On 29 April 2016, the High Court of South Africa (Gauteng Division, Pretoria) issued a judgment to an application brought by Julius Malema, the president of the Economic Freedom Fighters, against the SARS’s Commissioner.
The battle between SARS and Malema began around 2014, when Malema was assessed for income tax in the amount of R18 192 295.36. Malema then requested to enter into a compromise offer with SARS as contemplated in section 200 of the Tax Administration Act No. 28 of 2011 (''the Act'') to pay R7 259 953.79 in full and final settlement of the tax liability. After 3 attempts, SARS and Malema signed a compromise agreement.
Chapter 14 of the Tax Administration Act deals with the waiving of tax debt and compromises on debt owed to SARS by taxpayers. The basis for the compromise is that, where a taxpayer is unable to pay the debt, SARS will secure the highest net return from the recovery of the tax debt. The term "compromise” is defined as an agreement:
- That is entered into between SARS and the taxpayer;
- Where the debtor undertakes to pay an amount which is less than the full amount of the tax debt due to SARS;
- In full settlement of the debt; and
- SARS agrees to write off the remaining portion of the debt permanently.
The request for a compromise must be initiated by the taxpayer and SARS requires detailed information in respect of the taxpayer’s financial affairs before making any decision as to whether the compromise will be accepted. When considering whether to enter into a compromise with the taxpayer, SARS will consider the history of payments by the taxpayer, past transgressions of tax law and the reasons why the taxpayer is unable to pay their debt in full.
According to the compromise offer, Malema was to make the final payment by November 2014 and, by 1 December 2014, Malema had complied with the agreement. On 13 March 2015, however, SARS contended that it was no longer bound by the compromise agreement, relying on the provisions of section 205 of the Act. SARS' simply stated in the answering affidavit that: ''…In view of the material breaches, nondisclosures and misstatements, SARS is of the view that it is not bound by the compromise agreement''.
The applicable provisions of section 205 the Act reads:
SARS is not bound by a compromise if:
- the debtor fails to disclose a material fact to which the compromise relates; or
- the debtor supplies materially incorrect information to which the compromise relates.
SARS stated that it was bound by the compromise agreement as Malema had failed in the following respects:
- To identity the donor that donated the money that financed part of the amount paid for the compromise and to ensure that the donations tax was paid on the said donation;
- Malema did not disclose his interest in certain immovable property;
- Malema failed to keep his tax affairs up-to-date by making payment of the previously acknowledged liability for the (additional) 2011 and 2012 assessments, and, in fact, he subsequently proceeded to object to the assessments and failed to declare donations received by his attorney, Brian Khan; and
- The Julius Sello Malema Trust, which paid the balance of the amount for the compromise agreement, had failed to keep its tax affairs in order.
Malema argued that the identity of the donor was of no consequence to SARS for purposes of the compromise agreement and contended that he had forgotten about the immovable property (even though the interest in the immovable property was mentioned in Malema's first request for a compromise).
SARS argued that the use of the word ''material'' within the context of section 205 was applicable to all information not disclosed by the taxpayer as material. In this regard, SARS' view is that it is entitled to full and accurate information in order to exercise its mandate to collect taxes. SARS further contended that the information submitted in terms of section 205 was either accurate or inaccurate. Therefore, any misstatement or failure to make a disclosure would automatically be material.
The Court did not make a judgment as to which interpretation of section 205 was correct as it referred the matter to trial. The Court did, however, consider SARS' argument, stating that SARS' argument is not logical as it would mean that any form of non-compliance with a compromise agreement, regardless of how insignificant it is, would result in a breach of the compromise agreement.
The Court further commented that the word ''material'', when properly construed within section 205, appears to convey that the misrepresentation or omission has to, to a significant extent, induce SARS to enter into a compromise agreement or to reject it. The Court held that the information provided either induces SARS to forego a debt or to enforce it and, only where the information provided is materially inaccurate or incomplete, will SARS be induced to forego a debt when it would have not done so had the information furnished been materially different.
The Court touches on something vital here: What happens in a situation where a taxpayer is unaware of certain facts and only becomes aware of those facts after an agreement of compromise has been entered into? Would this mean that SARS can enforce section 205 and claim that it is not bound by the compromise agreement?
It will be interesting to see what the Court says when the matter goes to trial and both parties lead evidence and arguments on the matter. The outcome, whichever way it goes, will determine the interpretation of the word ''material'' in relation to the provisions of section 205 of the Act – does any misstatement or non-disclosure qualify as material and consequently, allow SARS to cancel the compromise agreement, or will it depend on the circumstances of the case and the extent of the misstatement or non-disclosure?