Judgment summary
This judgment concerns two interrelated applications before the Tax Court: the taxpayer's application for a final order against SARS under section 129(2) of the Tax Administration Act (TAA) due to SARS's failure to deliver its rule 31 statement timeously, and SARS's counter-application for condonation of the late delivery and for a further period to deliver that statement (paras 1, 3).
The court traced a lengthy history of SARS delays and procedural non-compliance dating back to additional assessments raised on 17 March 2020 following a SARS audit (para 4), through the request for reasons, the objection, the partial disallowance, the notice of appeal, and ultimately the rule 31 statement, which was only served on 21 September 2021, well beyond the prescribed and even the self-imposed extended deadlines (paras 5 to 20).
The court also considered the merits of the underlying dispute, namely whether the taxpayer's payment of insurance premiums to RMB Structured Insurance Limited qualified as a deductible "expense" under IFRS for SMEs, engaging section 23L(2) of the Income Tax Act (paras 51 to 63). The court found that SARS's own pleaded case was internally inconsistent regarding the applicability of IFRS 4, undermining its prospects of success on the merits (paras 62 to 63).
The court dismissed SARS's condonation application, upheld the taxpayer's appeals for the 2016 to 2018 years of assessment, and ordered SARS to pay the taxpayer's costs on the party and party scale in both applications (para 67).
Background
Following an audit, SARS raised additional assessments against the taxpayer on 17 March 2020 for the 2016 to 2018 years of assessment (para 4). The taxpayer requested reasons on 2 April 2020, which SARS was required to provide by 10 June 2020 but only delivered on 7 September 2020, after failing to notify the taxpayer timeously of any extension (paras 5 to 7).
The taxpayer lodged its notice of objection on 20 October 2020 (para 8). SARS was required to decide the objection within 60 days, by 12 February 2021, but only did so on 22 February 2021, after the taxpayer delivered a rule 56(1)(a) notice (para 8). SARS partially disallowed the objection (para 8).
The taxpayer delivered its notice(s) of appeal on 31 March 2021 (para 9). SARS was required to deliver its rule 31 statement by 7 June 2021 under rule 31(1)(d), but failed to do so (paras 10 to 11). A series of extensions were sought by SARS, accompanied by shifting and, in one instance, false explanations (including a claim that counsel had "recently" been briefed when this was untrue) (paras 13 to 19). The rule 31 statement was ultimately served on 21 September 2021 (para 15).
Separately, disputes arose over the taxpayer's tax compliance status on SARS's e-filing system, notwithstanding an approved suspension of payment under section 164(2) of the TAA, causing the taxpayer commercial prejudice including risk to export permits, banking facilities and funding (paras 31 to 41).
Core dispute
The first issue was whether SARS's delay in delivering its rule 31 statement was so egregious that condonation should be refused, and whether the taxpayer was entitled to a final order under section 129(2) of the TAA upholding its appeal (para 3).
The second issue, overlapping with the first through the assessment of prospects of success, was the substantive tax dispute: whether payment of insurance premiums by the taxpayer to RMB Structured Insurance Limited qualified as an "expense" as contemplated in IFRS for SMEs, which determined the application of section 23L(2) of the Income Tax Act limiting deductions for certain short-term insurance policy premiums (paras 51 to 53).
Court findings
The court held that SARS displayed a persistent disregard for the time limits prescribed in the rules, including failing to seek extensions before expiry of prescribed periods, failing to explain delays, and making misrepresentations to the taxpayer regarding allocation of the matter and the briefing of counsel (paras 21 to 22).
Applying the interests of justice standard for condonation, having regard to the nature of the relief sought, the extent and cause of the delay, the reasonableness of any explanation, and prejudice to the taxpayer (para 26), the court found the delay egregious, unexplained, and that the taxpayer suffered severe and largely uncontested prejudice, including risk to its tax compliance status, export permits, banking facilities and funding (paras 31 to 43, 47).
On the merits, the court found that SARS's own papers relied on IFRS 4, despite the parties having previously agreed that IFRS 4 did not apply to the taxpayer as policyholder, and that SARS's counsel confirmed during argument that IFRS 4 did not apply. This inconsistency led the court to conclude that SARS lacked prospects of success on its defence as formulated (paras 56, 62 to 63).
The court held that the taxpayer's case, supported by independent expert opinion applying the Conceptual Framework for Financial Reporting, had sufficient merit to warrant final relief, and that if the taxpayer succeeded on the sole agreed issue, its remaining grounds of appeal would also succeed (paras 57 to 61, 65).
Outcome
The court dismissed SARS's counter-application for condonation (para 67.1). The taxpayer's appeals in relation to its 2016 to 2018 years of assessment were upheld (para 67.2). SARS was ordered to pay the taxpayer's costs in both the main and counter-applications on the scale as between party and party, as taxed or agreed (para 67.3). The court declined to award punitive costs because that request was raised only in heads of argument, without SARS having had an opportunity to address it in its papers (para 66).
Major issues / areas of contention
- Whether SARS's delay in delivering its rule 31 statement was so egregious that condonation should be refused.
- Whether the taxpayer was entitled to a final order under section 129(2) of the TAA due to SARS's non-compliance with rule 31.
- Whether SARS's counter-application for condonation of the late rule 31 statement should be granted, applying the interests of justice standard.
- Whether payment of insurance premiums to RMB Structured Insurance Limited qualified as an "expense" under IFRS for SMEs, engaging section 23L(2) of the Income Tax Act.
- Whether SARS's conduct in repeatedly altering the taxpayer's tax compliance status, despite an approved suspension of payment under section 164 of the TAA, was lawful.
- Whether costs should be awarded against SARS given its conduct in the litigation.