Taxpayers are no doubt aware of the “pay now, argue later” principle which was held to be constitutionally valid in the case of Metcash Trading Limited v Commissioner for South African Revenue Service and Another [2001] (1) SA 1109 (CC). That case decided that the Commissioner: South African Revenue Service’s (“the Commissioner’s”) powers to insist on the payment of tax, even though an objection had been lodged against assessments issued, was valid and that it is necessary for the taxpayer to first pay the tax in dispute and then to pursue the objection or appeal. The Constitutional Court did make the point though, that the Commissioner is empowered to agree to the postponement of tax, pending the finalisation of an appeal and that such decision must be made in compliance with the rules of administrative justice, flowing from the Constitution of the Republic of South Africa, Act 108 of 1996, as amended (“the Constitution”) and the provisions contained in the Promotion of Administrative Justice Act No. 3 of 2000.

Section 91 of the Income Tax Act, Act 58 of 1962, as amended (“the Act”) confers on the Commissioner a power to obtain judgment against a taxpayer by filing a written statement with the Registrar, without issuing a summons to the taxpayer and without prior notice being issued to the taxpayer. Section 91(1)(b) of the Act provides as follows:

“If any person fails to pay any tax or any interest payable in terms of section 89(2) or 89quat 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.”

Sometimes the first time that the taxpayer becomes aware of a judgment having been taken against him or her in this manner is when they apply for a loan from a bank or a new credit card or are informed that their credit rating is poor by virtue of the fact that a judgment has been taken against them by the South African Revenue Service (“SARS”).

The provisions of section 91(1)(b) of the Act were considered by Spilg J, in the case of MA Sepataka v Commissioner for the South African Revenue Service (Case No. 05/20445 decided on in the South Gauteng High Court, Johannesburg on 31 August 2010, as yet unreported) (“Sepataka”).

It was indicated in the judgment that on 17 March 2010 the Commissioner filed, with the Registrar of the South Gauteng High Court, a notice in terms of section 91(1)(b) of the Act, which was approved by a SARS official on 16 March 2010. In terms of the notice, the Commissioner withdrew the statement filed under section 91(1)(b) of the Act, whereby judgment had previously been granted against Sepataka on 1 December 2005 against the Applicant.

Sepataka applied for the rescission of the judgment granted to SARS on the grounds that he had not previously been made aware of the judgment. He only became aware of the judgment after he applied for a mortgage bond and a credit check revealed the outstanding monetary judgment against him. The Commissioner obtained judgment against the taxpayer by relying on the provisions of section 91 of the Act, which have been referred to above.

When a taxpayer fails to submit a return or does not complete and submit a proper tax return, the Commissioner may estimate the taxpayer’s income under section 78 of the Act. In terms of section 78(2) of the Act, any estimate made by the Commissioner is subject to objection and appeal under sections 81 and 83, 83(A) and 86(A) of the Act.

The Commissioner was of the opinion that Sepataka had not disclosed all income derived by him as required under the Act and, as a result, on 22 April 2004, raised an additional assessment of R702 215 for the 2001 year of assessment and R597 175 for the 2002 year of assessment.

SARS often identifies unexplained income by identifying unexplained increases in a taxpayer’s net assets from one year to the next. SARS will, typically, commence the capital reconciliation exercise by determining the taxpayer’s assets at the beginning of the tax year and deducting that from the taxpayer’s net assets at the end of that year. Where the increase in assets is disproportionate in relation to the taxpayer’s income and living expenses, SARS will treat the shortfall as unexplained income and seek to tax that amount as taxable income.

The Act confers on the Commissioner the power to estimate assessments and to obtain judgments against taxpayer’s based on an estimated assessment. In principle, these powers are aimed at ensuring that taxpayers properly disclose the income derived by them for tax purposes.

Spilg J, however, made the following point regarding the powers conferred on SARS in this regard:

“The provision however is draconian and should therefore be exercised with care by properly experienced and suitably qualified personnel since it may otherwise be reduced to an arbitrary guesstimate with grave consequences to the taxpayer. This is so because the Commissioner is entitled, even if there is an objection or an appeal, to seize and realise assets including money standing to the credit of the taxpayer’s bank account notwithstanding that these actions may jeopardise the taxpayer’s cash flow and business.”

Sepataka was dissatisfied with the estimated assessments issued by SARS and formally objected to those assessments on 27 June 2005.

Despite the fact that the taxpayer had objected to the assessments, the Commissioner relied on the powers contained in section 91 of the Act to apply, without notice, for judgment by filing a notice on 7 November 2005 with the Registrar of the South Gauteng High Court and judgment was granted against the taxpayer on 1 December 2005.

It is stated in the judgment that on 29 August 2007 that SARS allowed the taxpayer’s objection in respect of both years of assessment. The Commissioner thus accepted that the income originally submitted by the taxpayer in his tax returns was correct. Spilg J, points out that the estimate made by SARS was incorrect and was based on a duplication of certain amounts which would indicate that “suitably qualified or experienced persons were not engaged to perform the forensic analysis or accounting calculations. In the result their estimates were fundamentally flawed.”

The Judge was satisfied in Sepataka’s case that the documents submitted by the taxpayer’s chartered accountant disclosed a bona fide defence to the notice relied upon by the Commissioner to obtain judgment under section 91(1)(b) of the Act, and that it was incompetent for SARS to apply for judgment on the basis that the assessments were under objection.

The Judge recognised that SARS has the power to demand and collect tax under objection, even by appointing another person as the taxpayer’s agent under section 99 of the Act, in respect of the capital amount due in accordance with the “pay now, argue later” principle contained in section 88(1) of the Act, read with sections 99 and 100 of the Act. It is interesting to note that Spilg J pointed out that the issue of collecting interest and penalties pending an objection or appeal, may be on a different footing to the principal amount of tax due by a taxpayer.

Splig J decided that it is incompetent, when regard is had to the rights of objection and appeal, for SARS to obtain judgment against a taxpayer, prior to the finalisation of the objection. The Judge pointed out that SARS statutory powers to collect tax despite an objection and appeal, would be unnecessary if judgment could be obtained against the taxpayer prior to an objection being finalised.

Therefore, Spilg J, reached the conclusion that the judgment against Sepataka could not lawfully be obtained by virtue of the objection being lodged against the assessment and was thus a nullity, and for this reason the judgment was set aside.

Sepataka also applied for an order of costs against the Commissioner and the court needed to evaluate this application.

Spilg J, pointed out that care must be taken to ensure that prior to a statement being filed under section 91(1)(b) of the Act, that a responsible person in the Commissioner’s office, must satisfy himself or herself that there is not a pending objection or appeal, particularly where estimated assessments are issued pursuant to an effective lifestyle audit under section 78(1) of the Act.

The court suggested that there should be certain checks and balances in place to safeguard the rights of taxpayer’s insofar as the implementation of section 91(1)(b) of the Act is concerned.

Currently, the SARS official can certify a statement for purposes of section 91(1)(b) of the Act, by confirming the amount of tax payable by the taxpayer, without reference to any other details pertaining to the taxpayer’s affairs. Spilg J, suggested that the statement should contain additional information to satisfy the requirement of constitutional proportionality by indicating clearly:

  • “whether the assessment relied upon is an estimated assessment under the exercise of the powers conferred under section 78(1);
  • if so, the suitability of the qualifications and experience of the person to conduct the estimated assessment;
  • finally, that the responsible person has satisfied himself or herself from the records maintained by SARS that no objection or appeal was pending or, if lodged, has been finally disposed of so that there is no impediment to filing of the statement.”

The court held that the current statement filed by the Commissioner for judgment under section 91(1)(b) of the Act falls short of providing adequate safeguards against errors occurring in the future. This view of the court must be supported as concerns arise where, for example, a taxpayer submits an income tax return reflecting a loss derived from trading for the year whereas SARS treats that loss as income and levies income tax thereon, and subsequently seeks to recover that incorrectly assessed amount of tax and proceeds to file a statement at the court and secure the judgment against the taxpayer. It is important, therefore, that safeguards are in place to ensure that the assessments issued by SARS are correct and, furthermore, that no objection or appeal is pending against the assessments issued by SARS before judgment is taken against a taxpayer.

As a result, the Judge granted an order against SARS, setting aside the judgment granted against Sepataka on 7 November 2005. In addition, the court issued an order calling on SARS to show why SARS should not be liable for the taxpayer’s costs of the application to have the judgment in question rescinded.

It is clear that SARS has draconian powers in the Act to ensure the collection of tax lawfully due by taxpayers. Concerns, however, do arise where SARS uses those draconian provisions to recover tax which is not properly due, either because an assessment has been erroneously issued to a taxpayer, or where a proper objection has been lodged against that assessment and SARS has failed to timeously deal with that objection. It is hoped that SARS will take heed of the comments made by Spilg J and introduce the safeguards in the statements filed in courts in future when seeking judgment under section 91(1)(b) of the Act.