Whether wrong or right, pay now
07 February 2013
Posted by: SAIT Technical
By Dylan Buttrick (associate at Norton Rose)
Dylan Buttrick discusses the "pay now, argue later" principle when a taxpayer is involved in a dispute with SARS. This principle is contained in section 164 and 172 - 176 of the TAA. Also discussed is the ability of SARS to raise the so-called "jeopardy assessments" in certain circumstances.
A taxpayer entering into a dispute with the Commissioner regarding an assessment needs to consider the practical implications of which of what is popularly described as the "pay now, argue later” principle. Somewhat predictably, this principle, which was previously dealt with in sections 88, 91 and 92 of the Income Tax Act (Act), means that the payment of any outstanding tax is not suspended by virtue of the fact that the correctness of an assessment may be subject to a dispute. 1 October 2012, the general commencement date of the Tax Administration Act, 2011 (TAA) saw this principle, which remains largely intact, moving to sections 164, and 172 to 176 of the TAA.
Because the TAA applies to all Acts under the supervision of SARS, the principle applies to them all. While this statutory power may appear draconian, the principle has passed constitutional muster, and subsequent court decisions confirm that the prospect of a constitutional attack is "remote”. What then are the basic mechanisms of this principle? Previously, section 88 of the Act confirmed that the liability to pay tax was not suspended pending disputes unless the Commissioner directed otherwise. However, section 88 allowed the taxpayer to request that the Commissioner suspend the payment of tax. To this end, the Commissioner could suspend tax having regard to, inter alia: · the compliance history of the taxpayer; · the amount of tax involved; · the provision of adequate security by the taxpayer; · whether the payment of the amount involved would result in irreparable financial hardship to the taxpayer and whether sequestration and liquidation proceedings were imminent; · whether fraud was involved in the origin of the dispute; or · whether the taxpayer had failed to furnish any information requested by the Commissioner for the purposes of making a decision under section 88. From the outset a taxpayer had to understand that the decision to suspend payment under section 88 was at the discretion of the Commissioner, who had recourse to the above statutory list of factors to guide him in applying this discretion.
It is not a negotiation process. The taxes remained due and payable, which was of particular concern as section 88 did not require the Commissioner to halt collections pending a decision to suspend payment. Having said that, SARS would generally hold off collections when a legitimate request for suspension was being considered.
In addition, any grant of a suspension to make payment could be made subject to appropriate conditions (including the ability to review a previous decision). The Commissioner was also statutorily entitled to revoke a decision to suspend payment subject to certain criteria. Where the quantum of taxes is significant, it is our experience that the Commissioner is willing to allow a suspension provided the taxpayer furnishes adequate security on appropriate terms. In offering any security, the following should be considered by the taxpayer: · the security offered should be appropriate. For example a guarantee by an already over indebted entity will be of no real value to SARS. In contrast, the pledging of listed shares, third party guarantees or other liquid assets may be appropriate in the circumstances;
· the value of the security offered should, at a minimum cover the capital and interest portion of outstanding taxes; and
· the period for which the suspension will remain is often critical. In this regard a taxpayer would prefer the suspension to run as long as possible, ideally until the final determination by the courts. Obviously, SARS would tend to prefer the counter position where payment is suspended until determination by the tax court in order to ensure collection of the taxes as soon as possible following a judgment in its favour.
However, a taxpayer should never assume that their request will be successful. Previously, while the debt remained payable a taxpayer had to be wary of section 91(1)(b), a powerful collection mechanism in the Commissioner's arsenal, allowing him to file a statement with a court, which had the effect of a "civil judgment” against the taxpayer. Essentially, the Commissioner short-circuited the judicial process as the judgment was effected by the filing of the statement without recourse to an actual court application. The Act did not require the Commissioner to give notice to the taxpayer before utilising this collection mechanism. Needless to say, this sometimes resulted in significant commercial consequences, especially where a civil judgment against the taxpayer constituted a default under any security or other commercial agreement to which the taxpayer was a party. To add to the taxpayer's worries, in terms of section 92 the taxpayer could not challenge the "correctness” of the statement. There are divided court decisions on whether the Commissioner could rely on section 91 despite any pending objection or appeal.
However, we caution that the Commissioner has previously obtained various international opinions on the constitutional validity of the section 91 collection mechanism which confirm that it is both justifiable and reasonable in a democratic society where the collection of tax is fundamental to the functioning of the State. Should the Commissioner decide to reject a taxpayer's submission for suspension, that decision constitutes administrative action, and is capable of judicial review in terms of the Promotion of Administrative Justice Act, 3 of 2000 (PAJA). This review is of limited scope and in its simplest form means that if the Commissioner fails to properly apply his mind and reasonably consider the taxpayer's request for suspension, a decision can be challenged on the grounds that it violates the taxpayer's right to administrative justice. However, unlike judicial review of administrative action by other governmental departments, the Commissioner is statutorily obliged to collect tax, which is in itself a constitutional imperative for the proper functioning and development of the country. Accordingly, any decision not to suspend the payment of tax pending a dispute against a single taxpayer needs to be weighed against the greater public need for the proper and timeous collection of funds for the fiscus. What is the impact of the TAA?
The principle contained in the Act remains and is incorporated into the TAA. The decision to suspend is now made by a Senior SARS official and, in an interesting departure from section 91, section 164(6) of the TAA now states that SARS cannot commence recovery proceedings during the period that SARS first receives a request for suspension (or a suspension is revoked) until ten business days after SARS issues a decision in relation to the suspension or revocation. Further, in terms of section 172 of the TAA (essentially incorporating section 91 of the Act), SARS must give taxpayers ten business days notice before filing any statements with a court. However, SARS is not required to give the taxpayer prior notice if it believes it would prejudice the collection of tax.
The hard reality is that any taxpayer entering into a dispute with SARS, will be "punching above their weight” should SARS elect to utilise the full powers encompassed in the "pay now argue later” principle despite these changes.
More concerning is that the TAA introduces the concept of "a jeopardy assessment”, which in its simplest terms allows SARS to raise an assessment in advance of the date on which any return is normally due, in order to secure the collection of tax that would otherwise be in jeopardy. If the new jeopardy assessment is read with the "pay now, argue later” principle, this potentially enables SARS to collect taxes on the basis of an assessment for which no return has been submitted. Having said that, the TAA does allow for a jeopardy assessment to be reviewed by a High Court on the grounds that it is excessive, or that circumstances justifying a jeopardy assessment do not exist. In these cases, SARS (as opposed to the taxpayer) bears the burden of proving that the jeopardy assessment is reasonable under circumstances. Therefore, the TAA does provide the taxpayer with alternative relief in the case of jeopardy assessment.