South Africa: The Importance Of Documentation In Tax Disputes Highlighted In The New Dispute Resolution Rules

Last Updated: 29 August 2014
Article by Stephen Levetan and Taryn Solomon

Most Read Contributor in South Africa, September 2016

The new rules promulgated under section 103 of the Tax Administration Act No. 28 of 2011, which prescribe the procedures to be followed in tax disputes, took effect on 11 July 2014. These rules replaced the rules previously promulgated under section 107A of the Income Tax Act in their entirety, and now apply to all tax disputes.

In this article, we consider the new rule pertaining to discovery. Discovery of documentation is an important step which must be taken in all legal disputes. The discovery process can be described as the compulsory disclosure, by one party to a dispute to another, of all documents relevant to the issues in dispute. In tax dispute matters this is no different, and the retention and subsequent discovery of documents by the taxpayer becomes especially important where the taxpayer bears the onus of proof and indeed has in its possession documents which support its case. It should be noted, however, that all relevant documents have to be discovered by both the taxpayer and the South African Revenue Service ("SARS") (whether such documents are supportive of the party's case or not), including internal communications, but excluding legally privileged documents.

Whereas under the previous rules there was provision for the parties to make discovery only after the exchange of pleadings (as is the case in conventional litigation), under the new rules there are a now four occasions when discovery is either obligatory or can be requested at an earlier stage than was the case before. We highlight these below.

  • The firstsuch occasion is at the objection stage of a dispute. Rule 7(2)(b)(iii) provides that a taxpayer who lodges an objection to an assessment must specify the grounds of objection in detail, including "the documents required to substantiate the grounds of objection that the taxpayer has not previously delivered to SARS for purposes of the disputed assessment". This new rule effectively gives SARS an early insight into the taxpayer's supporting documentation upon which it relies quite early on in the dispute process and ensures that a taxpayer must draft a carefully considered and supported grounds of objection.

Rule 36 contains the main rules relating to discovery and provides for the next three occasions as follows:

  • After SARS has delivered its statement of grounds of assessment and opposing appeal ("Grounds of Assessment"), the taxpayer may, within 10 days after delivery of the SARS Grounds of Assessment require SARS to discover any document "material to a ground of the assessment" as set out in those Grounds of Assessment "to the extent that such document is required by the appellant to formulate its grounds of appeal".
  • Similarly, after a taxpayer has delivered its statement of grounds of appeal ("Grounds of Appeal"), SARS may, within 10 days after delivery of the taxpayer's Grounds of Appeal, require the taxpayer to discover any document "material to a ground of appeal"as set out in those Grounds of Appeal "to the extent such document is required by SARS to formulate its grounds of reply"("the SARS reply").
  • The fourth occasion is the standard requirement for the parties to discover following the exchange of pleadings by the parties (the Grounds of Assessment, Grounds of Appeal and the SARS Reply)

What is clear from the second and third occasions is that each party is entitled to discovery of documents earlier than was the case under the previous rules governing discovery which only consisted of a rule similar to that which is now covered in the fourth occasion where the parties were only entitled to discovery of documents after the exchange of their relevant pleadings in the matter, meaning that neither party had access to the other parties' relevant documentation prior to drafting their respective statements. This was often disadvantageous to a taxpayer as it would often be unclear to the taxpayer what documentation SARS might be relying on in pleading its case. SARS on the other hand would not necessarily have been at the same disadvantage as an audit, in which information and documentation would have been gathered from the taxpayer, would have preceded the issue of the disputed assessment.

As described above, the position now is that following SARS's delivery of its Grounds of Assessment, the taxpayer is entitled to request SARS to discover documentation material to a ground of assessment to the extent that the document is required by the taxpayer to formulate its Grounds of Appeal. SARS has the same entitlement prior to drafting their reply statement.

Not only in terms of these new discovery rules will a taxpayer have to make disclosure upfront of the documentation which it relies on for its grounds of objection, but will also have the opportunity to better understand SARS's case before it pleads thereto. This is a welcome development.

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.

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