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“Pay Now, Argue Later” Principle: When Must You Pay SARS?

03 June 2016   (1 Comments)
Posted by: Author: Ben Johannes
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Author: Ben Johannes (SAIT)

The best way to deal effectively with one of the most controversial principles in tax collection is to understand it’s intricacies. We delve into the "pay now, argue later principle” to prepare you should it arise as an issue for one of your clients. 

Background

In general commercial litigation where a claim for an outstanding amount is brought against a person, the person is not required to make payment to the claimant until a court has adjudicated on the issue.

However, in terms of tax matters SARS is entitled to collect amounts owing by a taxpayer in terms of an assessment. Although there are various remedies that the taxpayer can follow if they disagree with the assessment, in most instances the taxpayer will be required to pay the amount claimed by SARS regardless of the validity of their objection and hope to later reclaim the amount disputed. 

This is known as the "pay now, argue later” principle where the payment of tax is not suspended pending an objection or an appeal, unless directed otherwise. The reason for the existence of this principle is to ensure effective and prompt collection of taxes.

The "pay now, argue later” principle is firmly established in our law and has been codified as part of the Tax Administration Act. This article looks at the basis of the principle and what it means for when a taxpayer must pay SARS. It considers the various prescribed factors that must be taken into account, especially, SARS’ ability to collect a tax debt from third parties such as a taxpayer’s bank, as well as the use of jeopardy assessments.

Although controversial, the principle is firmly rooted in law

While the "pay now, argue later” principle is part of our tax law, it is true, ex facie, that if the taxpayer convinces SARS or a court that the assessment was incorrect, and that the tax was not owed to SARS, then the amount that was not due to SARS must be refunded with interest.

While the possibility of a refund may sound like an equitable solution, often payment under such circumstances may cause a taxpayer financial hardship as it may have to fund the tax payment for a number of years while it pursues its various remedies against SARS.

The "pay now argue later” principle was dealt with in the case of Metcash Trading Ltd v Commissioner, South African Revenue Service [2000] 62 SATC 84. In this case, the legality of the concept survived scrutiny by the Constitutional Court in the context of Value-Added Tax (VAT) when a taxpayer sought to impugn the VAT legislation contending it to be incompatible with section 34 of the Bill of Rights, namely the section that guarantees access to courts. The Constitutional Court upheld the pay-now, argue-later principle.

In the case of Capstone 556 (Pty) Ltd and Kluh Investments (Pty) Ltd v CSARS [2011] 74 SATC 20,Binns-Ward J held that:

"the considerations underpinning the ‘pay now, argue later’ concept include the public interest in obtaining full and speedy settlement of tax debts and the need to limit the ability of recalcitrant taxpayers to use objection and appeal procedures strategically to defer payment of their taxes”.

In his judgment, Binns-Ward J went on and said:

"There are material differences distinguishing the position of self-regulating vendors under the value- added tax system and taxpayers under the entirely revenue authority-regulated income tax dispensation. Thus the considerations which persuaded the Constitutional Court to reject the attack on the aforementioned provisions of the VAT Act in Metcash might not apply altogether equally in any scrutiny of the constitutionality of the equivalent provisions in the [Income Tax] Act”.

When the Tax Administration Act (TAA) No. 28 of 2011 was promulgated on 1 October 2012 the "pay-now-argue-later” principle was retained in section 164 of the TAA. 

However the TAA also contained a section that allows for the principle to be suspended. In terms  of section 164 (2) of the TAA, a taxpayer may request a suspension of the obligation to pay an amount of tax or a portion thereof under an assessment where the taxpayer disputes or intends to dispute the liability to pay that tax under the dispute resolution provisions contained in Chapter 9 of the TAA.

Section 164(3) provides that a senior SARS official must use their discretion when deciding when to suspend the payment of the disputed tax or a portion thereof having regard to the criteria as set out in section. It is therefore important that a taxpayer understands in which circumstances they may not have to make payment to SARS of the disputed tax. The section refers to the following relevant factors, including:

whether the recovery of the disputed tax will be in jeopardy or there will be a risk of dissipation of assets;

the compliance history of the taxpayer with SARS;

whether fraud is prima facie involved in the origin of the dispute;

whether payment will result in irreparable hardship to the taxpayer not justified by the prejudice to SARS or the fiscus if the disputed tax is not paid or recovered; or

whether the taxpayer has tendered adequate security for the payment of the disputed tax and accepting it is in the interest of SARS or the fiscus.

In analysing section 164(3) (a) – (e)of the TAA it is clear that the list of criteria is not exhaustive. As explained by Croome & Olivier (2015:379), because of the word "including” in section 164(3)(a) – (e) of the TAA it can be argued that the criteria in the list are not the only relevant factors to be considered. Further relevant factors can be considered when exercising SARS’ discretion, which means that both the taxpayer and SARS will be able to consider additional relevant factors not listed in this subsection. 

It will most likely depend on the specific circumstances and facts of each matter for SARS to consider further factors which will be relevant. 

SARS extraordinary powers to collect outstanding tax debt from third parties

In terms of section 179(1) of the TAA, a senior SARS official may require third parties who hold money of a taxpayer, for example a pension or a salary, to pay the money to SARS if the owner of the money has debts. If the third party parts with the money contrary to the notice, section 179(3) stipulates that a party becomes personally liable for the money.

The payment by a third party, for example the taxpayer’s bank to SARS in terms of section 179 of the TAA, does not stem from the debt owed by the debtor, but because of the obligation that this section places on the bank compelling them to satisfy the debt of the taxpayer.

Section 179 of the TAA only applies to amounts of money owed or held. Thus if the nature of the relationship between the bank and taxpayer is that the bank owes the taxpayer money or holds such money invariably the bank would have to comply with the payment instruction in section 179(3) of the TAA.

Furthermore, if the nature of the right is merely a contractual claim for something other than money or that it only becomes money owed on maturity, it becomes questionable whether SARS can enforce any rights against the financial institution until such time as the rights become enforceable.

Financial institutions, especially banks, have accused SARS of not following its own processes when collecting outstanding tax debt. In many instances banks had to create a dedicated department to deal with the huge increase in requests for payments.

Taxpayers are often unaware they have outstanding tax debt. This is because SARS does not contact the taxpayer before the third-party is appointed to collect the debt. However, if a taxpayer wants to object to a tax liability the taxpayer must request a suspension of payment first (Section 164 of the TAA). It should be kept in mind that objection alone does not suspend the requirement to pay.

Jeopardy Assessments

Jeopardy assessments (as provided in section 94 of the TAA), also known as protective assessments, may be issued in advance of the date on which the return is normally due. This is to secure the early collection of tax that would otherwise be in jeopardy or where there is some danger of tax being lost by delay. 

In terms of section 94 (3) of the TAA, SARS bears the onus of proving that a jeopardy assessment is reasonable under the circumstances. A taxpayer has the right to take the matter on review to the High Court in terms of section 94 (2) of the TAA. Raising of a jeopardy assessment at a stage before any tax return is due is clearly a drastic measure.

Conclusion

The principle of "pay now argue later” as enforced by SARS has long been a contentious one.Taxpayers should also pay attention to correspondence from SARS and should not ignore SARS requests, but rather communicate any difficulties as SARS might amend the timeframes for payment. It is clear that taxpayers need to know what their rights are and when they should take legal action.

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This article first appeared on the May/June 2016 edition on Tax Talk.

Comments...

Kenneth J. Swettenham says...
Posted 10 June 2016
I think most of us, as Tax Practitioners, understand the "Pay now, Argue Later" principle and way it is done that way. The problem that I have consistently had over many years, is trying to explain it to a client who "owes" SARS money that is currently being disputed. Most clients just don't have the funds to pay upfront, especially if it's an amount that shouldn't have to be paid in the first place. Yes, SARS does give clients a chance, if you apply for a suspension of payments, in most instances but this all adds to the volumes of work. It does on the face of it, appear to be a very unfair system.

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