What constitutes a practice generally prevailing? 

By Dr Hendri Herbst and Jané Visagie

Taxpayers often rely on various sources of information and guidance provided by the South African Revenue Service (‘SARS’) to comply with their tax obligations and plan their tax affairs. These include interpretation notes, rulings, circulars, guides, and other publications issued by SARS from time to time. However, not all of these documents have the same legal status or effect, and taxpayers need to be aware of the implications of relying on them.

One of the key concepts that determines the legal value of SARS’s guidance is the notion of a ‘practice generally prevailing’ (‘PGP’). According to section 5(1) of the Tax Administration Act 28 of 2011 as amended (the ‘TAA’) a PGP is defined as “a practice set out in an official publication regarding the application or interpretation of a tax Act.”

The concept of a PGP is relevant for at least two reasons. Firstly, it provides a basis for SARS to exercise its discretion in certain matters, such as the extension of periods, the remittance of penalties and interest, and the condonation of non-compliance. It follows that in exercising a power or performing a duty, SARS must, among other things, have regard to a ‘practice generally prevailing’. In other words, SARS must act consistently and fairly in applying its policies and procedures to different taxpayers in similar situations.

Secondly, and more importantly for taxpayers, a PGP can assist taxpayers in discharging the burden of proof in terms of section 102(1) of the TAA, under which a taxpayer must prove –

• that an amount, transaction, event or item is exempt or otherwise not taxable;
• that an amount or item is deductible or may be set off;
• the rate of tax applicable to a transaction, event, item or class of taxpayer;
• that an amount qualifies as a reduction of tax payable;
• that a valuation is correct; or
• whether a ‘decision’ that is subject to objection and appeal under a tax Act, is incorrect.

Moreover, a PGP may serve as a defence against additional assessments, penalties, or interest imposed by SARS. Therefore, if a taxpayer can prove that they acted in accordance with a PGP at the time of filing a return or performing an act, they can avoid any adverse consequences that may arise from a subsequent change in SARS’ interpretation or application of the law.

That being said, establishing the existence and content of a PGP is not always a straightforward task. Based on the definition in section 5(1) of the TAA, it is clear that only official publications can constitute a PGP.

Section 1 of the TAA defines an ‘official publication’ to mean “a binding general ruling, interpretation note, practice note or public notice issued by a senior SARS official or the Commissioner”. As such, only these documents can potentially constitute a PGP.

The Memorandum on the Objects of the Tax Administration Bill, 2011, states the following at paragraph 2.2.2.4 in respect of the concept of a PGP:

“In terms of clause 5 the sources of SARS’ “binding” practices will be official publications, for example a binding general ruling, interpretation note, practice note, or public notice issued by a senior SARS official or the Commissioner that deals with the application or interpretation of a tax Act.”

It should thus be cautioned that not every document or communication issued by SARS amounts to a PGP, and that each case must be assessed on its own facts and circumstances. A PGP may furthermore change over time, depending on the evolution of both the law and the practice of SARS. Therefore, taxpayers cannot rely on a PGP indefinitely, and must keep abreast of any developments that may affect their tax position. Consequently, when applying the contents of any document to determine a tax position, a taxpayer must have due regard for the legal status of such document in terms of establishing a PGP, and not make the mistake of assuming that all SARS documents can be relied upon in defence of a tax position taken.

In terms of section 5(2) of the TAA, a PGP “set out in an official publication, other than a binding general ruling, ceases to be a practice generally prevailing if –

• the provision of the tax Act that is the subject of the official publication is repealed or amended to an extent material to the practice, from the date the repeal or amendment becomes effective;
• a court overturns or modifies an interpretation of the tax Act which is the subject of the official publication to an extent material to the practice from the date of judgment, unless –
  • the decision is under appeal;
  • the decision is fact-specific and the general interpretation upon which the official publication was based is unaffected; or
  • the reference to the interpretation upon which the official publication was based was obiter dicta; or
• the official publication is withdrawn or modified by the Commissioner, from the date of the official publication of the withdrawal or modification.”

Similarly, in terms of sections 85 and 86 of the TAA, SARS can withdraw a PGP that is based on an advance ruling or binding private or class ruling. In such instance, the process followed in the aforesaid provisions must be complied with.

One of the most common and useful sources of guidance provided by SARS are the tax guides, which cover various topics and aspects of taxation, such as general principles, specific transactions, administrative procedures, and compliance obligations. These guides are intended to assist taxpayers in understanding and applying the tax laws, and to provide practical examples and illustrations of common scenarios and issues.  Taxpayers should, however, be aware that these guides do not have the force of law, and do not necessarily comprise nor reflect a PGP. As SARS provides in the disclaimer that accompanies each guide: “[t]his guide is not an ‘official publication’ as defined in section 1 of the TAA and accordingly does not create a practice generally prevailing under section 5 of that Act. It is also not a binding general ruling under section 89 of Chapter 7 of the TA Act.” Therefore, while the tax guides can be helpful and informative, they are neither conclusive nor authoritative, and taxpayers should not rely on them as the sole basis for their tax decisions or actions.

With this in mind, taxpayers are well advised to consult the relevant legislation, interpretation notes, rulings, and case law, and seek professional advice where necessary, to ensure that they comply with the applicable tax laws and avoid any adverse consequences that may arise from a different or revised interpretation or application of the law by SARS.