Direct v indirect application of the Constitution when interpreting statutes

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CHAPTER 4 THE REVENUE’S UNFAIR ADVANTAGE – THE PRACTICAL APPLICATION AND CONSTITUTIONALITY OF REVERSE ONUS OF PROOF PROVISIONS AND PRESUMPTIONS AS APPLIED IN INCOME TAX MATTERS

“What kinda odds are those?” – Al Capone (Comisky, Feld & Harris 1995: 1(1-1))

INTRODUCTION

Al Capone, the notorious American gangster of the 1930s, whilst waiting to be charged for committing various tax offences, heard the clerk of the court call his case, “United States of America versus Alphonse Capone”. He turned to his attorneys and apparently remarked, “What kinda odds are those?” (Comisky, Feld & Harris 1995: 1(1–1). Capone’s apprehension, it is submitted, is felt by virtually every South African taxpayer when SARS comes calling even when he or she is “innocent” of any tax offence. The apprehension can turn to fear, especially where tax evasion is involved as the penalties and sanctions that may be imposed can ruin a taxpayer financially and may even, although not usually, lead to a period of imprisonment.
A tax challenge, like any other legal challenge, involves three major elements: the law, the facts and what Cardoza (1921) refers to as the human factor in the form of the judiciary. The law and the principles involved in interpreting fiscal legislation within a constitutional framework were covered in Chapters 2 and 3. This chapter covers the second element, the facts and the onus of proof in regard to the facts. Chapter 5 will discuss both the importance of facts and the third element, the human factor, in the form of the judiciary, in the context of clean hands, good facts and due process of law as it relates to the right to just administrative action (section 33 of the Constitution) and some of the other fundamental rights guaranteed in the Bill of Rights.
It is important to distinguish between questions of law and questions of fact as the onus of proof provisions relating to revenue legislation as contained in the Tax Administration Act (previously contained in the Income Tax Act) are not concerned with questions of law but only with questions of fact (De Koker 1995: 18.65; ITC 1725 (64 SATC 223)). The following simple example illustrates the difference between questions of fact and questions of law:
Question of fact: Did the taxpayer receive a bona fide loan from his or her employer or was the loan a disguised form of remuneration?
Question of law: Is a bona fide loan included in the definition of “gross income” as provided for in section 1 of the Income Tax Act?
Many valid legal challenges are lost by taxpayers because they are unable to present sufficient good facts to a court to satisfy or discharge the so-called “reverse onus” of proof provisions as now contained in the Tax Administration Act. The article at the core of this chapter, entitled “The application and constitutionality of the so-called reverse onus of proof provisions and presumptions in the Income Tax Act: the revenue’s unfair advantage”, was published in 2009 in a peer-reviewed accredited journal (Goldswain 2009: 61–83), some three years prior to the promulgation of the Tax Administration Act on 4 July 2012. The article discusses the generally unfair advantage that SARS has over the taxpayer in a tax challenge because of the reverse onus of proof provisions as contained in the Income Tax Act at the time the article was written.
The structure for this chapter is to reproduce, in its original format, the peer-reviewed accredited journal article as it was published. Thereafter, the provisions of the Tax Administration Act that relate to the onus of proof will be analysed, discussed and compared to the onus of proof provisions as contained in the Income Tax Act but limited to those reverse onus provisions discussed in the article. In the article, certain recommendations were made and it will be interesting to compare the recommendations made at the time of writing the article to the new onus of proof provisions that have become effective from 1 October 2012. Please note that in the article reproduced below, the South African Revenue Service is incorrectly referred to as the South African Revenue Services. Furthermore, as indicated in paragraph 1.1 of this thesis, the 1996 Constitution should be referred to as The Constitution of the Republic of South Africa, 1996 in terms of the Citation of Constitutional Laws (Act 5 of 2005) and not The Constitution of the Republic of South Africa (Act No. 108 of 1996) as indicated in the article.

THE REVERSE ONUS OF PROOF PROVISIONS AND PRESUMPTIONS – THE THIRD “CORE” ARTICLE

OBJECTIVE OF THE REMAINDER OF THIS CHAPTER AND MATTERS CONSIDERED TO BE BEYOND ITS SCOPE

In the core article to this chapter, it was concluded that the three reverse onus of proof provisions of the Income Tax Act examined, prima facie, infringed upon one or more of the fundamental rights of taxpayers. The recommendation was that the onus of proof provisions of the Income Tax Act that provide for administrative penalties and criminal sanctions, namely sections 76 and 104, were constitutionally unsound and should be amended to bring them into line with the Constitution. In spite of the fact that the section 82 onus of proof provision is prima facie unconstitutional, no recommendation for its amendment was made as the ultimate conclusion was that the provision would probably pass constitutional muster as being reasonable and justifiable in an open and democratic society (section 36 of the Constitution).
Some three years after the publication of the core article to this chapter, the Tax Administration Act was promulgated and came into effect on 1 October 2012. The new legislation, prima facie, provides for a substantive shift in the two reverse onus of proof provisions as contained in the Income Tax Act that have been of concern since 1994 when the new constitutional dispensation was negotiated – the provisions that relate to the imposition of administrative penalties or additional tax (section 76) and criminal sanctions (section 104). The objective of the remainder of this chapter, therefore, is to examine briefly whether the new onus of proof provisions contained in the Tax Administration Act, have actually brought about any significant change to these two penal provisions.
It is considered to be beyond the scope of the remainder of this chapter and of this thesis in general, to discuss in detail how and when any administrative penalties (for failure to comply with the administrative provisions of any tax legislation) or criminal sanctions (essentially for fraudulent non-disclosure or tax evasion where wilful intent is involved) imposed by SARS on a taxpayer or by a court, if criminal in nature, may or may not be remitted as this aspect is not discussed in any detail in the core article used as the basis for this chapter. Research was done some years ago by the present author in a series of five accredited journal articles as to the interpretation by the judiciary of the meaning of “extenuating circumstances” and the defences that may be pleaded by a taxpayer in support of the remission of penalties imposed in terms of section 76 of the Income Tax Act (see Goldswain 2001: 123–135; Goldswain 2001: 137–154; Goldswain 2002: 71–85; Goldswain 2003: 67–79; Goldswain 2003: 45–66). The defences and extenuating circumstances identified in those articles will, it is submitted, still play a part in determining the extent of any penalty that may be imposed, whether administrative or criminal, in terms of the Tax Administration Act.
In order to achieve the objective of the remainder of this chapter, it is considered necessary to present a brief overview of the differences (if any) between the onus of proof provisions as contained in the Income Tax Act – but only those onus of proof provisions discussed in the core article – and the Tax Administration Act. Thereafter, the practical implications of the changes to the onus of proof provisions will be evaluated before concluding on whether the new onus of proof provisions will ensure the fair and just treatment of a taxpayer in an administrative penalty or criminal sanctions situation. In effect, the question to be answered in this respect is whether the new onus of proof provisions will contribute towards ensuring that a taxpayer is a recipient of justice rather than a victim of justice. If this question can be answered in the affirmative, then the standards of justice and fairness as required by the Constitution will be satisfied.

DIFFERENCES BETWEEN THE ONUS OF PROOF PROVISIONS CONTAINED IN THE INCOME TAX ACT AND THE TAX ADMINISTRATION ACT

From the core article used in this chapter, it is clear that the reverse onus of proof provisions contained in the Income Tax Act and applied prior to 1 October 2012, may lead to the unfair assessment to taxes and, by its application, could even directly result in the imposition of unjust and unfair administrative penalties on the taxpayer by the Commissioner – as was the case in ITC 1758 (65 SATC 396) and ITC 1489 (53 SATC 99). Both these cases are discussed in detail in the core article as well as later on in this chapter. The general reverse onus of proof provision (section 82 of the Income Tax Act) can, therefore, be considered to have a compounding effect when applied in conjunction with the reverse onus of proof provisions or presumptions for the imposition of additional tax or penalties – whether in terms of section 76 or 104 of the Income Tax Act.
The general onus of proof provision, as contained in section 82 of the Income Tax Act, remains intact in the Tax Administration Act (sections 102(1)(a), 102(1)(b) and 102(f)). The application and implications of the reverse onus of proof provisions thus remain the same as described and discussed in the core article to this chapter. As such, it can be concluded that there is still a possibility of unjust and unfair treatment for the taxpayer as far as the assessment to normal income tax is concerned.
On the other hand, in situations where administrative penalties or criminal sanctions may be imposed, the new onus of proof provisions of the Tax Administration Act appear to have levelled the playing fields. SARS appears no longer to have the unfair advantage that it had in the past. In administrative and criminal penalty situations, the onus is now on SARS to prove or justify the imposition of any penalty rather than the taxpayer having to prove that the penalty should not be imposed. Theoretically, the taxpayer is now placed in a better position than before to be “a recipient of justice rather than a victim of justice”. His or her right to just administrative action and other fundamental rights now, prima facie, appear to be protected.
The next three paragraphs will discuss the practical application and constitutionality of the onus of proof provisions when penalties and sanctions are imposed on taxpayers in terms of the Tax Administration Act for infractions in tax matters, namely the administrative non-compliance penalty (sections 210 and 211), the criminal non-compliance penalty (section 234), the administrative understatement penalty (sections 221 to 223) and the criminal tax evasion penalty (section 235).

ADMINISTRATIVE NON-COMPLIANCE PENALTIES

Sections 210 and 211 of the Tax Administration Act, when read together, provide for administrative penalties to be imposed by SARS on a taxpayer for certain non-compliance offences, for example, the non-submission of a return by a certain date. It is a fixed amount penalty determined according to the assessed loss or taxable income of the taxpayer for the preceding year. Sections 210 and 211 have been carried over, word for word from the present section 75B of the Income Tax Act. There is no mention, either in section 75B of the Income Tax Act or in the new sections 210 and 211 of the Tax Administration Act, of any specific onus provision. The provisions merely states that where a non-compliance offence is committed, a penalty must be imposed by SARS but may be remitted if “exceptional circumstance” are present. The “exceptional circumstances” are listed in section 218.
Thus, because of its silence, it may be presumed that the onus of proof would be on SARS to prove any non-compliance should the taxpayer contest, by the objection and appeal procedure, the imposition of any penalty. For example, SARS would allege that a taxpayer failed to submit a return of income, which he or she was obliged to do in terms of the Income Tax Act or the Tax Administration Act. With the onus of proof being on SARS, SARS would have to lead evidence to the effect that the return had neither been submitted nor received, if contested by the taxpayer. If the taxpayer alleges that the return was submitted by e-filing, a SARS computer systems expert could testify that the computer records show – the records would have to be produced as evidence – that the return had not been submitted electronically. The onus would then shift to the taxpayer to show that the return had been submitted and, if the taxpayer has an acknowledgement from SARS that the return had been received by them, then that would discharge the onus of proof and that would be the end of the dispute.
Therefore, with no reverse onus provision or presumption on the taxpayer, it can be concluded that there are no constitutional issues at stake in regard to the onus of proof in the imposition of administrative non-compliance penalties in terms of sections 210 and 211 of the Tax Administration Act.

CRIMINAL NON-COMPLIANCE AND TAX EVASION PENALTIES AND SANCTIONS

Section 75 of the Income Tax Act covered the imposition of a penalty, on conviction by a court of law, for certain non-compliance offences as well as for the understatement or non-disclosure of income or other related, but stipulated, tax fraud and evasion activities. The criminal sanction took the form of a fine or a period of imprisonment for a period not exceeding twenty-four months. There was no reverse onus of proof provision in terms of section 75 so there were no constitutional issues in that regard.
Section 104 of the Income Tax Act also covered criminal tax fraud and evasion activities but, unlike section 75, did not cover non-compliance issues or offences. Thus, there was some overlapping of sections 75 and 104 of the Income Tax Act relating to fraudulent activities but the penalty that could be imposed, on conviction by a court of law, in terms of section 104, was somewhat harsher – a fine or a period of imprisonment not exceeding five years. In an analysis of the onus provisions of section 104 in the core article to this chapter, it was concluded that the presumption of guilt of the taxpayer contained in section 104(2), which effectively creates a reverse onus of proof, was unconstitutional and should be removed.
Section 234 of the Tax Administration Act now covers the criminal non-compliance aspects that were previously covered by section 75 of the Income Tax Act. Section 235 effectively covers the criminal understatement and tax evasion offences previously covered by section 75 as well as the tax evasion and fraudulent activities stipulated in section 104 of the Income Tax Act.
Before there can be a criminal conviction for any non-disclosure offence in terms of section 234 of the Tax Administration Act, the taxpayer must be proved to have wilfully and without just cause committed the non-compliance tax-related offence. The onus of proof, since the section is silent on the matter and has no presumption to the contrary would, therefore, in terms of the common law, falls on SARS as is the case in all criminal matters. The standard of proof, as in all criminal matters, is for SARS to prove beyond a reasonable doubt that the taxpayer wilfully committed the tax offence without just cause (S v Zuma and Others (1995(2) SA 642 (CC)). Section 234 of the Tax Administration Act provides for a sanction, as was the case for section 75 of the Income Tax Act, of a fine or a period of imprisonment for a period not exceeding two years. Since there is no reverse onus or presumption in regard to the guilt of the taxpayer contained in section 234 of the Tax Administration Act, no constitutional issues should arise in this regard.
As indicated in the core article for this chapter, there was a constitutional issue in regard to section 104 of the Income Tax Act since a reverse onus presumption was contained in that section. Both the Katz Report (1994) and the core article to this chapter recommended that section 104 be amended to place the onus of proof on SARS. In effect, section 235 of the Tax Administration Act now places the onus on SARS to prove that the taxpayer intended to evade taxes. The standard of proof is, once again, as with all criminal matters, for SARS to prove beyond a reasonable doubt that the taxpayer intended to evade tax. Thus, at face value, there is no constitutional issue.
However, there is a sting in the tail to the onus of proof provision in the form of section 235(2), which provides that any person who makes a statement with the intention to evade or who assists another person to evade taxes, is presumed to be guilty of tax evasion unless such person “proves that there is a reasonable possibility that he or she was ignorant of the falsity of the statement and that the ignorance was not due to negligence on his or her part”. In SARS’ Short Guide to the Tax Administration Act (SARS 2012a: para 17.3), SARS attempts to justify this unfair presumption by stating:
This does not result in a so-called “reverse onus”, but only places on the accused an evidentiary burden in relation to statements made by him. If discharged the onus would remain on the state to prove beyond reasonable doubt knowledge of, or negligence in relation to, the falsity of the statement. While it may limit the fundamental right to silence, it does so only in relation to facts which are peculiarly within the knowledge of the accused and in respect of which it would not be unreasonable to require the accused to discharge an evidentiary burden.
This presumption of guilt, it is submitted, is no different to the presumption of guilt as was contained in section 104(2) of the Income Tax Act. A five-year imprisonment sentence could be imposed in terms of this section 104 and therefore the concerns of the Constitutional Court as raised and expressed in S v Mbatha: S v Prinsloo (1996 (3) BCLR 293 (CC) at 299) – discussed in detail in the core article to this chapter – in regard to presumptions of guilt, are relevant. Even SARS, in its guide, admits that a taxpayer’s fundamental rights are violated by this presumption. Accordingly, it may be concluded that section 235 of the Tax Administration Act may not pass constitutional muster if challenged by a taxpayer in future. It is submitted that the new legislation is merely using different wrapping paper to cover the same package in an attempt to constitutionalise the process.

ADMINISTRATIVE UNDERSTATEMENT PENALTY

Sections 221 to 223 of the Tax Administration Act, in effect, replace section 76 of the Income Tax Act. The new sections, as was the case with section 76 of the Income Tax Act, target the more serious non-compliance offences and conduct of the taxpayer that includes elements of tax evasion and which results in an understatement of taxable income. In the core article that forms the basis for this chapter, it was argued and submitted that the deeming provision of section 76(5) of the Income Tax Act created a reverse onus of proof provision that, in combination with section 82 of the Income Tax Act, often led to injustice and unfairness for the taxpayer when the matter of administrative penalties was considered. The provisions could, therefore, be construed as unconstitutional. It was recommended that the deeming provision contained in section 76(5) be removed or amended to bring it within the ambit of constitutional acceptability.
Sections 221 to 223 of the Tax Administration Act have now put an end to the present wide discretionary powers that were available to the Commissioner to impose “additional tax” or a penalty of up to 200% in terms of section 76 of the Income Tax Act. In particular, section 223 of the Tax Administration Act provides for an understatement penalty framework or matrix that has as its objective, “ensuring consistent treatment of taxpayers in comparable circumstances” (SARS 2012a: para 16.1). The extent of the penalty to be imposed is ascertained by placing the circumstances of each case within a table that determines the percentage penalty to be applied to the shortfall of taxes payable due to any understatement of taxable income by the taxpayer. It is done, so it is contended by SARS, according to “objective criteria” (para 16.1).
Section 223(1) of the Tax Administration Act includes the following table, which clearly sets out the percentage penalty that should be imposed in any given situation, based on the category of behaviour (not defined in the legislation) of the taxpayer:
In terms of section 102(2) of the Tax Administration Act, the onus of proving the basis for any understatement penalty imposed in terms of the table, is upon SARS. Thus, only in the very worst scenario of intentional tax evasion, where the taxpayer has also been obstructive or where it is a repeat case of intentional tax evasion, may SARS impose a 200% penalty. However, it still remains the prerogative of the Tax Court to exercise its “own, original discretion” should the taxpayer decide to object and appeal against the imposition of penalties by SARS (Da Costa v CIR (47 SATC 87 at 95)).
The shift from a reverse onus of proof to an onus that requires SARS, on a balance of probabilities, to prove that the taxpayer’s behaviour fits within one of the relevant categories in the table, is a welcome break from the past and, it is submitted, contributes towards the protection of taxpayers’ rights in general. Nevertheless, numerous questions arise in connection with the meanings or interpretation to be attributed to the various behavioural categories used in the table and whether there can be a deviation from the penalty percentage as determined in the table by the judiciary. In other words, may the judiciary use some other rate, say 40% rather than 50% if the category falls slightly short of “no reasonable grounds for tax position taken” (a 50% penalty), but substantially in excess of “reasonable care not taken in completing return” (a 25% penalty)? Only having a 25% or 50% rate for the penalty could materially affect the amount of the penalty being imposed – especially where the amount of tax understated is large. The prescribed rates are arbitrary and as will be seen from the discussions in Chapters 6 and 7 of this thesis dealing with the right to equality (section 9 of the Constitution), the judiciary tends to find that arbitrary legislation is unconstitutional (First National Bank of SA Ltd t/a Wesbank v CIR and Another (64 SATC 471)). Furthermore, would seeking the advice of a tax consultant and following the consultant’s advice be classified merely as a substantial underpayment of taxes or a more serious behavioural category? All these aspects will need to be decided by the judiciary in future. Further investigation and research in this area is considered necessary.
In the next paragraph, an attempt is made to compare the possible practical effect of the imposition of additional tax in terms of section 76 of the Income Tax Act to the imposition of penalties in terms of section 223 of the Tax Administration Act, bearing in mind the difference in the onus of proof provisions between the two sections. In order to make this comparison meaningful, three of the cases discussed in the core article to this chapter will be used as a basis for this comparison.

TABLE OF CONTENTS
CHAPTER 1 INTRODUCTION, IDENTIFICATION OF AREA OF RESEARCH, OBJECTIVE AND IMPORTANCE OF RESEARCH, STRUCTURE OF THESIS, RESEARCH METHODOLOGY, AND MATTERS GENERALLY CONSIDERED TO BE BEYOND THE SCOPE OF THIS THESIS
1.1. Introduction: The Rosetta Stone and the South African Constitution
1.2. Identification of area of research
1.3. Objective of the research
1.4. Importance of the research
1.5 Structure of thesis
1.6 Research methodology
1.7 Matters generally considered to be beyond the scope of this thesis
1.8 The rule of law and the Constitution
1.9 Summary
CHAPTER 2 THE WINDS OF CHANGE – FROM ADAM SMITH TO THE “PURPOSIVE” APPROACH IN INTERPRETING FISCAL LEGISLATION
2.1 Introduction
2.2 Arguing the notion that the approach used by the judiciary to interpret fiscal legislation is the root or foundation of all taxpayers’ rights
2.3 The winds of change – the first “core” article
2.4 Errata in article
2.5 Synthesis and concluding remarks
CHAPTER 3 HANGED BY A COMMA, GROPING IN THE DARK AND HOLY COWS – FINGERPRINTING THE JUDICIAL AIDS USED IN THE INTERPRETATION OF FISCAL STATUTES
3.1 Introduction
3.2 Direct v indirect application of the Constitution when interpreting statutes
3.2 Hanged by a comma, groping in the dark and holy cows – the second “core” article
3.3 Aspects discussed in the core article that need further clarification
3.4 The contra fiscum presumption
3.5 Synthesis and concluding remarks
CHAPTER 4 THE REVENUE’S UNFAIR ADVANTAGE – THE PRACTICAL APPLICATION AND CONSTITUTIONALITY OF REVERSE ONUS OF PROOF PROVISIONS AND PRESUMPTIONS AS APPLIED IN INCOME TAX MATTERS
4.1 Introduction
4.2 The reverse onus of proof provisions and presumptions – the third “core” article
4.3 Objective of the remainder of this chapter and matters considered to be beyond its scope
4.4 Differences between the onus of proof provisions contained in the Income Tax Act and the Tax Administration Act
4.5 Administrative non-compliance penalties
4.6 Criminal non-compliance and tax evasion penalties and sanctions
4.7 Administrative understatement penalty
4.8 Practical effect of the new onus of proof provision where an administrative understatement penalty is imposed
4.9 Synthesis and concluding remarks
CHAPTER 5 THE TAXPAYER’S QUEST FOR ADMINISTRATIVE JUSTICE – CLEAN HANDS, GOOD FACTS, DUE LEGAL PROCESS AND THE HUMAN ELEMENT
5.1 Introduction
5.2 The quest for administrative justice – the fourth “core” article 124 The taxpayer’s quest for just administrative action – clean hands, good facts, due process and the human element
5.3 Synthesis and concluding remarks
CHAPTER 6 ARE SOME TAXPAYERS MORE EQUAL THAN OTHERS? – AN APPRAISAL OF THE AMBIT OF THE CONSTITUTIONAL RIGHT TO EQUALITY IN SOUTH AFRICAN TAX LAW
6.1 Introduction
6.3 Synthesis and concluding remarks
CHAPTER 7 JUDGE FOR YOURSELF – THE PRACTICAL APPLICATION OF THE RIGHT TO EQUALITY WITHIN A FISCAL ENVIRONMENT
7.1 Introduction
7.2 Judge for yourself – the sixth “core” article
7.3 Synthesis and concluding remarks
CHAPTER 8 CONCLUSION
8.1 Brief overview of the originating ideals that underlie our fundamental rights
8.2 The Constitution – supremacy of Constitution v supremacy of Parliament
8.3 Disrespect, distrust, tax planning, tax evasion and the carrot and stick approach
8.4 Summary of conclusions and recommendations
8.5 Areas where further research is necessary
8.6 Overall conclusion, synthesis and the final word
Bibliography
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