Compromise of Tax Debts
19 July 2013
Posted by: Author: Graeme Palmer
Author: Graeme Palmer (Garlicke & Bousfield Inc)
Compromise is often said to be the best and cheapest lawyer. In certain circumstances the South African Revenue Services (SARS) can enter into a compromise agreement with a taxpayer, where the taxpayer undertakes to pay less than the full amount of a tax debt and SARS undertakes to permanently write off the remaining portion.
A senior SARS official, may upon request from a taxpayer, authorise a compromise if the purpose of the compromise is to secure the highest net return from the recovery of the tax debt, and it is consistent with the considerations of good management of the tax system and administrative efficiency.
When submitting a request for a compromise the taxpayer must include a detailed statement of his financial affairs with supporting documents. In considering the request SARS may have regard to the extent that the compromise may result in –
- savings in the costs of tax collection;
- collecting tax at an earlier date then would have been the case;
- collecting a greater amount of tax then would have been the case; or
- the abandonment of the taxpayer of some claim or right under a tax Act which has monetary value.
SARS does not have unfettered power to compromise. A compromise may not be concluded if –
- the taxpayers’ other tax affairs are not up to date;
- the taxpayer has entered into a compromise in the three years preceding the request for compromise;
- other creditors intend instituting insolvency proceedings against the taxpayer;
- other creditors will either be prejudiced or placed in a position of advantage relative to SARS;
- a compromise will adversely affect broad taxpayer compliance.
In order to compromise a tax debt an agreement must be concluded between SARS and the taxpayer. The agreement must set out the amount payable by the taxpayer in full satisfaction of the debt together with an undertaking by SARS not to pursue recovery of the balance of the debt. If the compromise is subject to any conditions these would also need to be included in the agreement.
Taxpayers must be mindful that SARS will not be bound by the compromise if material facts were not disclosed, or materially incorrect information was supplied to SARS to which the compromise relates. Further, SARS will not be bound if the taxpayer does not comply with a condition of the agreement or is liquidated before complying fully with a condition of the agreement.