Introduction
On 31 March 2025 the Constitutional Court ("Court") handed down a judgment regarding the interpretation and application of section 105 of the Tax Administration Act, 2011 ("TAA").
Section 105 of the TAA provides that a taxpayer may only dispute an assessment or certain decisions ("assessments") in proceedings under Chapter 9 of the TAA.
Before dealing with the Court’s guidance on the appropriateness of a High Court giving a section 105 direction it is necessary to briefly explain certain procedures under the TAA.
Information gathering and additional assessments
Additional assessments typically arise pursuant to the South African Revenue Service ("SARS") exercising information gathering powers under the TAA.
The audit process is as follows:
- a taxpayer is selected for an audit;
- thereafter:
- the taxpayer must be given notice of commencement of the audit and progress reports;[1]
- upon conclusion, where the audit identifies adjustments of a material nature, SARS must, within 21 business days or a further period, provide the taxpayer with a document containing the outcome of the audit and grounds for the proposed assessment;[2]
- the taxpayer must, within 21 business days or a further period, respond in writing to SARS’ facts and conclusions in its audit outcome document.[3]
Should SARS issue an additional assessment, it must provide the taxpayer with a statement of the grounds for the assessment (where it is not fully based on a return).[4]
Default dispute resolution procedure
Section 104 of the TAA provides that a taxpayer, aggrieved by an assessment, may object to it. A taxpayer may do so after requesting reasons for the assessment.
SARS may allow or disallow the objection in whole or in part.
The taxpayer may then appeal against the disallowance to the Tax Court.[5]
The dispute resolution rules provide for:
- SARS to deliver a statement of grounds of assessment and opposing the appeal;
- the taxpayer to deliver a statement of grounds of appeal; and
- SARS to reply to the statement of grounds of appeal.
The issues in dispute are those reflected in the Tax Court pleadings (as referred to above).
Nature of Tax Court proceedings
An appeal in the tax court is an appeal in the wide sense, meaning it is a fresh hearing. The parties may present new evidence within the context of the pleadings.
The Tax Court is empowered to make its own decision on the merits (except in respect of matters within SARS’ discretion).
Costs are only awarded against a losing party if the grounds of assessment or grounds of appeal are held to be unreasonable.[6]
A tax assessment becomes final if there has been no objection or appeal or once an appeal has been determined by the Tax Court or a higher court.
Issues before the Court
The issues before the Court included the following:
- the effect of section 105 of the TAA on a High Court’s jurisdiction to hear and determine tax cases by way of review or declaratory applications;
- whether a heightened ‘exceptional circumstances’ test applied before a High Court could hear and determine tax cases;
- whether a High Court direction is required in respect of a Promotion of Administrative Justice Act ("PAJA") or legality review of, or challenge to, an appealable assessment;
- whether a High Court direction is required in respect of declaratory applications which, if answered in favour of the taxpayer, would show that an appealable assessment is wrong;
- identifying factors a High Court should take into account in deciding whether to give a section 105 direction; and
- the effect of section 105 of the TAA in circumstances where a review application or declaratory application is brought before SARS has issued an assessment.
General principles
The Court held, inter alia, as follows:
- the High Court has jurisdiction to hear and determine tax cases turning on legal issues. A taxpayer can therefore dispute an assessment in the High Court (by way of a review application, or a declaratory application questioning the correctness of an assessment);
- a Tax Court does not appear to have jurisdiction to entertain a PAJA or legality review or grant declaratory orders;
- as the purpose of section 105 of the TAA is to conditionally suspend the High Court’s jurisdiction, a High Court cannot exercise jurisdiction unless it has given a section 105 direction;
- section 105 of the TAA, properly construed, requires a properly motivated justification for a departure from the default tax dispute resolution process as set out in the TAA i.e., a taxpayer is not required to show exceptional circumstances.
Factors relevant to a section 105 direction
The Court provided the following guidance:
- a section 105 direction is needed if an assessment has been issued;
- each case depends on its own facts;
- judicial aversion to piecemeal adjudication is an important factor (because of the potential for delay, multiplication of costs and inefficient use of judicial resources). This danger arises where a taxpayer pursues review or declarator relief in the High Court while simultaneously pursuing other grounds of appeal in the Tax Court. If the substance of the taxpayer’s point could be adjudicated in the Tax Court this will be a powerful factor against giving a section 105 direction;
- whether a taxpayer has lodged an objection and/or whether it has been disallowed is a relevant factor.
Relevant factors in review cases
The Court provided the following specific guidance applicable to review proceedings:
- in review proceedings an objection constitutes an internal remedy. If a taxpayer has not lodged an objection, and there are no exceptional circumstances exempting a taxpayer from doing so, it is difficult to see how a section 105 direction would be appropriate;
- the ambit of a Tax Court’s appellate/quasi-review competence, where a component of the assessment depends on the lawful exercise of SARS’ discretionary power, is a relevant factor (particularly where the exercise of such power is not made subject to objection and appeal);
- whether SARS’ conduct preceding the issuing of an assessment was irregular, the nature and seriousness of the irregularities, and whether the assessment should be set aside on account thereof, are relevant factors. The Court concluded that there could be a class of complaints that could be pursued by way of review applications in the High Court and this was a relevant factor in giving a section 105 direction;
- if there are other reasons that make it appropriate to give a section 105 direction, the fact that a successful review may result in SARS not being able to issue a fresh assessment (due to prescription), is not a reason to withhold a section 105 direction;
- where the assessment does not involve a discretion on the part of SARS:
- the closer a review ground is to a ground of appeal the less likely it is for a section 105 direction to be granted (in essence this applies where the legal challenge is based on the assessment being wrong). In such cases the prospects on review should carry little weight as the review grounds can be fully ventilated in the Tax Court. Examples of such review grounds include the following:
- the assessment was materially influenced by an error of law or fact;
- irrelevant considerations were taken into account/relevant considerations were not taken into account;
- the assessment was not authorised by the taxing provisions on which SARS relies on;
- the assessment is not rationally connected to the information before SARS or the reasons given by SARS for the assessment;
- the assessment was so unreasonable that no reasonable person could have exercised the power to issue it;
- procedural irregularities, occurring before an assessment is issued, should be assessed in light of the fact that the opportunity to be heard will be available in the Tax Court (given the wide nature of appeal proceedings before it) to cure them. A High Court must therefore assess whether preference should be given to a curative remedy in the Tax Court or a review remedy in the High Court;
- the practical use of a review remedy should also be considered (if an assessment is set aside and remitted to SARS to comply with procedural requirements would it affect the assessment outcome - taking into account that the question does not arise in relation to a substantive ruling on lawfulness but in relation to whether a section 105 direction should be given);
- procedural irregularities relating to a failure to furnish reasons may already have been remedied (for example a failure to provide reasons during an audit before a proposed assessment has been issued may have been remedied through statements of grounds for an assessment after an additional assessment was issued, or the furnishing of reasons to a taxpayer before a taxpayer objects to an assessment, and/or through reasons for SARS disallowing an objection, and/or in SARS’ pleadings before the Tax Court);
- SARS’s duty to act in an administratively fair manner - the more egregious or wilful SARS’ conduct is (such as corruption, bad faith, abuse of power), and the greater a taxpayer’s merits are in succeeding with a review application, the more likely it is that a High Court will give a section 105 direction;
- where the assessment involves a discretion on the part of SARS which is subject to objection and appeal:
- the factors are likely to be the same as set out above (in the context of assessments which do not involve a discretion on the part of SARS) except that there is a need to draw a distinction between a true SARS discretion (where there is more than one possible outcome on a set of identical facts) and a loose SARS discretion (where there is only one right answer taking into account a number of disparate and incommensurable features). In the case of a true SARS discretion, the taxpayer may want to have SARS exercise its discretion properly before it subjects itself to the default tax dispute resolution process;
- where a discretionary component of an assessment is not expressly subject to objection and appeal, the Tax Court may, when hearing an appeal against an assessment, perform a quasi-review function in relation to the discretionary component (based on case law suggesting grounds of appeal are co-extensive with review grounds). In such cases a High Court is less likely to grant a section 105 direction;
Relevant factors in declaratory cases
The Court provided the following specific guidance:
- in a declaratory application there is no statutory duty to exhaust internal remedies. Accordingly, an applicant would need to satisfy the High Court that it should not be required to follow the default tax dispute resolution process;
- a High Court will need to satisfy itself that the point a taxpayer raises is one of law, involves no factual disputes, and that:
- the point of law is of general importance and a precedent will be of public use; or
- the point of law does not apply only to existing assessments but also future tax treatment;
- other factors include:
- whether the point of law raised is the only point on which a taxpayer challenges an assessment as if there are other challenges, this could result in piecemeal adjudication; and
- whether it would be appropriate for a costs order to be granted in the High Court litigation as Tax Court litigants are not ordinarily entitled to/burdened by cost orders (unless the grounds are found to be unreasonable);
Relevant factors where an assessment has not been issued
Taking the above into account the Court stated that whilst section 105 is not directly applicable where an assessment has not been issued, a High Court could consider the following in such applications:
- whether a taxpayer is ‘jumping the gun’ in order to avoid the application of section 105;
- the time period before an assessment is likely to be issued;
- the time period to resolve a dispute in the default tax dispute forum; and
- whether a section 105 direction would not be appropriate were an assessment to be issued.
Conclusion
At least two of the appellants’ appeals were dismissed by the Court and a third appellant was not granted condonation for the late filing of its application for leave to appeal.
Taxpayers are well advised to consult legal professionals on appropriate strategies and remedies to challenge SARS conduct and assessments.
Obtaining the correct legal advice is important to avoid costly and drawn-out legal proceedings.
[1] Section 42(1) of the TAA
[2] Section 42(2)(b) of the TAA
[3] Section 42(3) of the TAA
[4] Section 96(2) of the TAA
[5] Tax Board in certain circumstances
[6] Section 130(1) of the TAA
