The case for reliable, credible and authentic evidence in resolving tax disputes
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Whenever a taxpayer applies for condonation for the late submission of an objection, or seeks the remission of administrative penalties, a credible reason or reasonable excuse must be provided.
These reasons or excuses should not merely be extracted from the wording of a tax Act simply because a particular section appears applicable. Documentary evidence must also be submitted to support the taxpayer’s position. Such evidence should not be flimsy or superficial, but must be thorough, comprehensive and convincing.
A taxpayer may apply for an extension of the period within which to lodge an objection. The relevant provision governing such an application is section 218 of the Tax Administration Act. This section provides that the taxpayer must have experienced circumstances such as:
(a) a natural or human-made disaster;
(b) civil disturbance or disruption of services;
(c) serious illness or accident;
(d) serious emotional or mental distress; or
(e) serious financial hardship, such as the inability of an individual to meet basic living requirements.
However, merely selecting or “hand-picking” one of these grounds is not sufficient to justify the granting of an extension. The taxpayer must substantiate the claim with reliable and authentic evidence.
For example, where reliance is placed on serious illness, the taxpayer should be able to provide authentic medical reports from specialist doctors, together with supporting hospital records reflecting the dates of admission and discharge. Such documentation must be credible, detailed and capable of withstanding scrutiny.
Lutzkie v CSARS (1135/2023)
The purpose of this brief is not to regurgitate the narrative of the Supreme Court of Appeal of South Africa (SCA) court but apply aspect relating to what constitutes valid and credible documentary evidence.
The judgment in this case provides a sound legal basis for the requirement that taxpayers submit reliable, credible and irrefutable documentation in support of their tax positions. It is arguably one of the few recent cases that clearly articulates the importance of credible documentary evidence in tax disputes and emphasises that unsupported assertions by a taxpayer are insufficient.
Introduction to the court case
The matter was discussed in the SCA. Only the conclusion relating to documentary evidence is shared as it is an important component of this brief.
The issue on the table was whether an amount of approximately R1.67 million paid into Mr Lutzkie’s bank account during the 2007 year of assessment constituted taxable income or repayment of a shareholder’s loan.
The dispute began after SARS conducted what it termed a “lifestyle audit” into Mr Lutzkie’s financial affairs. During this investigation SARS identified a deposit of R1 670 099.85 paid into his bank account on 15 June 2006 from an offshore entity associated with the British Virgin Islands. SARS regarded the amount as undeclared taxable income and proposed including it in his gross income for the 2007 year of assessment. Mr Lutzkie disputed this conclusion and initially informed SARS that the amount represented a loan advanced to him by an entity known as Volaw Trust for the purpose of paying legal fees. In support of this version, an unsigned acknowledgement of debt was produced.
SARS was not persuaded by this explanation. On 28 May 2010 it issued an assessment including the amount as taxable income and imposed additional tax equal to 90 per cent of the disputed amount because of the understatement of income.
Mr Lutzkie objected to the assessment, arguing that the amount was not income but a loan. SARS rejected the objection, leading him to appeal to the Tax Court.
The ‘shifting’ facts
The Tax Court proceedings became important because the factual version advanced by Mr Lutzkie changed significantly over time. When the matter eventually came before the Tax Court, Mr Lutzkie amended his grounds of appeal. The original explanation that the amount was a loan for legal expenses was effectively abandoned.
Instead, a new case was advanced, namely that the payment represented repayment of a shareholder’s loan account held by him in a foreign company called M.C.M Development Limited. According to this revised version, Mr Lutzkie was the beneficial owner of shares in the offshore entity, and when the company was dissolved the remaining funds in the company were remitted to him as repayment of his shareholder’s loan.
A notable feature of the case was that Mr Lutzkie himself did not testify before the Tax Court. Instead, his case relied almost entirely on the evidence of his auditor, Mr Adriaan van Dyk. Mr van Dyk testified about investigations he conducted many years after the events in question. He relied heavily on emails exchanged with Ms Jody Gray, an employee associated with the VG Group in the Isle of Man, which had previously been linked to Volaw Trust.
The emails formed the foundation of the taxpayer’s argument. In one email Mr van Dyk suggested that the disputed payment represented repayment of a shareholder’s loan after the dissolution of the offshore company. Ms Gray replied by indicating that Volaw Trust had acted merely as an administrative service provider and that the funds “would have been” remitted through Volaw Trust’s client account after closure of the company’s bank account. In another email she stated that she believed it was “likely” that the funds were transferred as repayment of a shareholder’s loan rather than as a dividend.
The use of ‘words’
The courts attached considerable significance to the wording used in these emails. The SCA noted that Ms Gray repeatedly used speculative language such as “would have been” and “likely,” demonstrating that she lacked direct personal knowledge of the underlying facts. The emails therefore did not establish as fact that the payment represented repayment of a loan account. Instead, they amounted to speculation or opinion unsupported by documentary proof.
Evidence based on hearsay
The Tax Court was also troubled by the evidentiary difficulties surrounding Mr van Dyk’s testimony. SARS objected to large portions of his evidence on the basis that it was hearsay. The Tax Court repeatedly warned that hearsay evidence would not be admitted unless properly dealt with under the Law of Evidence Amendment Act. Despite these warnings, Mr van Dyk continued giving evidence based largely on what other people had told him or what he inferred from documents and conversations. No formal application was ever made to admit hearsay evidence in the interests of justice under section 3 of the Law of Evidence Amendment Act.
The SCA devoted substantial portions of its judgment to explaining the rules governing hearsay evidence. It stressed that hearsay evidence is generally inadmissible unless certain statutory requirements are satisfied. A party wishing to rely on hearsay evidence must clearly and timeously ask the court to admit it. This is necessary because fairness requires that the opposing party know the evidentiary case it must answer. The Court emphasised that litigation by ambush is unacceptable.
The SCA rejected the taxpayer’s argument that because SARS cross-examined Mr van Dyk extensively, the hearsay evidence somehow became admissible. The Court held that inadmissible evidence does not become admissible merely because it is not objected to strongly enough or because cross-examination takes place. Courts remain obliged to decide cases only on admissible evidence.
The Court Judgements
The Tax Court had concluded that the taxpayer failed to discharge the burden of proof resting upon him under section 82 of the Income Tax Act. That section placed the onus on the taxpayer to prove that an amount was exempt or not taxable. According to the Tax Court, Mr Lutzkie’s case “fell hopelessly short” of discharging this burden. The court found the evidence contrived and characterised the overall conduct as intentional obfuscation. Particular concern arose from the unexplained existence of the original acknowledgement of debt which had supported the abandoned “loan for legal fees” version. The Tax Court regarded this as suggestive of an attempt to fabricate evidence.
The Tax Court was equally critical of the taxpayer’s overall conduct during the audit and litigation process. It remarked that the strategy adopted appeared designed to delay and frustrate proceedings rather than provide a proper explanation for the source of the funds. The court was also influenced by the fact that the taxpayer himself elected not to testify, even though he was the person best placed to explain the nature of the payment and the offshore arrangements.
The Tax Court therefore upheld SARS’ assessment and confirmed that the disputed amount formed part of taxable income. It also upheld the 90 per cent penalty imposed by SARS.
Mr Lutzkie appealed to the Full Court of the Gauteng Division. The majority agreed with the Tax Court and held that the taxpayer failed to prove that the payment represented repayment of a shareholder’s loan. The majority accepted that the evidence of Mr van Dyk was largely hearsay and insufficient to discharge the taxpayer’s burden of proof.
However, the minority judgment took a different view. It held that once the hearsay evidence had effectively been received by the Tax Court, the court should have assessed its weight and probative value. The minority considered that the probabilities favoured the taxpayer’s version, especially because it was not uncommon for shareholder loans to be repaid upon dissolution of a company. The minority also attached significance to Ms Gray’s statements that the funds were likely repayment of a shareholder’s loan. In its view, SARS had not meaningfully challenged the substance of this evidence.
The SCA ultimately held a view that the Tax Court had never formally admitted the hearsay evidence. On the contrary, the record demonstrated repeated warnings that hearsay evidence was inadmissible unless properly introduced under the statutory framework. The SCA emphasised that speculative emails and second-hand explanations did not amount to affirmative evidence capable of discharging the taxpayer’s burden of proof.
The need to supply reliable and affirmative evidence
The Court referred to earlier authorities establishing that a taxpayer seeking to prove non-taxability must present reliable and affirmative evidence satisfying the court on a balance of probabilities. The SCA concluded that evidence of this quality was entirely absent in the present case.
In conclusion SCA confirmed that the taxpayer failed to discharge the burden of proving that the offshore payment was non-taxable. The evidence relied upon was speculative, hearsay and unsupported by reliable documentation or direct testimony from the taxpayer himself.
The judgment is significant for several reasons. It reaffirms the strict burden resting on taxpayers to prove that disputed amounts are not taxable. It also illustrates the dangers of relying on hearsay evidence and speculative offshore documentation in tax disputes.
Out-of-pocket medical expenses and how the principles of the case apply
Although the claiming of out-of-pocket medical expenses is not the direct subject of this court case, it nevertheless has relevance to the present discussion. Out-of-pocket medical expenses, also referred to as additional medical expenses, are frequently disallowed by SARS individual taxpayers submit their ITR12 income tax returns.
As the 2026 filing season approaches, it is appropriate that we look at this. In relation to the disallowance of medical expenses, the relevant provision is section 6B(4) of the Income Tax Act. The relevant extract provides as follows:
“For the purposes of this section, any amount contemplated in subsection (3) or the definition of ‘qualifying medical expenses’ that has been paid by the taxpayer …”
Particular attention should be given to the word “paid”. The term “paid” refers to amounts that have actually been settled and does not extend to amounts that are merely “due and payable”. The literal meaning of “due and payable” is fundamentally different from amounts that have in fact been paid. Amounts that are “due and payable” still remain unpaid. It is noted that certain well-known medical aid societies include remarks such as:
“Claims not recovered from the scheme: R18 000.00”
Taxpayers should appreciate that the phrase “claims not recovered from the scheme” does not constitute proof that payment was actually made. It merely reflects an amount not reimbursed by the medical scheme. The unrecovered amount, in itself, is not proof of payment.
Accordingly, even where an expense was incurred in a prior year of assessment, the deduction or credit is generally claimable only in the year in which payment was actually made.
The taxpayer must therefore be able to produce credible proof that the expense was paid. Copies of cheques, bank statements, credit card statements, or receipts issued by the supplier of medical goods or services would constitute tangible proof of payment.
In the absence of such evidence, the taxpayer may fail to discharge the burden of proof imposed by section 102 of the Tax Administration Act. A taxpayer claiming the medical expenses must be able to demonstrate that he or she actually paid the relevant amounts.
