Navigating tax disputes: Key rulings by South Africa’s Constitutional Court on Section 105 of the Tax Administration Act

By Dr Hendri Herbst and Dewald Pieterse

Introduction

In a series of recent rulings, the Constitutional Court of South Africa (CC) has addressed significant tax disputes involving the Commissioner for the South African Revenue Service (SARS) and various corporate entities. These cases, which were heard together due to overlapping legal questions, primarily revolve around the interpretation and application of Section 105 of the Tax Administration Act 28 of 2011 (TAA). These rulings are crucial for taxpayers and tax practitioners as they clarify certain aspects of procedural fairness, the appropriateness of declaratory relief, and the factors relevant to granting section 105 directions. The TAA, which came into force on 1 October 2012, introduced a uniform regime for objecting to and appealing assessments and decisions made by SARS. Section 105 stipulates that a taxpayer may only dispute an assessment or decision described in section 104 in proceedings under Chapter 9 unless a High Court otherwise directs. This provision ensures that tax disputes are primarily resolved in the Tax Court, with the High Court serving as an exception when a direction is granted. The cases under review (which were heard jointly) include United Manganese of Kalahari (Pty) Limited, Rappa Resources (Pty) Limited, Forge Packaging (Pty) Limited, Absa Bank Limited and United Towers (Pty) Limited, and Lueven Metals (Pty) Limited. The CC’s judgment is cited as United Manganese of Kalahari (Pty) Limited v Commissioner for the South African Revenue Service and four other cases (CCT 94/23; CCT 98/23; CCT 66/23; CCT 72/24; CCT 320/23) [2025] ZACC 2 (31 March 2025). Each case involves taxpayers seeking review or declaratory relief, raising questions about whether they were entitled to pursue such relief in the High Court, having regard to section 105 of the TAA.

The CC’s judgment, comprising a finding in each case based on principles outlined, provide clarity on the interpretation and application of section 105, emphasizing the importance of procedural fairness, the appropriateness of declaratory relief, and the factors relevant to granting section 105 directions. This article will provide an overview of these cases, with a specific focus on the Absa Bank portion of the judgment. The Absa Bank case involved complex transactions and the application of the general anti-avoidance rules (GAAR), raising significant legal questions suitable for determination by the High Court. The article will highlight the key legal principles, the court’s reasoning, and the implications for taxpayers and tax practitioners ensuring a comprehensive understanding of the recent developments in tax law.

Relevant provisions governing objections and appeals

The TAA defines “assessment” as the determination of tax liability or refund. There are four types of assessments identified under the TAA: original, additional, reduced, and jeopardy assessments.

Section 91 of the TAA outlines that an original assessment can either be a self-assessment, where the taxpayer determines their tax liability, or a first assessment made by SARS. Furthermore, section 92 mandates that SARS must issue an additional assessment if it is satisfied that the original assessment does not reflect the correct application of tax law, thereby correcting any prejudice to SARS or the fiscus.

Procedures for objections and appeals

Taxpayers who are aggrieved by an assessment can object to it under section 104 of the TAA, read with rule 7 of the dispute resolution rules promulgated under section 103 of the TAA (Rules). Rule 7 allows for objections to be lodged within 80 days after the date of assessment. Prior to the Rules being amended in March 2023, the period was 30 days after the date of assessment. SARS is then required to notify the taxpayer of the allowance or disallowance of the objection within 60 days after the objection has been lodged, or within 45 days if additional substantiating documents were requested under rule 8.

If the objection is disallowed, taxpayers have the right to appeal against the assessment under section 107. This section must be read with rule 10 of the Rules, which prescribes a 30-day period for lodging appeals following the disallowance of the objection. Depending on the amount in dispute, the appeal will be to the Tax Court or Tax Board. At appeal stage, it is also possible that SARS and the taxpayer first attempt to resolve the dispute through alternative dispute resolution. Although the TAA has been amended to allow for alternative dispute resolution at objection stage, these provisions have not yet come into effect.

The appeal must specify in detail the grounds for disputing the basis of the decision to disallow the objection.

Summary of the cases considered

United Manganese of Kalahari (Pty) Limited v Commissioner for the South African Revenue Service

In this case, United Manganese of Kalahari (UMK) challenged additional assessments issued by SARS based on transfer pricing adjustments. UMK argued that SARS should have afforded it the opportunity to comment on the “Second Thesis” (i.e. a certain view taken by SARS regarding connected person relationships) before issuing the additional assessments, alleging procedural unfairness due to SARS’ failure to issue a revised audit findings letter in terms of section 42(2)(b) of the TAA. UMK sought review and declaratory relief in the High Court, including a section 105 direction and a section 7(2) exemption under the Promotion of Administrative Justice Act, 3 of 2000 (PAJA). The High Court dismissed UMK’s application, stating that a section 105 direction was necessary and that the alleged procedural unfairness could be addressed through the tax appeal process. The Supreme Court of Appeal (SCA) upheld the High Court’s decision, emphasizing that UMK had not made out a case for a section 105 direction. The CC found that UMK needed a section 105 direction to pursue the review and declaratory relief, and that the procedural issues raised could be adequately addressed through the tax appeal process.

Rappa Resources (Pty) Limited v Commissioner for the South African Revenue Service

Rappa Resources sought to review additional VAT assessments issued by SARS, alleging procedural irregularities and bad faith. Rappa contended that SARS had acted irrationally and with an ulterior purpose, targeting a taxpayer with “deep pockets”. Rappa also argued that the audit was conducted improperly and for an ulterior purpose to delay VAT refunds. The High Court granted Rappa’s amendment to include a prayer for a section 105 direction but postponed consideration of that prayer, ruling that it should be heard together with the main review. The SCA upheld the High Court’s decision, stating that Rappa had not made out a case for a section 105 direction and that the Tax Court could adequately address the taxpayer’s concerns through its curative powers. The CC found that Rappa needed a section 105 direction to pursue the review and that the issues raised could be resolved through the tax appeal process.

Forge Packaging (Pty) Limited v Commissioner for the South African Revenue Service

Forge Packaging challenged additional assessments related to the disallowance of deductions and the imposition of understatement penalties. Forge argued that SARS had not given adequate reasons for disallowing the assessed loss and reducing the taxable loss to nil. Forge also contended that SARS had not invited it to make representations before imposing the penalties. The High Court refused to grant a section 105 direction, striking the review from the roll and ordering Forge to pay SARS’ costs. The court found that Forge’s review application was premature and that the issues could be resolved through the tax appeal process. The CC upheld the High Court’s decision, emphasizing that the taxpayer’s concerns could be addressed through the tax appeal process.

Absa Bank Limited and United Towers (Pty) Limited v Commissioner for the South African Revenue Service

This case involved complex transactions and the application of the general anti-avoidance rules (GAAR) in sections 80A to 80L of the Income Tax Act, 58 of 1962 (ITA). Absa Bank and United Towers challenged the GAAR assessments issued by SARS, which re-characterized tax-exempt preference share dividends as taxable interest, resulting in additional tax and understatement penalties. The High Court granted a section 105 direction, finding that the legal questions raised by the taxpayers were suitable for determination by the High Court. The court’s decision underscores the importance of addressing pure points of law through judicial review when appropriate. After SARS successfully appealed the High Court’s decision to the SCA, the taxpayers appealed to the CC, whichupheld the High Court’s decision, emphasizing the need to resolve complex legal questions through judicial review.

Lueven Metals (Pty) Limited v Commissioner for the South African Revenue Service

Lueven Metals sought declaratory relief regarding the interpretation of section 11(1)(f) of the Value-Added Tax Act, 89 of 1991, before any assessments were issued. Lueven argued that its sales of fully refined bars to Absa should be zero-rated, and that the phrase “which has not undergone any manufacturing process other than” referred only to processes undertaken by the vendor. The High Court found that section 105 did not apply in the absence of an assessment and that the legal question was suitable for declaratory relief. The court dismissed Lueven’s application, stating that the interpretation of section 11(1)(f) was not a marginal case and that declaratory relief was not warranted. The CC found that Lueven did not need a section 105 direction and that the legal question was suitable for declaratory relief.

Overview of the Absa Bank Portion of the Judgment

Background

The case of Absa Bank Limited and United Towers (Pty) Limited v Commissioner for the South African Revenue Service involved complex transactions and the application of the GAAR. Between 2013 and 2015, Absa concluded four subscription agreements to acquire preference shares issued by PSIC Finance 3 (RF) (Pty) Limited (PSIC3). Absa received tax-exempt dividends on these preference shares. The transactions were introduced to Absa by the Macquarie Group, and Absa concluded related agreements with entities in Macquarie, including a right to put the preference shares to Macquarie in certain circumstances and an obligation by Macquarie to make up any shortfall in Absa’s anticipated returns on the shares, including any shortfall arising if the dividends were taxed contrary to expectation.

In May 2018, SARS notified Absa that it would be conducting an audit into the tax treatment of the preference shares. SARS sought information from Absa, which was provided, and also obtained information from other persons.

On 13 November 2018, SARS issued a notice in terms of section 80J of the ITA (80J notice), setting out its intention to apply the GAAR and the reasons for proposed GAAR assessments for Absa’s 2014 to 2018 tax years. Absa responded to the section 80J notice, but SARS disagreed with Absa’s contentions and refused the request to withdraw the notice. Subsequently, SARS issued GAAR assessments, re-characterizing the tax-exempt preference share dividends received by Absa as taxable interest, resulting in additional tax and understatement penalties.

High Court Review

Absa sought review and declaratory relief in the High Court, challenging the GAAR assessments. The High Court held that the section 80J notices were reviewable in terms of the legality principle, while the notices of assessment were reviewable in terms of PAJA. The High Court considered whether there was a factual dispute regarding Absa’s knowledge of the transactions involving PSIC4, D1 Trust, and Macquarie Bank Limited (MBL). SARS argued that it was entitled to test the veracity of Absa’s claim of ignorance through discovery and cross-examination in the Tax Court. However, the High Court rejected this argument, stating that SARS had assessed on the basis that the tax was due despite Absa’s ignorance, and it was not open to SARS to seek a chance to prove that Absa did have knowledge. On the merits, the High Court upheld Absa’s argument on the alleged party error, finding that there was no factual basis to allege that Absa was anything more than an investor in preference shares and that no scheme reaching Absa was established. The High Court also accepted Absa’s case on the alleged tax benefit error, applying the “but for” test to determine whether a tax liability had been avoided. The High Court granted Absa leave to pursue the review, set aside the Commissioner’s refusal to withdraw the section 80J notices, set aside SARS’ letters of assessment, and ordered SARS to pay costs, including the costs of two counsel.

SCA Judgment

SARS appealed to the SCA, which delivered judgment on 29 September 2023. The SCA held that the section 80J notices themselves had no adverse effect or impact and were not reviewable. Regarding section 105, the SCA referred to the SCA judgment in Rappa  and stated that the High Court could only exercise jurisdiction in exceptional circumstances. The SCA found that the High Court had not exercised its discretion properly and that the two alleged errors involved factual disputes rather than pure questions of law.

CC Judgment

The CC  decided that the SCA had misdirected itself in holding that the two alleged errors involved disputed facts. The CC held that the applicants were raising errors of law emerging from SARS’ own statement of the facts in the section 80J notices and assessment letters. The CC confirmed that the High Court’s decision to entertain the application on its merits was correct and granted leave to appeal. The remaining issues in the appeal were left for later determination, and the respondent was ordered to pay the applicant’s costs of opposing the application for leave to cross-appeal.

Key Legal Principles

Section 105 of the TAA

Section 105 of the TAA is a pivotal provision that governs the forum for disputing assessments or decisions made by SARS. Initially, section 105 stated that a taxpayer could not dispute an assessment or decision in any court or other proceedings except in proceedings under Chapter 9 or by application to the High Court for review. This was later amended to read: “A taxpayer may only dispute an assessment or decision as described in section 104 in proceedings under this Chapter, unless a High Court otherwise directs“.

The CC judgment has provided clarity on many pertinent aspects regarding the application of Section 105 of the TAA. We continue below to briefly provide an overview of some of the most important questions raised.

1. Is a section 105 direction needed for a High Court review or declaratory application?

Section 105 of the TAA stipulates that a taxpayer may only dispute an assessment or decision described in section 104 in proceedings under Chapter 9, unless a High Court otherwise directs. This means that a section 105 direction is indeed necessary for a taxpayer to pursue a review or declaratory application in the High Court. The High Court’s jurisdiction to entertain such applications is conditionally suspended until a section 105 direction is granted. The provision aims to ensure that disputes are primarily resolved in the Tax Court, with the High Court serving as an exception.

2. What is the effect of section 105 on the High Court’s jurisdiction?

Section 105 conditionally suspends the High Court’s jurisdiction to entertain review and declaratory applications concerning tax assessments or decisions until a direction is granted. This suspension is not an outright ouster of jurisdiction but rather a procedural requirement that must be met for the High Court to proceed with such cases. The High Court retains its pre-existing jurisdiction, but it can only exercise this jurisdiction on the merits of the case once a section 105 direction is given. This ensures that the Tax Court remains the primary forum for tax disputes, with the High Court intervening only in specific circumstances.

3. When and how should a section 105 direction be sought and adjudicated?

A section 105 direction should be sought at the threshold of proceedings, typically through a preliminary hearing if the coercive power of the High Court is needed before the main case is ready for hearing. This preliminary hearing should be expedited as far as possible, subject to the organisation of rolls in different Divisions of the High Court. The taxpayer must apply for the direction, and the High Court will adjudicate whether to grant it based on the appropriateness of departing from the default remedy provided by the Tax Court. The application for a section 105 direction can be made alongside the main application for review or declaratory relief, but it must be substantively justified.

4. What test should the High Court apply when deciding whether to grant a section 105 direction?

The test for granting a section 105 direction is whether there is justification for departing from the default remedy provided by the Tax Court, rather than requiring exceptional circumstances. The High Court must consider whether the departure is appropriate or whether there is good cause for the departure. This involves assessing whether the taxpayer’s grievance can be adequately addressed through the Tax Court’s processes or whether the High Court’s intervention is necessary to ensure fair administrative action. The High Court has a wide discretion in making this determination, and each case will depend on its own facts.

5. What factors should the High Court consider when deciding on a section 105 direction?

The High Court should consider several factors when deciding whether to grant a section 105 direction. These include whether the taxpayer has lodged an objection to the assessment and whether the objection has been disallowed. In review cases, the process of objection serves as an internal remedy under section 7(2) of PAJA, and the High Court may decline to grant a direction if the taxpayer has not exhausted this remedy without exceptional circumstances. In declaratory cases, the High Court should assess whether the application raises a pure point of law or involves factual disputes that are better suited for the Tax Court. Other relevant factors include the urgency of the matter, the potential for piecemeal adjudication, and whether the taxpayer’s grievance involves serious procedural irregularities or malfeasance. The High Court’s discretion is procedural in nature and should be exercised judicially, considering all relevant facts and principles.

Discretionary Powers and Judicial Review

The exercise of discretionary powers by SARS is a significant aspect of tax administration and litigation. Discretionary powers may affect the content of an assessment, and taxpayers may allege procedural irregularities or unfairness in SARS’ conduct preceding the issuance of an assessment. For instance, if SARS is minded to make potential adjustments of a material nature, it must give notice to the taxpayer together with the grounds of the proposed assessment, allowing the taxpayer to respond. The Tax Court has the authority to investigate whether the relevant component of an assessment is supported by a lawful exercise of the Commissioner’s discretionary power. This function is akin to judicial review but is part of the Tax Court’s wide appellate function. The Tax Court’s consideration of the exercise of discretionary power is more limited than where the exercise of the power is made subject to appeal; it is confined to investigating the lawfulness of the exercise of the discretionary power.

In cases where the discretionary component of an assessment is not expressly subject to appeal, the Tax Court may perform a quasi-review function. The grounds of appeal in this respect are coextensive with review grounds, making it challenging for the taxpayer to persuade the High Court to grant a section 105 direction. The High Court may consider whether there is added benefit achievable in a High Court review that could not be achieved in a Tax Court quasi-review. The Tax Court’s wide power of revision includes the power to determine the legality of an assessment on grounds of review, as affirmed in cases such as Kommissaris van Binnelandse Inkomste v Transvaalse Suikerkorporasie Beperk 1985(2) SA 668(T) and South Atlantic Jazz Festival (Pty) Ltd v Commissioner for the South African Revenue Service 2015 (6) SA 78 (WCC).

However, the Tax Court is not a court of similar status to the High Court and has not been assigned review powers as contemplated in PAJA, making it necessary to approach the High Court for certain review and declaratory applications.

Conclusion

The CC’s judgment, essentially comprising rulings in five cases, provided significant clarity on the procedural and substantive aspects of tax dispute resolution in South Africa. These judgments underscore the importance of procedural fairness and the appropriate forum for resolving tax disputes, primarily directing such matters to the Tax Court unless the circumstances justify High Court intervention. The cases, each of which dealt with different underlying tax provisions aside from the section 105 direction issue illustrate the diverse challenges taxpayers face when disputing SARS assessments. The CC has emphasized that section 105 directions are necessary for High Court reviews or declaratory applications, ensuring that the Tax Court remains the primary forum for tax disputes.

In particular, the Absa Bank case highlights the complexities involved in applying the GAAR and the necessity of addressing pure points of law through judicial review when appropriate. The CC upheld the High Court’s decision to grant a section 105 direction, reinforcing the need for judicial review in cases involving intricate legal questions. Overall, these rulings provide valuable guidance for taxpayers and tax practitioners, emphasizing the procedural requirements and considerations for seeking section 105 directions.

The judgments ensure that tax disputes are resolved efficiently and fairly, maintaining the integrity of the tax administration system while allowing for judicial oversight in exceptional cases.