Monday, 14 February 2011

SARS told to use a draconian tax law with care

Taxpayers are no doubt familiar with the "pay now,argue later" rule that was held to be constitutionally valid in the case of Metcash Trading Limited v Commissioner for S out h African Revenue Service and Another. That case decided that the commissioner's powers to insist on the payment of tax, even though an objection had been lodged against assessments issued, was valid and that it is necessary for the taxpayer to first pay the tax in dispute and then to pursue the objection on appeal.

The Constitutional Court did make the point, though, that the commissioner is empowered to agree to the postponement of tax pending the finalisation of an appeal and that such decision must be made in compliance with the rules of administrative justice flowing from the constitution and the provisions contained in the Promotion of Administrative Justice Act.

Section 91 of the Income Tax Act gives the commissioner the power to obtain judgment against a taxpayer by filing a written statement with the registrar without issuing a summons to the taxpayer and without prior notice being issued to the taxpayer.

Receiver can establish an estimated
assessment without notifying the taxpayer.
Judge Spilg warns SARS to use
this draconian law with caution.
Sometimes the first time the taxpayer becomes aware of a judgment against him or her is when they apply for a loan from a bank or for a new credit card or are informed that their credit rating is poor because a judgment has been taken against them by SARS.

The provisions of section 91(1)(b) of the act were considered by Judge Spilg in the case of MA Sepataka v Commissioner for the South African Revenue Service in the South Gauteng High Court, Johannesburg, in August, last year.

It was indicated in the judgment that on March 17 2010 the commissioner filed a notice in terms of section 91(1)(b) of the act with the registrar of the South Gauteng High Court that was approved by a SARS official on March 16. In terms of the notice the commissioner withdrew the statement filed under section 91(1)(b) of the act, whereby judgment had previously been granted against Sepataka on December 1 2005.

Sepataka applied for the rescission of the judgment granted to SARS on the grounds that he had not previously been made aware of the judgment. He only became aware of the judgment after he applied for a mortgage bond and a credit check disclosed the outstanding monetary judgment against him.

When a taxpayer fails to submit a return or does not complete a proper tax return the commissioner may estimate the taxpayer's income under section 78 of the act. The commissioner was of the opinion that Sepataka had not disclosed all income derived by him as required under the act and, as a result, on April 22 2004 raised an additional assessment of R702 215 for the 2001 year of assessment and R597 175 for the 2002 year of assessment.

SARS often identifies unexplained income by identifying unexplained increases in a taxpayer's net assets from one year to the next.

Typically, SARS will begin the capital reconciliation exercise by determining the taxpayer's assets at the beginning of the tax year and deducting that from the taxpayer's net assets at the end of that year.

When the increase in assets is disproportionate in relation to the taxpayer's income and living expenses, SARS will treat the shortfall as unexplained income and seek to tax that amount as taxable income.

The act gives the commissioner the power to estimate assessments and to obtain judgments against taxpayers based on an estimated assessment. These powers are aimed at ensuring that taxpayers properly disclose the income derived by them for tax purposes.

Judge Spilg, however, made the following point:"The provision however is draconian and should therefore be exercised with care by properly experienced and suitably qualified personnel, since it may otherwise be reduced to an arbitrary guesstimate with grave consequences to the taxpayer. This is so because the commissioner is entitled, even if there is an objection or an appeal, to seize and realise assets, including money standing to the credit of the taxpayer's bank account, notwithstanding that these actions may jeopardise the taxpayer's cash flow and business."

Sepataka was dissatisfied with the estimated assessments issued by SARS and formally objected to those assessments on June 27 2005.

Although the taxpayer had objected to the assessments the commissioner relied on the powers contained in section 91 of the act to apply, without notice, for judgment by filing a notice on November 7 2005 with the Registrar of the South Gauteng High Court and judgment was granted against the taxpayer on December 1 2005.

It is stated in the judgment that on August 29 2007 that SARS allowed the taxpayer's objection in respect of both years of assessment. Judge Spilg points out the estimate made by SARS was incorrect.

The judge was satisfied in Sepataka's case that the documents submitted by the taxpayer's chartered accountant disclosed a bona fide defence to the notice relied upon by the commissioner to obtain judgment under section 91(1)(b) of the act, and that it was incompetent for SARS to apply for judgment on the basis that the assessments were under objection. It is interesting to note that Judge Spilg pointed out that the issue of collecting interest and penalties pending an objection or appeal, may be on a different footing to the principal amount of tax due by a taxpayer. Judge Spilg decided that it is incompetent, when regard is had to the rights of objection and appeal, for SARS to obtain judgment against a taxpayer prior to the finalisation of the objection.

Judge Spilg reached the conclusion that the judgment against Sepataka could not lawfully be obtained by virtue of the objection being lodged against the assessment and was therefore a nullity, and for this reason the judgment was set aside.

The court held that the current statement filed by the commissioner for judgment under section 91(1)(b)falls short of providing adequate safeguards against errors occurring in the future.

This view of the court must be supported, as concerns arise when, for example, a taxpayer submits an income tax return reflecting a loss derived from trading for the year, whereas SARS treats that loss as income and levies income tax thereon, and subsequently seeks to recover that incorrectly assessed amount of tax and proceeds to file a statement at the court and secure a judgment against the taxpayer.

It is important, therefore, that safeguards are in place to ensure that the assessments issued by SARS are correct and, furthermore, that no objection or appeal is pending against the assessments issued by SARS before judgment is taken against a taxpayer.

As a result, the judge granted an order against SARS setting aside the judgment granted against Sepataka on November 7 2005. It is hoped that SARS will take heed of the comments made by Judge Spilg and introduce the safeguards in the statements filed in courts in future when seeking judgment under section 91(1)(b) of the act.


Dr Beric Croome is a tax executive at ENS. This article first appeared in Business Day’s ‘Business Law & Tax Review’ February 2011.
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