SARS wants to cut a taxpayer lifeline

SARS is testing the limits of the Tax Court by seeking to increase disputed assessments after prescription, an approach that could leave taxpayers worse off for having challenged an assessment.

When taxpayers dispute an assessment, the expectation is straightforward, said Webber Wentzel’s Nina Keyser and Karen Miller.

“Either the taxpayer wins, and the assessment is reduced, or the South African Revenue Services (SARS) wins, and the assessment remains unchanged,” Keyser and Miller said.

“However, recent cases raise a surprising question – could the Tax Court ever order SARS to increase an assessment? This possibility has sparked debate following recent judgments and SARS’s evolving litigation tactics.”

Keyser and Miller explained that the Tax Court may order SARS to “alter” an assessment. The rules suggest that this only permits downward adjustments.

“The Tax Court may rule only on the issues contained in SARS’s statement of grounds of assessment, the taxpayer’s statement of grounds of appeal, and SARS’s reply thereto,” they said.

“SARS’s statement of grounds of assessment may not introduce new factual or legal grounds that amount to a novation of the assessment or that would require the issuing of a revised assessment.”

Accordingly, Keyser and Miller said SARS cannot argue before the Tax Court that the disputed assessment should have been higher.

“If SARS believes that the disputed assessment should have been higher, it must issue an additional assessment,” they said.

“SARS must issue any additional assessment within three years from the date of the original assessment for the relevant tax period.”

After three years, the assessment prescribes, unless the taxpayer made a misrepresentation or committed fraud, Keyser and Miller noted.

“The practical reality is that, by the time a matter reaches the Tax Court, the three-year period within which SARS may raise an additional assessment is almost always closed,” they said.

For example, in the 2024 ABD (IT 14302) court case, which was heard in the Tax Court, the timeline was as follows –

• 2015: SARS raised the additional assessment based on its first expert.
• 2020: SARS consulted a second expert with a different view of arm’s length (market-related) pricing – long after the three-year period had expired.

“This makes it nearly impossible for SARS to argue that the failure to raise a further assessment was due to misrepresentation. The real reason was a change in expert opinion, not the concealment of facts,” they said.

Misrepresentation vs opinion

According to Keyser and Miller, taxpayers are required to report their “affected transactions” on their income tax returns at arm’s length prices.

“Where financial year accounts cannot be adjusted, taxpayers may correct pricing by making an adjustment in the tax return,” they explained.

“This places the onus on the taxpayer to prove that the affected transactions have been priced at arm’s length.”

“Once such evidence is provided, the taxpayer discharges the onus of proof, which then shifts to SARS to establish an alternative arm’s length position.”

“The determination of an arm’s length amount is not binary – it is inherently open to debate and involves the exercise of judgment.”

Keyser and Miller explained that if a taxpayer adopts one approach and SARS adopts another, this does not mean the taxpayer made a misrepresentation of a material fact.

In the 2024 Pear case (IT 46080), the Tax Court confirmed that the three-year prescription period does not apply where a taxpayer has misrepresented material facts.

However, whether an amount must be taxed is not a fact but a question of law, involving a legal opinion. Similarly, whether an amount is arm’s length is a matter of opinion rather than fact, Keyser and Miller said.

“If a taxpayer declares what it believes to be an arm’s length price, SARS must issue an additional assessment within the three-year period. If this were not the case, transfer pricing matters would never prescribe,” they said.

Worse outcomes possible for taxpayers

With the prescription having taken effect, SARS is left to argue that the Tax Administration Act permits the Tax Court to order the taxman to issue an increased assessment, Keyser and Miller explained.

“In our view, this argument is unlikely to succeed. The dispute resolution framework is premised on the issues before the court being those contained in the original assessment and objection, not a new basis introduced years later,” they said.

This principle was confirmed in the 2025 Flower case (IT 25209), where the court rejected SARS’s attempt to pivot to a new basis for the assessment midstream.

“SARS’s statement of grounds of assessment must be measured against the assessment itself. The rules allow for amplification of the grounds of assessment before the Tax Court, but not for their substitution,” they said.

Keyser and Miller stressed that SARS’s recent litigation strategies suggest an attempt to reopen prescribed assessments – an approach that could, if successful, leave taxpayers worse off for having challenged an assessment.

“For now, the law and precedent favour taxpayers – disputes remain confined to the original assessment and objection,” they said.

“Nevertheless, vigilance is essential. Transfer pricing remains a contested space, and litigation strategies in this area continue to evolve.”