One mistake that can cost South African taxpayers dearly

Taxpayers cannot bypass the prescribed dispute resolution process when challenging SARS assessments or understatement penalties, as this can lead to wasted time, high costs, and dismissal of their claims.

In the recent Free State High Court case of Ditsoane Trading and Project CC v CSARS, the court reaffirmed the High Court’s jurisdictional limits regarding tax disputes with the South African Revenue Service (SARS).

This was explained by Tax Consulting South Africa’s head of tax controversy and dispute resolution, André Daniels, and senior tax attorney Richan Schwellnus.

They said this judgment underscores that disputes relating to understatement penalties under sections 222 and 223 of the Tax Administration Act (TAA) must, as a general rule, be dealt with through the tax board or tax court.

This is the procedure unless a High Court expressly directs otherwise under section 105 of the TAA, Daniels and Schwellnus said.

“In this case, the taxpayer sought to appeal an earlier decision dismissing its challenge to the constitutionality of SARS’s Understatement Penalty Committee and the penalties imposed,” they said.

“The taxpayer argued that the matter involved a legality review of the exercise of public power, and thus fell within the jurisdiction of the High Court. The court, however, disagreed.”

It was held that the dispute arose directly from a SARS assessment and an ensuing understatement penalty determination under the TAA. As such, Chapter 9 of the Act prescribed the proper avenue for objection and appeal.

According to this Chapter, these types of disputes must first proceed through the internal objection and appeal processes, with the tax board or tax court as the default forum.

The court cited the Supreme Court of Appeal’s decision in Commissioner for the 2023 SARS v Rappa Resources case. The court reiterated that section 105 ensures that tax disputes follow the structured statutory dispute resolution route.

That means the High Court’s jurisdiction is not automatic, but contingent upon a deviation order, which the taxpayer had not obtained, Daniels and Schwellnus explained.

“Importantly, the court also emphasised that a jurisdictional inquiry must precede any consideration of the merits. Once a court concludes that it lacks jurisdiction, it cannot proceed further.”

The court further dismissed the taxpayer’s reliance on the Biowatch principle. It noted that constitutional cost protection applies only to genuine constitutional matters, not to vexatious or misconceived disputes.

“Finding no reasonable prospects of success on appeal, the court dismissed the application with costs, including the costs of two counsel,” they said.

A message to South Africans who want to take SARS to court

According to Daniels and Schwellnus, this decision reinforces the courts’ consistent position that tax disputes should follow the legislated internal remedies before resorting to higher judicial forums for adjudication.

“Section 105 of the TAA is not a procedural technicality, but a substantive jurisdictional gatekeeper designed to preserve the integrity and efficiency of the tax dispute resolution system,” they said.

“Taxpayers and their representatives are reminded that attempts to bypass the tax court framework, even when framed as constitutional or legality reviews, will not succeed without an explicit order authorising deviation.”

Daniels and Schwellnus said the Ditsoane Trading judgment adds to the growing body of jurisprudence affirming the TAA’s dispute resolution hierarchy.

“It also signals to practitioners that a careful and disciplined approach to the prescribed remedies is not merely a procedural formality, but a jurisdictional necessity,” they said.

“This clarity should, in turn, reduce jurisdictional disputes and promote consistency in the handling of understatement penalty challenges.”

They stressed that taxpayers facing understatement penalties or other assessment disputes should seek early professional advice from qualified tax attorneys before approaching the High Court.

“Proper navigation of the objection and appeal process can save significant time, cost, and risk, thus ensuring that disputes are resolved within the appropriate forum and in line with the TAA’s procedural framework,” they said.