• Service: Tax, Global Compliance Management Services, International Tax
  • Type: Regulatory update
  • Date: 7/23/2014

South Africa - Duty of examiners to understand taxpayer's business 

July 23: South Africa's Supreme Court of Appeal issued a decision that clarifies certain duties and obligations of the South Africa Revenue Service (SARS) to understand the taxpayer’s business and recordkeeping system when conducting a tax audit. SARS v. Pretoria East Motors (Pty) Ltd (291/12) [2014] ZASCA 91


The case concerns an income tax and VAT audit of a car dealership located in Pretoria and selling new and used vehicles. The taxpayer’s accounting system was a customised system—one of the system’s peculiarities was that some purely internal transactions were reflected as “sales” on the system. The accounting system could therefore be misleading, if not properly understood.

The SARS auditor examined the accounts and, when a discrepancy was found that was not understand and for which there was no adequate explanation, the auditor simply made an assessment for additional tax?either income tax or VAT or, in some instances, both.

The Supreme Court of Appeal found that the SARS auditor failed to become familiar with the taxpayer's customized accounting system, even though the taxpayer made all information available, and that the auditor raised additional assessments in instances when she did not understand something and left it to the taxpayer to prove otherwise. The court ordered SARS to pay the taxpayer’s costs.

Read a July 2014 report prepared by the KPMG member firm in South Africa: SARS tax audits, the Tax Administration Act and making an effort to understand the taxpayer’s business operations

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