Section 99 of the Tax Administration Act (28/2011) addresses the limitation periods for issuing assessments. More specifically, Section 99(1)(b) provides that, in the case of a self-assessment for which a return is required, the South African Revenue Service (SARS) cannot issue an additional or reduced assessment after five years from the original assessment’s ‘date of assessment’, which is defined in Section 1 of the act as the date on which a required return is submitted in the case of a taxpayer’s self-assessment.
A ‘self-assessment’ is defined in Section 1 of the act as a determination by a taxpayer of an amount of tax payable under a tax act, which includes submitting a return which incorporates the tax determination. Thus, a self-assessment is any return on which the amount of tax due appears, such as returns submitted for:
- value added tax;
- provisional tax;
- dividends tax;
- secondary tax on companies (STC); and
- transfer duty.
In its 31 May 2018 judgment in CSARS v Char-Trade ((776/2017) ZASCA 89), the Supreme Court of Appeal had to determine whether an assessment issued for STC in respect of a dividend cycle ending in February 2007, which had been levied under Sections 64B and 64C of the Income Tax Act (58/1962), had prescribed in accordance with Section 99 of the Tax Administration Act.
Between 2007 and 2011, Char-Trade 117 CC t/a Ace-Packaging (the respondent) advanced various loans to closely related corporations and companies within its group of companies. In terms of the respondent’s annual financial statements, such loans:
- were unsecured;
- bore interest “at current rates”; and
- had no fixed terms of repayment.
Pursuant to its audit of the respondent’s tax affairs, SARS held that the respondent had advanced interest-free loans or loans to closely related corporations and companies. SARS contended that since the loans bore interest at a rate that was below the official interest rate, they constituted deemed dividends and were subject to STC under Section 64C(4)(d) of the Income Tax Act.
At the relevant time, Section 64C(2) of the Income Tax Act provided that:
- subject to Section 64C(4), any loan advanced by a company to a shareholder or a connected person in relation to that shareholder would be deemed to be a dividend declared by such company; and
- STC would be payable thereon.
Under Section 64B(7), the company had to submit a return for the STC.
On 9 November 2012 SARS issued assessments for STC for the 2007 to 2011 cycles, which the respondent objected to on 12 December 2012. The respondent’s basis for the objection centred on its submission that the loans had been made to independent companies that were not connected persons for tax purposes. SARS disallowed the objection and on 11 April 2013 the respondent lodged an appeal, during which it conceded that the loans had been advanced to connected persons. However, such loans bore interest at a rate that was not less than the official interest rate.
Notably, on 17 June 2014 the respondent introduced an additional defence that the assessment for 2007 had prescribed in terms of Section 99 of the Tax Administration Act and “fell to be set aside in its entirety”. It was common cause between the parties that the respondent had never submitted any return in respect of the dividend cycle ending in 2007. In addition, no payment of STC had been made by the respondent with reference to that dividend cycle.
Tax Court decision
The Tax Court found that the respondent’s dividend cycle had coincided with its financial year end. Accordingly, the STC return and payment in respect of the loans advanced by the respondent should have been submitted and paid by 31 March 2007. The Tax Court concluded that as the 2007 assessment had been raised on 9 November 2012 – more than five years after the return and payment were deemed to be due – the assessment had prescribed.
Key issue for consideration
The Supreme Court of Appeal was requested to determine whether Section 99(1)(b) of the Tax Administration Act had prohibited SARS from issuing an assessment for STC in respect of the dividend cycle that had ended in 2007. This would be the case if five years had lapsed since the original assessment’s date of assessment.
Supreme Court of Appeal decision
The Supreme Court of Appeal found that the intended effect of Section 99(1)(b) of the Tax Administration Act, read with the definition of ‘date of assessment’ set out in Section 1 of the act, is that:
prescription cannot commence to run against [the commissioner for SARS (CSARS)] until such time as a return has been submitted by the taxpayer. It is by submitting a return that the taxpayer informs CSARS about a dividend, including a deemed dividend, and that STC is payable thereon.
The Supreme Court of Appeal stated that prescription in respect of the 2007 dividend cycle could have commenced only once the respondent had filed a return for STC, which would have constituted the original assessment. As the respondent had failed to submit the STC return, there was no original assessment from whose assessment date the five-year period could have run.
The Supreme Court of Appeal held that prescription had not commenced to run as the respondent had failed to file a return for STC. Thus, it was found that the Tax Court had erred when it held that prescription had commenced in March 2007.
It is evident that in the case of a self-assessment where a return is required, prescription will commence to run from the date on which such return is submitted to SARS. This decision clarifies that it is crucial for taxpayers to be aware of the limitation periods for the issuing of assessments by SARS for all types of tax.
For further information on this topic please contact Gigi Nyanin at Cliffe Dekker Hofmeyr by telephone (+27 115 621 000) or email (firstname.lastname@example.org). The Cliffe Dekker Hofmeyr website can be accessed at www.cliffedekkerhofmeyr.com.