Pay now argue later – back in the spotlight Two recent decisions
08 July 2011
Posted by: SAIT Technical
PWC Tax Synopsis - June 2011
Pay now argue later – back in the spotlight Two recent decisions in the Western Cape have again thrust the "pay now argue later” issue into the public eye.
There is a conflict between the desire of SARS to collect the revenue that it assesses to tax and the reluctance of the taxpayer to make payment where the assessment is disputed. A distinction should also be drawn between the case where the taxpayer initiates a dispute in order to delay having to make payment and the situation in which the dispute is grounded on well-founded issues, where the taxpayer is concerned that amounts will be tied up over a lengthy period of time, but are likely to be found not to have been correctly assessed.
Prior to 1 February 2011 the position was that the obligation to pay was suspended until an objection had been determined – although this was not SARS’ practice, it appears that the ‘pay now argue later’ principle only applied from the commencement of an appeal. However, once the objection was disallowed, the obligation to pay was not suspended and the taxpayer could only obtain suspension by making application for an extension of time within which to pay. Our courts have indicated that the power to grant an extension should be exercised reasonably having regard to the circumstances of the matter.
The Income Tax Act was amended with effect from 1 February 2011 to deal with situations where a taxpayer may apply for the suspension of a demand for payment of tax pending the determination of a dispute. The position now is that the obligation to make payment of assessed taxes is not suspended by an objection or pending the decision on an appeal. However, the taxpayer may request SARS to suspend the payment of the tax or a portion of the tax where the amount is subject to dispute.
In making a decision on a request, SARS is required to consider a number of prescribed factors, largely pertaining to the taxpayer’s compliance record, financial position and the risk of non-recovery. Any decision may be revoked if the objection or appeal is vexatious or frivolous, if the taxpayer is dilatory in prosecuting the objection or appeal, if, on reconsideration, the suspension should not have been granted or if the circumstances which had warranted a suspension may have changed materially.
The promulgation of the new provisions also provided that any suspensions granted prior to 1 February 2011 would expire on 1 August 2011 unless renewed before that date. In one of the matters that came before the High Court (Kluh Investments (Pty) Ltd v C:SARS and The Minister of Finance Case No. 8274/2011), a suspension had been granted under the old dispensation on 20 December 2010 pending the determination of a matter on appeal, provided that the appeal was lodged timeously and subject to the condition that it might be reviewed at any time.
However, after 1 February 2011, the decision was withdrawn and payment of the tax was demanded. The taxpayer sought an order in the High Court declaring that the provisions of the Income Tax Act prior to its amendment effectively on 1 February 2011 did not give SARS the right to review and withdraw a suspension of its right to demand payment until the appeal had been finally determined. Therefore, it argued, the suspension would only expire on 1 August 2011 or on the earlier determination of the appeal. The argument relied on the fact that the new provisions specifically included a power of revocation, whereas the old provisions did not.
The Court determined that the grant of a suspension under the old provisions was at the direction of the Commissioner. The obligation to pay was enforceable "unless the Commissioner otherwise directs”. The Court pointed out: "It is clear in my view that the power to direct necessarily includes the power to formulate the content of the relevant order or instruction. I can think of no reason why the content of the direction should not include a reservation of the right to revisit its terms; particularly having regard to the factors that would have to weigh with the Commissioner in determining it.” It was therefore found that the decision to withdraw the suspension was permitted under the previous legislation notwithstanding that no specific provision to this effect was contained in the law.
Taxpayers who have agreements for a suspension of payment of assessed income tax that were issued prior to 1 February 2011 should ensure that they submit applications for extension no later than 31 July 2011.