There is a good chance that an assessment based on a ‘secret audit’ will be set aside in the absence of extenuating circumstances.
In a matter heard before the Port Elizabeth Income Tax Court earlier this year, a taxpayer’s appeal was upheld.
The taxpayer (the appellant), who had been the CEO of a company, had received a significant amount of money from his former employer. SARS assessed his tax as if the lump sum were normal income.
The appellant, however, maintained that the money was not normal income, and should have been assessed as a retirement or retrenchment benefit, which would have meant less tax. His objection was disallowed and the case went to court.
In its document setting out its case for the court, SARS said that an audit had produced findings that adversely affected the appellant and formed the basis of its case.
The appellant had not known about the audit; he had never been informed about it in writing and no findings had been communicated to him.
SARS also used a letter from the employer in its findings. This stated that it was with regret that the appellant was being asked to step down, and went on to note his good leadership and passion for the company.
Because of this, SARS viewed the lump sum as being ordinary income to be taxed in the usual way.
The judge pointed out that Sections 40 and 42 of the Tax Administration Act provide for a taxpayer to be notified of an audit and kept informed of the process. This had not happened, and the appellant had not been afforded an opportunity to place his facts before SARS.
There are times when such notification might not be legally required, but these are exceptions. In the case under discussion, there were no exceptional circumstances.
The judge added that SARS had interpreted the letter from the appellant’s employer in a selective way. It had not taken into account other factors that would have led to a different conclusion by SARS.
Finding for the taxpayer
The judge found that SARS had not complied with the Tax Administration Act and the audit was set aside, along with the resulting assessment. Interest charged against the appellant was remitted and SARS had to pay his legal costs.
In conclusion, if you are assessed and that assessment is based on a ‘secret audit’, the assessment and audit can be set aside, unless SARS had good reason for not letting you know about the audit.
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