SARS Refund Intercepted
09 October 2013
Posted by: Author: PwC
The cheque is (not) in the mail
Paying by cheque and using the mail to deliver the cheque can carry unpleasant risks. This is well illustrated in a recent decision of the Supreme Court of Appeal which dealt with the payment by SARS of a substantial refund.
SARS issued an assessment which reflected that a substantial refund was due to the taxpayer. The notice of assessment advised that the refund would be processed "soon”. The notice reflected that SARS did not have the taxpayer’s banking details and went on to state that, if it should be found when the refund was processed for payment that the bank details were incorrect, the refund would be paid by means of a cheque which would be sent to the taxpayer’s nearest post office for collection.
When the time for payment came, SARS drew a cheque on its bank account and delivered it in a sealed envelope to Secure Mail (a division of the South African Post Office), requesting that it be held for collection at the Menlyn Post Office. A collection notice was issued for delivery to the taxpayer.
The collection notice was intercepted by a fraudster, who, using a forged authorisation purporting to have been issued by a firm of chartered accountants, collected the cheque. Thereafter, the statutory records relating to the company at the Registrar of Companies were amended by removing the names of the directors of the taxpayer company and replacing them with the name of an accomplice of the fraudster. The accomplice then, purporting to be authorised to do so, opened a bank account in the name of the company, deposited the cheque which was duly honoured by SARS’ banker, and withdrew the funds over a short period of time.
The taxpayer contacted SARS and demanded payment. SARS refused and stated that it had paid the refund by mailing the cheque and that the risk of misappropriation had thereafter rested with the taxpayer.
The taxpayer did not take this lying down and instituted proceedings to compel payment. In the High Court, his claim was rejected. The Court held that the notification on the notice of assessment gave the taxpayer a choice as to the mode of payment and, by not supplying bank details, it had authorised that payment be made by cheque through the mail.
The decision was taken on appeal to the full bench of the North Gauteng High Court. In a split decision, the majority upheld the earlier decision, finding that:
". . the only plausible inference to be made was that there was a tacit agreement that remittance of payment should be done through registered post.”
Thus it was that the matter finally came before the Supreme Court of Appeal, in the matter of Stabilpave (Pty) Ltd v SARS  ZASCA 128 (26 September 2013).
The well-reasoned judgment of Meyer AJA, in which the other four Justices of Appeal concurred, summarised the law relating to the payment of a debt by way of delivering a cheque using the mail citing extensively from the judgment of Nienaber J in Mannesmann Demag v Romatex 1988 (4) SA 383 (D) at 389 -390.
The points made in that judgment indicated that when a debtor tenders payment by cheque and the creditor accepts it, payment is not effected until the cheque is honoured and the risk of misappropriation remains with the debtor. However, if the creditor stipulates a mode of payment, the risks inherent in the method stipulated lie with the creditor.
The law relating to payment through the post was then summarised in the following terms:
"It is clear from this passage that any agreement ‘about the particular mode of performance’ or ‘as to the manner of payment’ is reached only if the creditor stipulates (or requests or authorises) a particular mode of payment and the debtor accedes to the request.”
This then set the scene for considering the effect of the statement in the notice of assessment. Did the notice give the taxpayer a choice as to the mode of payment, and, if so, did the failure of the taxpayer to respond by providing banking details constitute an agreement that SARS was authorised to make payment through the post?
On examining the notice, Meyer AJA found the following:
- The notice informed the taxpayer of the position as at a particular date;
- It informed the taxpayer that a refund of the amount standing to the credit of its account would be paid in the near future;
- It advised the manner of payment, namely that payment would be by way of a cheque which could be collected from the nearest post office or by means of an electronic funds transfer;
- The banking particulars that would be used are those reflected on the notice, and if these were incorrect at the date of processing of the refund, payment would be made by cheque.
Importantly, Meyer AJA found (at paragraphs  and ):
" There is no invitation, expressly or by implication, to the taxpayer to furnish banking particulars should the taxpayer wish to be paid by means of electronic transfer. If there was such invitation one would have expected the taxpayer to be informed that payment would be effected by means of an electronic transfer, if valid banking particulars were available or furnished by the taxpayer. A further and clear indication that the notice does not afford a choice as to the manner of payment is the absence of a cut-off date on or before which the taxpayer might furnish its banking particulars to SARS. Instead, the taxpayer is informed that payment will be made soon. The notice is merely for the information of the taxpayer.
 The clear implication of the notice is an advice from SARS that the tax record of Stabilpave reflected no banking particulars and that payment would therefore be effected by means of a cheque through the post. No choice was afforded to Stabilpave. The method of payment was dictated by SARS. The mere fact that a creditor knows or expects to be paid by cheque through the post or that it does not raise an objection does not in itself give rise to an implied request or election by the creditor to be paid in such manner.”
It was therefore held that the risk of loss had not passed to the taxpayer, but had remained with SARS and judgment was given in favour of the taxpayer.
One can sympathise with SARS, which had used apparently secure means to ensure that payment reached the taxpayer, and had fallen victim to a fraud scam that bears the hallmarks of a sophisticated, collusive crime. However, the decision emphasises the principle that the creditor is the person who has the right to elect the manner in which payment may be made and that there must be clear evidence that the creditor has agreed to accept payment by cheque through the post.
This article was first published on pwc.co.za (Tax Synopsis: September 2013)