One taxpayer mistake could tip the scales in SARS’ favour

A ruling by the Supreme Court of Appeal (SCA) sent a warning to taxpayers that objecting to SARS assessments must be carefully framed from the outset, as new grounds of objection cannot be introduced later during tax litigation.

This was explained by Tax Consulting SA’s Head of Tax Controversy & Dispute Resolution, André Daniels, and Senior Tax Attorney, Richan Schwellnus.

“A recent SCA judgment provides an important reminder for taxpayers and their tax advisors,” Daniels and Schwellnus said.

“A notice of objection filed with the South African Revenue Service (SARS) in tax disputes is not merely a preliminary procedural step that can later be reshaped during litigation.”

In the 2026 Baseline Civil Contractors v CSARS case, the SCA considered the proper interpretation of Rule 32(3) of the Tax Court Rules.

The court also considered whether a taxpayer may introduce a fundamentally new ground of appeal during the Tax Court pleading stage. “The SCA’s answer was clear,” Daniels and Schwellnus said.

“While taxpayers may advance new arguments on appeal, they may not introduce an entirely new case directed at a different component of an assessment raised by SARS that was never objected to in the first place.”

“The decision reinforces a critical strategic lesson in tax disputes and litigation: the grounds of objection define the dispute. If they are not properly framed at the outset, the opportunity to correct course later may be limited.”

This tax dispute arose from Baseline Civil Contractors’ 2018 corporate income tax return. The company declared gross income exceeding R320 million and claimed deductions totalling approximately R73 million.

Among these deductions claimed was an amount exceeding R11 million, which Baseline contended represented a profit distribution paid to a participating partnership entity. SARS subsequently disallowed this deduction following an audit.

It argued that the partnership payment did not qualify as expenditure incurred in the production of income under section 11(a), read with section 23(g) of the Income Tax Act.

“Instead, SARS regarded the payment as a voluntary distribution of profits made after the income had already been earned, thus raising an additional assessment,” Daniels and Schwellnus said.

“Baseline thereafter objected to SARS’s additional assessment on the basis that the payment was a deductible business expense.

After SARS disallowed the objection, the taxpayer appealed. However, at that stage, Baseline’s litigation strategy changed.

The attempted shift

“During the Tax Court pleading stage, Baseline sought to introduce a new ground of appeal,” Daniels and Schwellnus explained.

“Instead of arguing only that the R11 million payment was deductible, Baseline advanced an alternative position: that the amount had never accrued to it at all, because it had effectively been received on behalf of the partnership.”

This argument fundamentally altered the nature of this tax dispute, since under Baseline’s original objection, the disputed amount formed part of Baseline’s gross income, but was claimed as a deduction.

“However, under the new argument, the taxpayer averred that this amount never formed part of its gross income in the first place,” they said.

“SARS disagreed, arguing that the taxpayer was attempting to raise an entirely new ground of objection to a different component of its additional assessment.”

Daniels and Schwellnus added that both the Tax Court and the High Court initially agreed with SARS before the matter ultimately reached the SCA.

The central issue before the SCA was the interpretation of Rule 32(3) of the Rules promulgated under Section 103 of the TAA. This section regulates the statement of grounds of appeal that a taxpayer may advance in the Tax Court.

“This rule permits taxpayers to raise new grounds of appeal; however, this is not permissible where a new ground of objection is raised that was not previously contained in the original objection submitted to SARS,” they said.

The SCA explained the distinction between new arguments attacking the same part of a disputed assessment and new cases directed at a different component of the assessment.

The former is permitted. The latter, however, is not allowed. Rule 32(3), therefore, allows a taxpayer to refine its legal reasoning, but not to fundamentally reshape the grounds of a dispute.

Taxpayers can miss their opportunity

The SCA held that Baseline’s new argument was not simply a different or refined legal explanation for the same objection, Daniels and Schwellnus said.

“Instead, it constituted an entirely new case. The original objection accepted that the R11 million formed part of Baseline’s gross income and sought to deduct it as expenditure,” they explained.

“The new argument, however, asserted that the amount had never accrued to Baseline at all and therefore should not have been included in gross income. These two positions were fundamentally inconsistent.”

As the court observed, it is not possible to argue on one hand that an amount was incurred as expenditure in producing income, and on the other hand that the same amount never formed part of the taxpayer’s income.

“Allowing this new argument would therefore have required the Court to entertain an entirely new objection that had never been raised during the objection stage, which is not allowed under Rule 32(3),” they said.

The SCA emphasised that Rule 32 forms part of a structured dispute resolution process under the TAA. Daniels and Schwellnus explained that the objection and appeal framework in terms of the TAA is designed to –

• Crystallise the issues in dispute
• Define the scope of the litigation
• Prevent parties to the tax dispute from shifting their case midstream

“Allowing taxpayers to introduce new grounds of objection during the Tax Court pleading stage would undermine this structure and could prejudice SARS,” Daniels and Schwellnus said.

This is because doing so would force it to confront a dispute that was never raised during the objection phase, which serves to prevent “ambush litigation”.

The Baseline judgment highlights a practical point that many taxpayers underestimate, they added. The notice of objection is not merely a procedural step. Rather, it defines the scope of the entire tax dispute.

“Once the objection has been lodged, the boundaries of the litigation are largely fixed. While taxpayers may refine their legal arguments on appeal, they cannot introduce a fundamentally new case directed at a different component of the assessment,” they explained.

Daniels and Schwellnus said that, for taxpayers and tax practitioners, the lesson is clear. Objections must be carefully framed by skilled and experienced tax specialists from the outset.

“Alternative grounds should be considered early, particularly where there is uncertainty about the legal characterisation of a transaction,” they said.

“Once a dispute reaches the Tax Court, the opportunity to reshape the case has likely already passed.”