Almost six years and two court cases later, a dispute between Absa and its wholly owned subsidiary United Towers, and the South African Revenue Service (Sars) – about the group’s involvement in an impermissible tax avoidance arrangement – has been sent back to the drawing board.
The Supreme Court of Appeal (SCA) on Friday upheld an appeal from Sars against a high court judgment in favour of Absa. In 2019 the Pretoria High Court reviewed and set aside tax assessments raised against Absa. The SCA found that the high court did not have jurisdiction to hear the review application and upheld Sars’s appeal against the finding.
Julia Choate, senior associate in Bowmans’ tax practice, says Absa will now have to go through the ordinary dispute resolution process and eventually through the Tax Court to have the dispute decided on merit.
The Absa dispute arose when Sars issued an anti-avoidance notice in 2018, stating that Absa and United Towers were “party to an impermissible tax avoidance scheme” and derived a tax benefit from it.
Absa requested Sars to withdraw the notice, informing the revenue authority that it was unaware of any scheme. Furthermore, it did not have a tax avoidance motive in mind, nor did it “procure a tax benefit” to which it was not entitled.
Sars did not withdraw the notices and issued tax assessments on the tax benefit it believed Absa and its subsidiary received.
Absa then approached the Pretoria High Court asking it to review Sars’s refusal to withdraw the anti-avoidance notice. It also asked the court to review the tax assessment.
The court entertained the application and set aside the decision by Sars to refuse to withdraw the notices. It also set aside the subsequent additional tax assessment.
Point of law
The court concluded that Sars’s decisions were subject to review based on the principle of legality. A taxpayer may approach the court directly for relief in exceptional circumstances. Exceptional circumstances would include a dispute that turned wholly upon a point of law.
The high court found that the anti-avoidance notices were premised upon an acceptance that Absa and United Towers were ignorant of the terms of the arrangement or scheme.
Therefore they could not be parties to the avoidance arrangement, and the subsequent additional tax assessments were tainted by an “error of law”.
Since the anti-avoidance notices and assessments were inextricably linked, both decisions by Sars were set aside.
Sars did not accept the court’s ruling and received leave to appeal.
The SCA said the high court finding – that Sars had accepted the assertion by Absa and United Towers that they had no knowledge of the nature and ambit of the scheme or arrangement – was incorrect.
“The notices set out reasons for the belief that the anti-avoidance provisions apply, no more.”
The SCA found that Absa and United Towers participated in steps forming part of an “arrangement”, the full ambit of which was described in the notices.
“Whether they had knowledge of the full nature of the transactions which comprised the arrangement, and whether their sole or main purpose in participating was to secure a tax benefit, are matters of disputed fact.”
Facts and law
The SCA held that it was a factual enquiry whether the arrangement constituted an “impermissible avoidance arrangement”. It was also a question of fact whether Absa and United Towers obtained a tax benefit.
“It is not a mere question of law,” the SCA found. “The high court predicated its finding that it had jurisdiction to review the assessments on the basis that the challenge to the assessments involved solely a question of law. That … was incorrect.”
Since the dispute did not involve solely a question of law, no exceptional circumstances existed to justify the high court assuming jurisdiction in the matter. It follows that in relation to the assessment review, it did not have the required jurisdiction to deal with the matter.
The high court ought therefore to have dismissed the application, the SCA found.
Choate, who specialises in dispute resolution and tax administration, believes the judgment in the high court was “well-reasoned and well-thought out”. However, it came as no surprise when Sars took it on appeal.
Unless otherwise directed
She referred to similar cases before the SCA relating to whether the high court has review jurisdiction over an assessment.
The Rappa Resources and United Manganese of Kalahari cases were decided on basically identical principles. In these cases, the SCA indicated that a high court should only exercise its jurisdiction (allow a review) in exceptional circumstances.
The Tax Administration Act has always granted exclusive jurisdiction to the tax court in terms of tax assessments “unless a high court otherwise directs”, notes Choate.
“We have always understood that to mean that the taxpayer can apply to the high court, but the court must decide if it will hear the case or not. The high court can exercise its discretion if the matter is to be decided on a purely procedural point or whether the matter requires a factual analysis, which is better done by the tax court.”
However, the Rapper and United Manganese cases have taken it further. The issue of “exceptional circumstances” is now brought into the mix, instead of the court exercising its own discretion.
The effect is that even before the taxpayer can get through the (high court) door they must show “exceptional circumstances”.
“It really leaves me feeling deeply uncomfortable that taxpayers’ administrative rights are eroded to a point where you have to go through a potentially lengthy and potentially costly first test to impugn a decision that is administratively fundamentally flawed,” says Choate.
Absa is yet to comment on the matter.