SARS scores a legal victory against taxpayers in South Africa

A recent Tax Court ruling confirmed that when SARS selects a test case, affected taxpayers have little control over disputes that may determine their own tax bill.

Shepstone and Wylie Tax Executive Johan Kotze explained that a court ruling highlights a growing tension in South African tax disputes.

This tension centres on how much control taxpayers retain over their appeals when the South African Revenue Service (SARS) selects a ‘test case’ to resolve issues affecting hundreds of taxpayers.

“The case of Taxpayer SX (Pty) Ltd v SARS 1 brings that question into sharp focus,” Kotze explained.

“At stake was not only a liability exceeding R20 million for the applicant, but also a broader dispute involving more than 300 taxpayers accused of improperly claiming Employment Tax Incentive (ETI) credits.”

According to Kotze, the judgment offers a clear and somewhat sobering answer: “taxpayers cannot have it both ways.”

The Tax Administration Act empowers SARS to designate a dispute as a ‘test case’ where its outcome is likely to determine the issues in multiple similar matters.

“Once designated, related appeals can be stayed pending the outcome of that case. This mechanism is designed to promote efficiency and consistency.”

“Instead of litigating hundreds of near-identical disputes, the courts can resolve the key legal questions once, with the result cascading across affected taxpayers.”

In this instance, the test case centred on whether certain arrangements, particularly involving limited-duration employment contracts and training structures, qualified for ETI benefits.

“The core issue was whether the individuals involved were genuinely ‘employees’ who ‘worked’ and were ‘remunerated’ as required by the legislation.”

Taxpayer SX did not oppose the idea of a test case outright. Instead, it adopted a more nuanced approach and agreed to a stay of its appeal, but only on the condition that it be allowed to participate in the test case proceedings.

“This was a strategic move,” Kotze said. “Participation would allow the taxpayer to influence the arguments, evidence, and ultimately the outcome of a case that could determine its own liability.”

“SARS rejected this request, arguing that allowing additional parties – particularly at a late stage – would delay proceedings affecting hundreds of taxpayers.”

A lesson for taxpayers

Ultimately, Kotze said the court sided firmly with SARS. The rules governing test cases require taxpayers to make a clear, unequivocal choice. They can oppose the designation, oppose the stay, or request participation.

“What they cannot do is attempt to combine options or impose conditions. Taxpayer SX’s ‘conditional agreement’ fell foul of this requirement.”

In the court’s view, Kotze said this was inconsistent with both the wording and the purpose of the rules, which are intended to streamline large-scale disputes, not make them more complex.

“Equally important was the court’s emphasis on practicality. With approximately 400 taxpayers implicated, allowing each to participate would defeat the very purpose of the test case mechanism.”

Kotze noted that, at first glance, the outcome of this particular case may seem harsh. Taxpayer SX argued that its circumstances were factually distinct.

The taxpayer cited issues such as multiple IRP5s and the specific nature of the work performed, and also highlighted the significant financial prejudice it faced.

However, the court was not persuaded that these differences were material to the central legal questions.

“The test is not whether cases are identical, but whether they are sufficiently similar such that the test case will resolve the key issues.”

“Importantly, the court noted that taxpayers are not left without recourse. If, after the test case is decided, a taxpayer can demonstrate that its situation involves genuinely distinct issues, it may apply to have the outcome not applied to its case.”

Kotze added that this judgment underscores the power of SARS’s test-case strategy and the limits it imposes on taxpayer autonomy.

“For taxpayers, the lesson is clear: once a test case is designated, the window for influencing its course is narrow and procedurally strict. Attempts to hedge positions or secure conditional rights are unlikely to succeed.”

“For advisors, the case highlights the importance of early, decisive action. Whether to oppose a test case, seek participation, or accept the stay is not merely procedural – it is a strategic decision with potentially far-reaching consequences.”