Tax Administration Act
Practice generally prevailing By Greg Boy
The Tax Administration Act no.28 of 2011 (‘the TAA’) officially became legislation on 1 October 2012. There is much talk over the South African Revenue Service’s (‘SARS’) extended authority in this new act, for example, around the search and seizure; however not much light has been shed on the implications of the new definition for the term ‘practice generally prevailing’.
This term is relevant to the Income Tax Act in terms of s79(1)’s third proviso – which states that SARS is not entitled to raise additional assessments if the amount which should have been assessed was in accordance with the ‘practice generally prevailing’ at the date of the assessment.
Before the TAA, this term was taken to mean “the practice known to and applied by the Commissioner personally or, in view of his powers of delegation, through a duly delegated division at the SARS Head Office. A ‘practice generally prevailing’ is therefore one that has been expressly authorised by the Commissioner (personally or through the delegated Head Office Division) and is being applied throughout the country – it cannot be said that a practice that has its origin in a branch office of SARS falls within the concept.” This understanding stemmed largely from court cases, and had no formal definition in legislation.
In CIR v SA Mutual Unit Trust Management Co Ltd , practice generally prevailing was seen as a practice generally applied in different SARS offices in assessing taxpayers, not necessarily just one or two SARS offices. Thus a considerable onus was placed upon the taxpayer to prove that a practice was one generally prevailing at the date of assessment.
Section 5(1) of the new TAA defines this term as “a practice set out in an official publication regarding the application or interpretation of a tax Act”. The term ‘an official publication’ could be assumed to include (but not be limited to) Interpretation Notes, Explanatory Memoranda and Guides issued by SARS from time to time. This would significantly decrease the burden of proof on the taxpayer in proving a practice generally prevailing, as he/she would simply have to refer to the relevant publication, provided that it was in effect at the date of assessment. Section 5 of the TAA does not specify dates in relation to publications, so one would assume that if the relevant publication was available to the public at the time of assessment, it would be seen to be a practice generally prevailing under the new definition.
Section 5(2) indicates that a practice generally prevailing will cease to be as such (other than a binding general ruling) if certain events occur – repeal or amendment to the provisions of a tax Act, the court overturns or modifies an interpretation of a tax Act, or if the official publication is withdrawn or modified by the Commissioner. It is therefore important for taxpayers, seeking to rely on this new definition, to they ensure the publication or provision of the Act relied upon was not amended subsequent to issue and prior to assessment.
Section 5(3) states that a binding general ruling will cease to be a practice generally prevailing in the circumstances described in s85 or 86 of the TAA (which deal with circumstances in which advance rulings cease to be of effect).
A potential problem arises in the case where a tax Act indicates one treatment, while a SARS publication indicates another. A good example is in relation to the carrying forward of assessed losses. Court decisions of the Supreme Court of Appeal have concluded that ss20(1)(a) and (2) of the Income Tax Act indicate that a legal entity may not carry forward an assessed loss from a previous year unless that entity carried on a trade in the succeeding year.
ITC 1830 further concluded that in addition to the ‘trade requirement’ (mentioned above), an assessed loss could not be carried forward where there was no income in the year against which to set-off any balance from the previous year. Therefore it would seem that the courts have interpreted s20(1)(a) and (2) to indicate that there is a requirement to be carrying on a trade as well as earning income, in order to carry forward an assessed loss. SARS upset the apple-cart by issuing Interpretation Note 33, stating that in certain instances, income from trade is not a requirement in carrying forward an assessed loss. A taxpayer could not be faulted for struggling to understand which of the two (court cases or Interpretation Note) prevails. Under the new definition of a practice generally prevailing in the TAA, it would appear that the Interpretation Note would trump the court decisions, being an ‘official publication regarding the application or interpretation of a tax Act’.
So for taxpayers seeking to avoid additional assessments, the onus to prove a practice generally prevailing may have been lightened, in light of the new definition. The implications of the new definition do not end there and can work against the taxpayer. Section 44(3)(a) of the VAT Act, which deals with certain VAT refunds, provides that ‘if the Commissioner is satisfied that such payment (made by the vendor) was made in accordance with the practice generally prevailing at (the date upon which payment of the amount claimed to be refundable was made) no refund shall be made unless the claim for any refund is received...within six months after that date’.
In the case of Michael Weare v Comm:SARS , the taxpayer failed to overcome the burden of proof that the refund was not made in accordance with practice generally prevailing, and SARS was not required to refund him. So it seems that SARS might also derive some benefit from this new definition in certain instances.
It is yet to be seen how this new definition will affect disputes regarding the sections of the Acts discussed above, but both the taxpayer (in Income Tax cases) and SARS (in VAT cases) seem to have a slightly more bolstered arsenal.
