Judgment summary
This is an appeal to the Western Cape Division of the High Court against an order of the Tax Court (Magardie AJ, 2 December 2024), which dismissed the appellants' application under Rule 52(2)(b) of the 2023 Tax Rules. The appellants sought an order declaring their second objection, filed on 14 August 2023, to be a valid objection against estimated additional assessments issued by SARS on 25 March 2022 [3].
SARS had issued a notice of invalid objection on 22 September 2023, finding that the second objection did not comply with Rule 7(2)(b) of the 2023 Tax Rules, in particular the requirement in Rule 7(2)(b)(iii) to submit documents required to substantiate the grounds of objection [4, 44].
The central factual issue was the appellants' failure to provide SARS' Electronic Forensic Services team with effective access to the Healthbridge Electronic Medical Records System, despite having tendered such access in the second objection itself [23, 28, 42, 61].
The High Court (Saller AJ, Fortuin J and Ralarala J concurring) dismissed the appeal and ordered the appellants to pay costs jointly and severally on scale C, including the costs of two counsel [75, 76].
Background
The first appellant, Dr J Reid, is a specialist neurologist who renders services to the second appellant, Dr J Reid Inc, and is its public officer [22]. SARS conducted an audit relating to the first appellant's liability for personal income tax and donations tax, and the second appellant's liability for corporate income tax and VAT [22].
During the audit, SARS repeatedly but unsuccessfully sought access to the appellants' Healthbridge Electronic Medical Records System in order to verify information provided by the appellants [23]. SARS' audit protocols required its Electronic Forensic Services team to access electronic records directly from the source to confirm authenticity and veracity of data [40].
On 25 March 2022, SARS issued estimated additional assessments under section 95(1) read with section 92 of the Tax Administration Act, 28 of 2011 [24]. The appellants' entitlement to employ section 95 was not in dispute [24].
The appellants filed a first objection on 25 October 2022, which became the subject of a first Rule 52(2)(b) application to the Tax Court. That application was withdrawn on 1 August 2023, after publication of the 2023 Tax Rules [25].
On 14 August 2023, the appellants submitted a second objection through their tax practitioners, expressly acknowledging the requirement under the amended Rule 7(2)(b)(iii) to submit substantiating documents [26]. The second objection included a table of documents and attached three additional documents compiled by the tax practitioners, namely Annexure A (a recordal of the loan account between the first and second appellants), Annexure B (the second appellant's debtor's age analysis) and Annexure C (the second appellant's VAT schedule) [27]. In respect of the Healthbridge system records for 2016 to 2020, the second objection tendered electronic access [28].
Core dispute
The central legal dispute was whether the appellants' second objection constituted a valid objection for the purposes of Rule 7(2)(b) of the 2023 Tax Rules, and in particular whether the appellants had complied with Rule 7(2)(b)(iii) by submitting documents required to substantiate their grounds of objection [3, 4].
The appellants argued that Rule 7(2)(b)(iii) was drafted for the ordinary situation where the taxpayer bears the burden of proof under section 102(1) of the TAA. Where SARS issues estimated assessments under section 95 and bears the burden of proving their reasonableness under section 102(2), the appellants contended it was illogical and contrary to natural justice to require them to submit substantiating documents. They argued that no more should be required than a genuine and good-faith dispute of the assessment [57, 58].
A further factual dispute arose from the events of 19 September 2023, when the SARS Electronic Forensic Services team attended the appellants' premises but left without accessing the Healthbridge system. The parties offered different versions of what transpired, but it was undisputed that the appellants and their employees were not present to assist SARS with practical access and guidance on the system [42].
The appellants also argued that SARS had conflated the test for validity of an objection with the merits of the objection, that only SARS could prescribe which documents were required, that Rule 52(2)(b) applications created an unconstitutional cycle denying access to court, and that SARS' notice of invalid objection was vitiated by institutional bias and improper purpose [47, 49, 51, 74].
Court findings
The High Court upheld the Tax Court's findings and dismissed all of the appellants' contentions.
On the interpretation of Rule 7(2)(b)(iii), the court held that there is nothing in the language, context or purpose of the rule, or in Chapter 9 of the TAA as a whole, to support the contention that a taxpayer objecting to an estimated assessment bears a less onerous procedural burden than one objecting to an ordinary assessment. The distinction is not drawn expressly or by necessary implication in the statutory scheme [63].
The court found that section 95(4) of the TAA expressly preserves the taxpayer's obligation to submit returns and relevant material notwithstanding the making of an estimated assessment, and that under section 100(1)(b) an assessment becomes final in the absence of a valid objection [64, 65].
The court held that the burden of proof under section 102 of the TAA does not come into play at the objection stage but applies in litigation in the Tax Court in an appeal as provided for by section 129 of the TAA. The section 102 argument was therefore a red herring [69].
The court further found that the appellants' grounds of objection did not, in substance, challenge the reasonableness of the estimated assessments but took issue with their correctness [70].
On the facts, the court found that the appellants had themselves identified the Healthbridge system records as documents required to substantiate their grounds of objection, and had expressly tendered electronic access to that system in the second objection. When the appellants made reasonable electronic access to the Healthbridge system impossible, they failed to submit the very documents they had identified as being required [61, 73].
The court rejected the argument that SARS' approach unconstitutionally denied the appellants access to court under section 34 of the Constitution, noting that Rule 52(2)(b) itself provides a tailor-made mechanism for taxpayers to approach the Tax Court in such circumstances [71].
The court declined to engage substantively with the institutional bias and improper purpose argument, noting that no evidence was provided and that, since the Tax Court and the High Court on appeal consider the validity of the objection afresh under Rule 52(2)(b), there was considerable doubt whether an attack on SARS' notice of invalid objection on procedural grounds was available to the appellants [74].
Outcome
The appeal was dismissed. The appellants were ordered to pay the costs of the appeal jointly and severally on scale C, including the costs of two counsel where employed [1, 2].
Major issues / areas of contention
- Whether Rule 7(2)(b)(iii) of the 2023 Tax Rules, which requires an objecting taxpayer to submit documents required to substantiate grounds of objection, applies with equal force to an objection against an estimated assessment made under section 95 of the TAA.
- Whether the burden of proof under section 102(2) of the TAA, which places on SARS the burden of proving the reasonableness of an estimated assessment, reduces or negates the procedural documentary submission requirement imposed on the taxpayer by Rule 7(2)(b)(iii).
- Whether the appellants' failure to provide SARS' Electronic Forensic Services team with effective access to the Healthbridge Electronic Medical Records System constituted a failure to submit substantiating documents for the purposes of Rule 7(2)(b)(iii), given that the appellants themselves had tendered such access in the second objection.
- Whether SARS conflated the test for validity of an objection under Rule 7(2) with the question of whether the objection should be allowed or disallowed on its merits.
- Whether the requirement of a valid objection as a precondition for an appeal under the statutory scheme infringes a taxpayer's right of access to court under section 34 of the Constitution.
- Whether a Rule 52(2)(b) application is in the nature of a review of SARS' notice of invalid objection, or whether the Tax Court and the High Court on appeal must consider the validity of the objection afresh.
- Whether SARS' notice of invalid objection was vitiated by institutional bias or improper purpose.