Payment of tax during an objection regulated

In January, the Government Gazette contained a notice determining the date on which section 13(1) and 38(1) of the Taxation Law Second Amendment Act, 2009 will come into operation. Government Notice number 50, contained in the Government Gazette 33977, provided that February 2011 shall be the date on which Sections 13(1) and 38(1) of the Taxation Law Second Amendment Act, 2009 shall come into effect.

In order to ascertain the import of the abovementioned Government Gazette it is necessary to refer to the provisions of section 13(1) of the Taxation Law Second Amendment Act, 2009. Section 13(1) of the said statute substitutes the existing provisions contained in section 88 of the Income Tax Act of 1962.

The Government Gazette provides that the rules contained in the new version of section 88, which will be dealt with below, will come into operation on February 1. The South African Revenue Service (SARS) placed the Government Gazette's notice on its website when it was issued and, subsequently, issued a press release setting out the consequences of the notice and how SARS will deal with the new rules.

The old version of section 88 of the act regulated the payment of tax pending an appeal. It did not deal with when a taxpayer had lodged an objection and SARS had not made a decision on that objection. Section 88 of the act now regulates the payment of tax pending an objection or appeal lodged by a taxpayer.

It must be remembered that the Constitutional Court in Metcash Trading Limited vs the Commissioner: SARS 2001(1) SA 1109 (C) held that provisions of section 36 of the Value-Added Tax Act of 1991 (the VAT Act) which requires a taxpayer to “pay now, argue later" was constitutionally valid. Section 88 of the act is identical to section 36 of the VAT Act.

The Commissioner has the power to postpone the payment of tax pending the finalisation of an appeal. The old section 88 did not specify the criteria that SARS should take into account to determine whether a taxpayer should be granted a postponement of payment of tax pending finalisation of an appeal. The Constitutional Court held in Metcash that any decision made by the Commissioner on a taxpayer's request is subject to the rules of administrative justice, as a decision made under section 88 constitutes administrative action as envisaged in the constitution.

The new provisions of section 88 now deal with the powers of SARS to recover tax even though the taxpayer's objection or appeal has not been finalised.

Section 88 makes it clear that a taxpayer is entitled to request that SARS suspends the payment of any tax or a portion thereof due under an assessment when the liability to pay that tax is disputed by lodging an objection or appeal.

Section 88(3) of the act now provides that the Commissioner may suspend the payment of the tax in dispute by having regard to the following criteria:

• The compliance history of the taxpayer;
• The amount of tax involved;
• The risk of dissipation of assets by the taxpayer concerned during the period of suspension;
• Whether the taxpayer is able to provide adequate security for the payment of the amount involved;
• Whether payment of the amount involved would result in irreparable financial hardship to the taxpayer;
• Whether sequestration or Iiquidation proceedings are imminent;
• Whether fraud is involved in the origin of the dispute; and
• Whether the taxpayer has failed to furnish any information requested by the Commissioner under the act for a decision under section 88.

When a taxpayer receives an additional assessment or an assessment that does not agree with the tax return submitted by them to SARS, they have the right to lodge an objection to that assessment.

Left: Taxpayer's need to be aware of the requirements contained in section 88(3). IN determining whether to grant a taxpayer a suspension of payment, SARS must adhere to the rules of adminsitrative justice.

At the time that the objection is formulated the taxpayer should decide whether to pay the tax and know that if they succeed with their objection or appeal they will receive the tax paid by them together with interest. However, when a taxpayer chooses not to pay the tax, they will need to apply for the postponement of payment under section 88, and in the event that their objection does not succeed they will be liable for interest from the second date of the assessment issued to them.

Taxpayers need to be aware of the requirements contained in section 88(3) and should submit a formal application by way of a letter requesting postponement of payment pending finalisation of an objection or appeal, and show that each of the criteria mentioned above have been complied with.

Section 88(4) provides that SARS may refuse a request for postponement or may revoke a decision to suspend payment when SARS is satisfied that:

• The objection or appeal is frivolous or vexatious;
• The taxpayer employs dilatory tactics in the objection or appeal;
• On further consideration of the factors contemplated in section 88(3), the suspension should not have been given; or
• There is a material change in any of the factors described in section 88(3) upon which a decision to suspend the amount was based.

When a taxpayer succeeds with an objection and has paid the tax that was reflected on the additional assessment, he will receive the tax back from SARS together with interest thereon. Previously section 88 only required interest to be paid when the assessment was reduced pursuant to an appeal being allowed or conceded. The new section is more equitable than the old rules.

Section 36 of the VAT Act has been amended along the lines referred to above and should a taxpayer request a postponement of payment for a dispute under the act, the same criteria referred to above will need to be adhered to under the provisions of section 36 of the VAT Act.

When a taxpayer receives an additional assessment a decision must be made whether to lodge an objection against that assessment and, if so, a decision must be made whether to pay the tax due or alternatively to seek postponement of payment under section 88 or, in the case of a VAT matter, under section 36 of the VAT Act.

When SARS refuses a taxpayer's request to postpone payment subject to objection or appeal, the taxpayer may not object or appeal against that decision under the provisions of the act. The taxpayer would be required to pursue the matter in the high court on the basis that SARS has not complied with its obligations under the Promotion of the Administrative Justice Act of 2000. SARS, in determining whether a taxpayer should be granted a suspension of payment, must adhere to the rules of administrative justice and where it fails to do so a taxpayer should succeed in having the decision reviewed by the high court.

 Dr Beric Croome is a tax executive at ENS. This article first appeared in Business Law and Tax Review, March 2011, Business Day. Free image from ClipArt.

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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