Benjamin Franklin said, “diligence is the mother of good luck”, and that is exactly what is required when drafting an objection to an assessment or additional assessment issued by the South African Revenue Service (Sars).
Before putting pen to paper, there are a few crucial steps to follow that will minimise potential miscommunication with Sars and increase your chances of success, says Nico Theron, the founder of Unicus Tax Specialists.
During a recent webinar on objections and appeals, hosted by The Tax Faculty, Theron noted that, in most instances, one is dealing with an additional assessment where Sars has either disallowed an expense or an exemption. In some instances, taxpayers also object to the original assessment when they realise that they have made an error in their tax return.
Understand the assessment
The assessment should be analysed on a line-by-line basis. Some assessments reflect the difference only in the taxable income line. You will then have to look elsewhere to identify what the difference comprises.
“It is important to identify what caused the difference, because that will be the issue in dispute. The taxpayer has to understand what Sars did, and why they did it.”
The reason for the change from the original to the additional assessment is generally found in the grounds for the assessment. This is the fact or the law on which Sars based its assessment.
Sars will refer to the “finalisation letter” in the case of an audit. The letter sets out the reasons for the difference from the original to the additional assessment. It will state the facts or quote the law on which the additional assessment is based.
Theron says when there has been no audit and the taxpayer cannot find the grounds for the assessment, they have the right to ask for reasons.
He gives the example of a couple who went to France on a business trip and claimed travel expenses. For some reason, Sars’s understanding of the facts was that the couple went on vacation and therefore the travel expense claims were disallowed.
In terms of the Income Tax Act, expenses can be claimed only if they were incurred in the production of income. Sars claimed the taxpayer did not prove that the expenses were incurred in the production of income.
The taxpayer now understands what Sars has done (disallowed the travel expense claims), and why they have done it (the expenses were not incurred in the production of income).
Where did it go wrong?
Sars can either get the facts wrong, or the law, or the interpretation of the law. “If the facts are correct, it does not mean you don’t have a case. Sars could have made an error in law, or in their interpretation of the law.”
In this example, Sars got to the facts wrong by stating the couple was on vacation, whereas they were on a working trip. The question is why did Sars get it wrong? “You need to know this because you have to address it when you challenge the assessment,” says Theron.
His advice is to gather as much evidence as possible, such as minutes of meetings, a letter from the clients setting out reasons for the visit, or even copies of logbooks indicating the time access was granted to the clients’ offices in France.
“Sometimes, it will require out-of-the box thinking to find the evidence that will support the facts.”
Read, read and read
If the facts are not in dispute, one must question whether Sars correctly applied the law or whether Sars interpreted it correctly.
“You will only know this if you understand the law yourself,” says Theron. Read court cases, interpretation notes, articles or explanatory memorandums and textbooks that relate to the issue in dispute.
“Never assume that you know the law. I am being humbled by the law every day … It is not simple, and legislation changes regularly,” notes Theron.
He proposes that a detailed supporting letter should be attached to the prescribed form required to submit an objection. The letter is not a substitute for the prescribed form. It should preferably include:
- A header: state what you are objecting to, and who is objecting.
- An introduction: define accurately what you are disputing. Reference the specific assessment to which you are objecting and set out everything to which you are objecting in a table if necessary.
- Documents: add documents that will support your argument, whether it is on the facts, the law, or the interpretation of the law. List them so that they are easy to find when referring to them.
- Grounds for objection: clearly state the background, the facts and the documents that substantiate the objection.
The aim is to make the job of the senior Sars official who will present the taxpayer’s case to the objection committee as easy as possible.
- When making a statement of fact, refer to the annexure that contains the evidence that supports the statement;
- Do not make vague statements; and
- Add an index and a list of the tables.
Amanda Visser is a freelance journalist who specialises in tax and has written about trade law, competition law and regulatory issues.
Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies.