issue may have been a bit “thin” my view is that objection ought to have been disallowed and not invalidated depending on the exact detail of that evidence because if it is completely nonsensical and misses the point, then it as good as no evidence at all.

[11] Because, the taxpayer must, according to my reading of the judgment in the Dr X case, explain, in their objection, in detail with supporting documents, why each deposit is not taxable and in the event they can’t, then it does not matter whether SARS’ assessment is reasonable or whether SARS can prove the USP facts because SARS can then invalidate the objection, resulting in SARS going completely unchecked.

[12] Which taxpayers tend to do when they are hunting for the highest possible interest rates.

[13] After having followed the prescribed 93(1)(f) TAA procedure.

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