SARS: Waiving and compromising tax debts
23 May 2013
Posted by: Author: Dave Honeyball (Grant Thornton)
Source: Dave Honeyball (Grant Thornton)
Chapter 14 of the Tax Administration Act deals with the waiving of tax debt and compromises on debt owed to SARS by taxpayers. It may come as a surprise that SARS is willing to write off or reduce debts owed to them, but in specific situations they do indeed – subject to the provisions discussed further below.
The term "compromise” is defined as an agreement;
- that is entered into between SARS and the taxpayer
- where the debtor undertakes to pay an amount which is less than the full amount of the tax debt due to SARS
- in full settlement of the debt
- SARS agrees to write off the remaining portion of the debt permanently.
The basis for the compromise is that, where a taxpayer is unable to pay the debt, SARS will secure the highest net return from the recovery of the tax debt. The request for a compromise must be initiated by the taxpayer and SARS requires detailed information in respect of the taxpayer’s financial affairs before making any decision as to whether the compromise will be accepted. When considering whether to enter into a compromise with the taxpayer, SARS will consider the history of payments by the taxpayer, past transgressions of tax law and the reasons why the taxpayer is unable to pay their debt in full.
A compromise may not be entered into where:
- The debtor was party to an agreement with SARS to compromise an amount of debt within a period of three years before the current request for compromise;
- The debtor’s tax affairs are not up to date;
- Another creditor has communicated its intention to, or has, initiated liquidation or sequestration proceedings against the debtor;
- The compromise will prejudice other creditors, or if the other creditors will be placed in a position of advantage relative to SARS;
- It may adversely affect broader tax compliance;
- The debtor is a company or trust and SARS is unable to take action against or recover the debt from the personal assets of the persons related to e entity.
These provisions are quite useful in a business rescue situation where SARS may be asked, together with other creditors, to enter into a reduction of debt in order to keep a business afloat as part of restructuring the past debt of the business.
SARS may also decide to waive an amount of tax debt temporarily if it is considered uneconomical to pursue the debt. In this situation, the debtor is not absolved from the liability but is given a reprieve from paying the debt for a specific period. SARS may decide to withdraw its decision to waive of the debt if it believes that circumstances have changed to make pursuing the debt feasible.
Hopefully taxpayers won’t find themselves in situations where they need to compromise their tax debt, but should it be necessary, they are advised to approach SARS for a compromise, with the assistance from an experienced tax consultant.
In our experience, SARS is willing to enter into compromises where the taxpayer is in financial distress and has no realistic possibility of settling its tax debt which will bring the taxpayer immediate financial relief.