Unresolved aspects of the “pay now argue later" rule
07 February 2012
Posted by: SAIT Technical
Unresolved aspects of the "pay now argue later” rule
PWC Synopsis - RC Williams
SARS would have taxpayers believe that there is no room for discussion or debate on the existence or the scope of the rule, on the basis that, in Metcash Trading Ltd v CSARS 2001 (1) SA 1109 (CC) the Constitutional Court gave the rule its imprimatur, and declared that it did not infringe the Bill of Rights. That is a convenient half truth and, as a Yiddish proverb reminds us, a half truth is a whole lie. The fact is that, in Metcash, the Constitutional Court pronounced on the constitutionality of the pay-now-argue-later rule in the context of the Value-Added Tax Act, but said nothing at all about its constitutionality in the context of the Income Tax Act. It is by no means a foregone conclusion that the court would have reached the same conclusion if income tax had been in issue, for there are many significant differences between the two taxes, not the least being that there is far more scope for genuine disputation about income tax liability than liability for VAT.
On-going confusion and misunderstandings
If anyone doubts the level of confusion and misunderstanding regarding the pay-now-argue-later rule in the context of income tax, he need only look to the two High Court decisions, a mere year apart, in Mokoena v CSARS 2011 (2) SA 556 (GSJ) and Capstone 556 (Pty) Ltd v CSARS  ZAWCHC 297, which came to diametrically opposite conclusions on key aspects of the rule. In the context of income tax, the crux of the pay now-argue later rule lies in the interplay between section 88(1) and section 91(1) of the Income Tax Act Section 88(1) provides that - ‘Unless the Commissioner otherwise directs .. a) the obligation to pay any tax chargeable under this Act; and b) the right to ... recover any tax chargeable under this Act, shall not be suspended by any objection or appeal or pending the decision of a court of law ...’Section 91(1) provides that - (a) ... (b) If any person fails to pay any tax or any interest ... when such tax or interest becomes due or is payable by him, the Commissioner may file with the clerk or registrar of any competent court a statement certified by him as correct and setting forth the amount of the tax or interest so due or payable by that person, and such statement shall thereupon have all the effects of, and any proceedings may be taken thereon as if it were, a civil judgment lawfully given in that court in favour of the Commissioner for a liquid debt of the amount specified in the statement. (c) The Commissioner may institute proceedings for the sequestration of the estate of any taxpayer and shall for the purposes of such proceedings be deemed to be the creditor in respect of any tax due by such taxpayer or any interest payable by him ...
The conflicting decisions in two recent High Court judgments
Thus, the nub of section 88(1) is that a taxpayer’s obligation to pay tax is not suspended merely because he has lodged an objection or appeal against an income tax assessment, and section 91(1)(b) says that, if a person fails to pay tax when it is due (namely, on the date for payment set out in the relevant assessment), SARS can take "judgment” against that person merely by filing a statement, certified as correct, with a clerk or registrar of the court setting out the amount of tax that is due. However, the decision in Mokoena held that, if a taxpayer lodges an objection against an assessment, SARS cannot thereafter take "judgment” against that taxpayer in terms of section 91(1)(b), but must await the determination of the objection and any appeal to the Tax Court or the superior courts. The decision in Capstone held that this conclusion rested on an incorrect interpretation of the Income Tax Act; that a "judgment” taken by SARS in terms of section 91(1)(b) was not a true judgment at all, in that it did not resolve any dispute between SARS and the taxpayer, does not have "the rights-determining character of a judicially delivered judgment” and is a mere recovery provision, no different from the other recovery provisions in the Act. Consequently, a taxpayer had no legal basis for interdicting SARS from taking "judgment” in terms of section 91(1)(b) because, as a matter of law, the amount of tax, as recorded in the assessment, was in fact legally payable. The decision in Capstone is much more persuasive than that in Mokoena, but they are both judgments of a single judge of the High Court, and therefore both have the same precedential authority, which means that lower courts in their respective areas of jurisdiction - including the TaxCourt - are bound by these two disparate decisions. Strangely, SARS has apparently not taken the Mokoena decision on appeal. Indeed, the reported judgment in Capstone makes the extraordinary observation (at para) that "there was no appearance on behalf of the Commissioner” when Mokoena’s case was argued in the High Court and that Spilg J "was therefore deprived of the benefit of argument” in those proceedings from any party other than the taxpayer.
Suspension of the obligation to pay a disputed amount of income tax
The real issue -on which neither of these decisions provides any guidance - is the way in which the courts are going to interpret the provisions of section 88(3), in terms of which the Commissioner is required to decide, on the basis of the stipulated criteria, whether to grant the taxpayer’s request to suspend the obligation to pay thedisputed tax until the issue has been judicially determined. In its current form, section 88(3) provides that -The Commissioner may suspend payment of the disputed tax having regard to a) the compliance history of thetaxpayer; b) the amount of tax involved; c) the risk of dissipation of assets by the taxpayer concerned during the period of suspension; d) whether the taxpayer is able to provide adequate security for the payment of the amount involved; e) whether payment of the amount involved would result in irreparable financial hardship to the taxpayer;f) whether sequestration or liquidation proceedings are imminent; g) whether fraud is involved in the origin of the dispute; or h) whether the taxpayer has failed to furnish any information requested by the Commissioner in terms of this Act for purposes of a decision under this section. The Act gives no guidance as to the relative weight of these criteria. The relevance of some criteria - for example "the amount of tax involved” is not clear; is a large amount of disputed tax a pointer toward granting a suspension or refusing a suspension of the obligation to pay?
The probable attitude of the courts toward suspending the obligation to pay a disputed amount of income tax
It seems likely that - if the Commissioner makes a decision adverse to the taxpayer, in other words, decides not to suspend the obligation to pay the disputed tax, and the taxpayer then takes that decision on review in terms of the Promotion of Administrative Justice Act - the court will take as its starting point the base principle that tax is payable despite any objection or appeal, and that the pay-now-argue-later rule must prevail unless there is a substantial reason to deviate from the rule. The most obvious example of a substantial reason to deviate fromthe rule is that immediate payment of the disputed tax would cause "irreparable financial hardship” tothe taxpayer. The adjective "irreparable” sets the bar very high, and it is probably an inappropriate word anyway, since any amount of financial loss is inherently reparable by an award of damages. The court is likely to take the view that the contrary interpretation is untenable - namely that the default position, as it were, is that the obligation ought to be suspended unless there is substantial reason to decide otherwise, for example, if there is a significant risk of the dissipation of assets during any period of suspension. In the Metcash decision the court took cognisance of "the public interest in obtaining full and speedy settlement of tax debts in the overall context of the Act” and the "public policy considerations in favour of a general system whereby taxpayers are granted no leeway to defer payment of their taxes”. If the general rule were that a request for suspension of theobligation to pay a disputed amount of income tax should be granted, many taxpayers would probably leap on the bandwagon and procure the postponement of the obligation to pay months or years until judgment had beengiven in the final appeal against the assessment. The detrimental impact on tax collections if a postponement of the obligation to pay disputed tax was, in effect, there for the asking, is beyond doubt, and this is a factor that is likely to weigh heavily with a court.