The South African Revenue Service (SARS) occasionally issues interpretation notes, which – according to its website – "are intended to provide guidelines to stakeholders (both internal and external) on the interpretation and application of the provisions of the legislation administered by the Commissioner".
To date, SARS has issued more than 90 interpretation notes, some of which have been withdrawn.
Previously, SARS issued practice notes. Although most of these have been withdrawn, some important ones still exist – for example, Practice Note 31 1994, which states that even if a taxpayer is not a moneylender by trade, it may deduct interest incurred on borrowed money against interest incurred on money that it has lent.
Power to issue interpretation notes
Arguably, SARS has no specific power to issue interpretation notes. The only references to the term 'interpretation note' in the Tax Administration Act (28/2011) are the following:
- Section 89(3) of the act states that a 'binding general ruling' may be issued as an interpretation note.
- The term 'official publication' is defined in Section 1 of the act to mean "a binding general ruling, interpretation note, practice note or public notice issued by a senior SARS official or the Commissioner".
Interpretation notes have important statutory implications for taxpayers. A 'practice generally prevailing' is "a practice set out in an official publication regarding the application or interpretation of a tax Act" (Section 1 of the Tax Administration Act as read with Section 5(1)).
Under the Tax Administration Act, a practice generally prevailing may come into play as follows.
Where the practice concerns a service, procedural or administrative matter The Tax Ombud cannot review a SARS policy or a practice generally prevailing other than to the extent that it concerns a service matter or a procedural or administrative matter arising from SARS's application of the provisions of a tax act (Section 17 of the Tax Administration Act).
Where settling a dispute is appropriate and in the state's best interest SARS may settle a dispute with a taxpayer only if, among other things, it is appropriate and in the state's best interest (Section 146 of the Tax Administration Act). However, it will be deemed inappropriate and not in the state's best interest to settle a dispute if SARS is of the opinion that, among other things:
- no circumstances set out in Section 146 apply; and
- the settlement would contravene the law or a practice generally prevailing and no exceptional circumstances exist to justify a departure from the law or practice (Section 145(a)(ii) of the Tax Administration Act).
Where SARS is barred from issuing an assessment Under Section 99(1) of the Tax Administration Act, SARS is barred from issuing an assessment in a number of instances, including if:
- in the case of an additional assessment:
- the amount which should have been assessed to tax under the preceding assessment was, in accordance with the practice generally prevailing at the date of the preceding assessment, not assessed; or
- the full amount of tax which should have been assessed under the preceding assessment was, in accordance with the practice generally prevailing, not assessed;
- in the case of a reduced assessment, the preceding assessment was made in accordance with the practice generally prevailing on the date of that assessment; or
- in the case of a tax for which no return is required, the payment was made in accordance with the practice generally prevailing on the date of that payment.
As such, an interpretation note could set out a practice generally prevailing and could thus have a significant impact on taxpayers' rights under the Tax Administration Act.
What impact do interpretation notes have on interpretation of tax laws?
In Commissioner for SARS v Marshall NO,(1) the Supreme Court of Appeal was called on to interpret certain provisions of the Value Added Tax Act (89/1991). In its judgment, the court referred to and agreed with certain sections of SARS's Interpretation Note 39, issued on February 8 2013, holding as follows:
"These interpretation notes, though not binding on the courts or a taxpayer, constitute persuasive explanations in relation to the interpretation and application of the statutory provisions in question. Interpretation Note 39 has been in circulation for years and has not been brought into contention until now." (Footnote omitted.)
The courts have recently referred to interpretation notes during the course of their judgments. For example, in Volkswagen South Africa (Pty) Ltd v Commissioner for SARS, the Supreme Court of Appeal referred to certain provisions of SARS's Interpretation Note 59 2010 in order to establish SARS's view on the nature of government grants.(2)
The taxpayer in Marshall appealed to the Constitutional Court, which held as follows in relation to the use of interpretation notes when interpreting legislation:
"Why should a unilateral practice of one part of the executive arm of government play a role in the determination of the reasonable meaning to be given to a statutory provision? It might conceivably be justified where the practice is evidence of an impartial application of a custom recognised by all concerned, but not where the practice is unilaterally established by one of the litigating parties. In those circumstances it is difficult to see what advantage evidence of the unilateral practice will have for the objective and independent interpretation by the courts of the meaning of legislation, in accordance with constitutionally compliant precepts. It is best avoided."(3) (Footnote omitted.)
Accordingly, it is now settled law that courts should not have regard to SARS interpretation notes when interpreting legislation, but may do so where SARS's practice is evidenced by an interpretation note which has been recognised by SARS and the taxpayer. Conceivably, the abovementioned Practice Note 31 constitutes such a note.
However, a few questions have arisen in light of Marshall:
- Do SARS interpretation notes serve any purpose?
- Is it possible for a SARS interpretation note to unilaterally set out a 'practice generally prevailing' as defined and contemplated in the Tax Administration Act (ie, "a practice… regarding the application or interpretation of a tax Act")?
Ultimately, both SARS and taxpayers should be careful when relying on SARS interpretation notes.
For further information on this topic please contact Ben Strauss at Cliffe Dekker Hofmeyr by telephone (+27 21 481 6300) or email ([email protected]). The Cliffe Dekker Hofmeyr website can be accessed at www.cliffedekkerhofmeyr.com.
Endnotes
(3) Marshall NO v Commissioner for SARS (CCT208/17) [2018] ZACC 11 (April 25 2018) at page 6.
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