A critical analysis of the doctrine of legitimate expectation in the context of the advance tax ruling system and tax assessment measured by SARS, with specific emphasis on substantive legitimate expectation

Abstract

Section 1 of the Income Tax Act, 58 of 1962 (the Income Tax Act) and other related Revenue Acts empower the South African Revenue Service (SARS) to administer the Acts and to collect revenue for the government of the Republic of South Africa. Sometimes, in order to assess tax liability and collect revenue, the Commissioner and/or officials of SARS have to make certain representations and undertakings to taxpayers in general through interpretation notes, rulings, and other forms of communication. In certain circumstances, SARS is authorised to withdraw rulings made and at times already acted upon, often to the taxpayer’s detriment. This results in lack of clarity, uncertainty and inconsistency in the application of the law. In order to address this problem, an Advanced Tax Ruling System (ATRS) was introduced. In terms of the ATRS, the issuing of rulings is statutorily regulated and binding on both the taxpayer and SARS when certain conditions provided for in the Income Tax Act are met. The purpose of an ATRS is to promote clarity, consistency, and certainty in respect of the interpretation or application of the provisions of tax laws to which it applies. However, the Commissioner is not obliged to follow a policy or undertaking which is in violation of tax laws. Section 76N(3) provides that the Commissioner may withdraw or modify a binding private ruling, or a binding class ruling retrospectively, if the ruling was made in error; subject to sub paragraphs (a), (b) and (c) thereof. This creates uncertainty as opposed to the intention for which the ATRS was introduced. The critical question is, if the Commissioner timeously informed the taxpayer that he has decided not to honour the undertaking made in a valid binding private ruling, which is still in force to the detriment of the taxpayer, can the taxpayer raise a defence of substantive legitimate expectation? It is argued that the issuing of an ATR is an administrative action subject to judicial review, if, in the opinion of the concerned party, it will have an adverse effect. Further, in the event that the Commissioner informs the taxpayer timeously of the intention to withdraw a valid binding private ruling, which the taxpayer has acted upon to their detriment, can they raise a defence of a practice generally prevailing and/or substantive legitimate expectation? The doctrine of legitimate expectation as a defence was authoritatively accepted as part of the South African administrative law in the landmark case of Administrator Transvaal v Traub. However, Chief Justice Corbett expressly stated in a dictum that the content of the expectation may be substantive or procedural in nature, [but] the protection of that expectation, if found to be legitimate, was exclusively procedural. It is argued that the dictum ignores section 33 of the Constitution which introduced reasonableness as an element of the right to just administrative action, which means that the substance of a decision may be reviewed if it is unreasonable. The objective is to examine whether the courts could develop the doctrine of legitimate expectation beyond the procedural protection, as already done in countries in Europe. Copyright