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In litigation between a taxpayer and SARS, the onus of proof is generally on the taxpayer.

The onus of proof in litigation generally and in litigation with SARS in particular

In any litigation, that is to say, a dispute played out in court between opposing litigants, the onus of proof is crucial.

The court itself does not undertake any investigation into the disputed facts, and it is for the parties to prove their version of the facts by placing evidence before the court, either in the form of documents or by calling witnesses to testify on oath.

In many instances, litigation ends with a ruling that the party who bore the onus of proof has failed to discharge it.

In such circumstances, judgment must be entered for the other party. The losing party is usually ordered to bear the legal costs, for the general rule is that the party who gains judgment in his favour is entitled to have his legal costs paid by his opponent.

As is well known, in a criminal prosecution, the onus is on the State to prove all aspects of its case and the guilt of the accused beyond a reasonable doubt - which is a formidably high onus.

In civil matters, that is to say litigation between one individual or commercial entity and another, such as commercial disputes, the party who bears the onus of proof must discharge it on a balance of probabilities - a much less demanding onus.

The onus of proof in tax litigation

Of particular importance is the onus of proof in litigation between the South African Revenue Service and a taxpayer, in which SARS is arguing that, in the particular circumstances, the taxpayer is liable for tax arising out of a particular transaction, and the taxpayer is disputing such liability or the amount of the tax liability.

The onus of proof applies only to disputed facts. Where parties take a different view on the proper interpretation of the law, the litigants will put forward their respective arguments and the court will make a ruling on what the law is on the point in question.

The onus of proof in litigation between SARS and a taxpayer

Who bears the onus of proof in tax litigation between SARS and a taxpayer?

For example, where the taxpayer acquired particular property and later sold it at a profit, and SARS assesses the taxpayer to pay income tax on that profit on the basis that the taxpayer had sold the property in the course of carrying on a trade or scheme of profit-making, the burning issue will probably be - what was the taxpayer's intention at the time he acquired the property? Did he intend to hold it indefinitely as an income-producing capital asset, or did he intend to sell it as soon as he could profitably do so?

The Income Tax Act 58 of 1962 provides, in section 82, that once an assessment has been issued to a taxpayer, the onus is on him to prove that it is wrong. If he cannot do so (on a balance of probabilities) then the assessment stands.

The way in which a taxpayer contests an assessment to tax is, in the first instance, by lodging an objection to the assessment. If SARS does not accept the objection and amend the assessment, the taxpayer will then have to lodge an appeal to the Tax Court. The losing party in the tax court - whether the taxpayer or SARS - may then lodge a further appeal to the High Court and the Supreme Court of Appeal. When it comes to an assessment based on the provisions of the GAAR (the general anti-avoidance rule) which used to be contained in section 103(1) of the Income Tax Act but is now in Part IIA of the Act), it was held by the Tax Court in ITC 1636 (1998) 60 SATC 267 (and confirmed on appeal in CIR v Conhage (Pty) Ltd 1999 (4) SA 1149 (SCA)) that section 82, referred to above, which sets out the onus of proof, does not apply to section 103(1) because that section is a specific provision with its own internal rules regarding the onus of proof.

Consequently, in a tax dispute between SARS and the taxpayer in which SARS contends that section 103(1) applies (with the result that the Commissioner has draconian statutory powers to take action to nullify the tax benefit) the onus of proving every component element of section 103(1) is on the Commissioner - except to the extent that section 103 itself provides otherwise.

Of great significance in this regard is that section 103(4) provides that, once SARS proves that the tax scheme in question had the result of reducing or postponing a tax liability, it is presumed, unless and until the taxpayer proves otherwise, that the taxpayer had entered into the scheme with the sole or main purpose of tax avoidance. But in other respects, the onus is on SARS, for example to prove that the scheme was "abnormal" in the sense envisaged in section 103(1).

Recently, SARS has gone on record as accepting that the general onus provision contained in section 82 of the Income Tax Act does not apply to section 103(1). This is now explicitly conceded in SARS's Draft Comprehensive Guide to the General Anti-Avoidance Rule, released in December 2010, which also contains the important concession that -

Under the [new] GAAR the onus of proving the existence of the tainted elements falls upon the Commissioner. The Commissioner is, however, assisted in discharging this onus to the extent that the presence of a tainted element is established, as contemplated in sections 80C to 80E and sections 80A(a) to (c). The onus of proof that tax avoidance was not the sole or main purpose falls on the taxpayer.

In other words, the general onus of proof, as laid down in section 82 of the Income Tax Act, does not apply to the provisions of the new GAAR, and the onus of proof in relation to all aspects of the GAAR rests on SARS, except to the extent that the GAAR itself provides otherwise.

One respect in which the GAAR does provide otherwise is in regard to the purpose of the arrangement in question. As was the case under section 103(1), once SARS proves that the arrangement would have the result of avoiding tax, it is rebuttably presumed - in other words, it is presumed unless and until the taxpayer proves otherwise - that this was also the sole or main purpose of the arrangement.

The continuing relevance of section 103(1)

It needs to be borne in mind that, although section 103(1) has been replaced by a new general anti-avoidance rule contained in Part IIA of the Income Tax Act, section 103(1) continues to apply to any transaction, operation or scheme entered into before 2 November 2006 - of which many are, of course, still in operation, and will remain in operation for many years to come.

Moreover, it seems (although this raises complex issues of statutory interpretation) that - despite the coming into force of the new GAAR -section 103(1) will continue to apply to any step in a pre-2 November 2006 transaction, operation or scheme which was put into effect after that date.


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