Section 99 of the Tax Administration Act (the TAA) limits the period within which SARS can raise additional assessments. The Western Cape High Court recently tested those limits in CSARS v Meiring Citrus (Pty) Ltd. In this article, I set out the court’s approach to prescription and some of the questions I believe it raises.
The facts and the timeline
Meiring Citrus, a citrus farming company, took out a self-insurance product from Santam. It paid a premium of R10 million. Santam allocated R400 000 to an underwriting fee and R9,6 million to an experience account. The first claims reduce this balance. The taxpayer could cancel the policy at any time. The account balance earned notional interest. In the 2017 year, that interest came to R1 197,52.
When it comes to prescription, the dates matter. SARS issued the original 2017 assessment on 18 December 2017. SARS then conducted a verification and asked, among other things, about the sharp increase in insurance expenditure. The tax practitioner explained that this was self-insurance and referred to an attached contract. The attached document was in fact a debit order authorisation, not the contract. SARS finalised the verification with no adjustment. In December 2020, SARS opened an audit covering 2017 to 2019. The taxpayer provided the full agreements. SARS issued an additional assessment for the 2017 year of assessment on 19 July 2021, about three and a half years after the original assessment.
Section 99 requirements and SARS’ position
Section 99(1) bars SARS from issuing an additional income tax assessment more than three years after the date of the original assessment. Section 99(2) lifts this bar to the extent that the tax was not assessed due to fraud, misrepresentation or non-disclosure of material facts.
SARS relied on two grounds. First, the premium was mischaracterised as insurance. Second, the notional interest was not disclosed, which SARS contended was a material fact.
The court’s approach
The Tax Court had required causality on an item-by-item basis. One instance of listed conduct does not open the whole assessment. It held that the R1 197,52 was too small to amount to non-disclosure of a material fact.
The High Court took a different view. It held that materiality attaches to the fact not disclosed, not the amount. The test is qualitative, not quantitative. The court reasoned that disclosing the interest would have alerted SARS that the premium bore interest, prompting the necessary questions about the arrangement. (In my view, this reasoning is open to question. The ITR14 field for interest income does not distinguish its source. I am not convinced SARS could have made the link between the interest and premium from the return alone.)
The court found the non-disclosure of the interest and the misrepresentation of the nature of the agreement as insurance inextricably linked. On that basis, the section 99(2) exclusion applied and the additional assessments stood.
Questions the judgment raises
The court also remarked, in paragraph 134 of the judgment, that if an assessment is reopened for one item, SARS is authorised to correct all other components. It is not clear to me how far this statement was intended to reach. I would read it in the context of the premium and interest arising from the same policy, but the point may well resurface in future cases.
Two further issues stand out for me from reading the judgment. First is the potential role of information provided during a verification. Most practitioners assume prescription turns on the return. The court’s return to the information provided in 2018 in the judgment suggests verification responses may also count, although the judgment does not explicitly say this. Second, and related to the request and information provided, there may be a question as to where the taxpayer’s disclosure duty ends, and SARS’s duty to investigate further begins. The practitioner told SARS in 2018 that this was self-insurance. SARS could have asked for the agreement and the experience account then. The judgment places little weight on this.
Take-home message
It is essential to complete the ITR14 accurately. This point was well established in the Spur Group case a few years ago and is again illustrated in the Meiring Citrus judgment. That includes the yes/no questions, the line items, and the correct mapping of financial statement items to the return’s income statement and balance sheet fields. An inaccurate or incomplete return may cost a taxpayer prescription protection. In light of the court’s discussion of the responses to the request for information, the second take-home message is not to underestimate verification responses. They may well receive attention when it comes to prescription, as was the case here.
