It is imperative that taxpayers plan their commercial affairs to fall within the law. However, factors such as the economic climate, the sophistication of the South African Revenue Service ("SARS") and the uncertain tax environment as a result of the annual, often far-reaching, changes to the Income Tax Act, Act 58 of 1962 ("the Act"), increase the risk that the tax treatment of commercial transactions may be disputed by SARS and that such a dispute could end up in court or arbitration.
In planning and implementing transactions, taxpayers should, therefore, be mindful of the fact that anything they say or do could be used against them in a future dispute with SARS. Put differently, any action taken, from the conceptualisation phase until the actual hearing, could influence the result of a court case and assist or detract from a successful defense.
Taking the above into account, a taxpayer's approach to the obtaining of advice on the tax and legal implications, the disclosure of a transaction to SARS, an audit by SARS and responding to queries raised by SARS could be different. As lawyers who specialise in assisting taxpayers with the dispute resolution process, from the initial request for information to the court or arbitration procedure, we recommend that the following be taken into account:
- Taxpayers should know their rights in respect of legal
privilege applicable to the tax advice obtained by the taxpayer and
protecting such privilege from inadvertent waiver as a result of
disclosure of the tax advice or existence thereof to other parties.
Generally speaking, a taxpayer may claim that communications are
privileged if these are between an attorney and his/her client for
the dominant purpose of providing legal advice. The disclosure of a
privileged communication to a third party will normally be
construed as a waiver of the privilege, whether or not there was a
subjective intention to waive or abandon the privilege.
- Taxpayers should consider whether the commercial rationale for
entering into transactions has been accurately documented at the
time the transaction is implemented and whether the documentation
drafted correctly reflects the intention of the parties. This is
particularly important because by the time that a dispute reaches
the court, the specific individuals involved in planning and
implementing the transaction may no longer be in the taxpayer's
employ and no record may exist of the company's intention and
commercial rationale at the time the transaction was planned and
- Any correspondence or disclosure to SARS, whether formal or
informal, should be carefully prepared to ensure factual accuracy
and to ensure such correspondence or disclosure is sufficient. In
this regard taxpayers should know their rights relating to the
disclosure of information to SARS and the restrictions which apply
to taxpayers and SARS regarding the preservation of secrecy. For
- Although section 74A of the Act provides wide powers to SARS to
require taxpayers to provide information, the Commissioner may only
obtain such information for purposes of "administration of the
Act" which is a defined term. Obtaining information in respect
of an intended transaction, prior to its implementation, would for
example currently fall outside these wide provisions. We note that
although there is draft legislation which may impact on these
provisions, such legislation is not yet in force.
- With regard to the secrecy provisions, section 4 of the Act
contains provisions which broadly provide that persons in the
employ of the Commissioner shall preserve and aid in preserving
secrecy with regard all matters that may come to their attention in
performing their duties. A similar duty is placed on persons not
employed by SARS with regard to communications with SARS. The
respective obligations should be taken into account by taxpayers
when dealing with queries from SARS.
- Although section 74A of the Act provides wide powers to SARS to require taxpayers to provide information, the Commissioner may only obtain such information for purposes of "administration of the Act" which is a defined term. Obtaining information in respect of an intended transaction, prior to its implementation, would for example currently fall outside these wide provisions. We note that although there is draft legislation which may impact on these provisions, such legislation is not yet in force.
Nothing prohibits a taxpayer from planning his/her affairs and typically such planning focuses on achieving a specific commercial outcome. Similarly, nothing prohibits a taxpayer from taking steps to ensure future disputes are avoided, dealt with speedily or have a positive outcome. It, therefore, makes good business sense to ensure that advice is privileged and that there is no inadvertent compromise of proper planning as a result of a careless statements or lack of knowledge of a taxpayer's rights or obligations.
The next time you receive a SARS letter or phone call requesting information: remember, talk to your tax lawyer!
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.