Possession, as they say, is nine tenths of the law. Generally in commercial litigation where, for example, a claim for an outstanding amount is brought against a party, such party is not required to make payment to the claimant until a court has adjudicated on the matter.
However, when it comes to matters of tax, the Tax Administration Act, No. 28 of 2011 (‘TAA’) requires taxpayers to first make payment to SARS on assessment and then to pursue their various remedies against SARS.
It is true that if the taxpayer eventually persuades SARS or a court that the assessment was incorrect and the tax was not owed by it, the disputed amount will be refunded to the taxpayer with interest. However, the payment of the tax generally places the taxpayer at a disadvantage as it may have to fund the tax payment for a number of years whilst it pursues its various remedies. One recent tax case took approximately ten years from date of assessment until judgment by the Supreme Court of Appeal in Bloemfontein.
It is therefore important that a taxpayer understands in what circumstances it may not have to make payment to SARS of the disputed tax.
The “pay now argue later” principle was dealt with in the case of Metcash Trading Ltd v Commissioner, South African Revenue Service. In this case, the legality of the concept survived scrutiny by the Constitutional Court in the context of VAT when a taxpayer sought to impugn the VAT legislation contending it to be incompatible with section 34 of the Bill of Rights.
It was held in the case of Capstone 556 (Pty) Ltd and Commissioner, South African Revenue Service 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”.
The court went on to say the following:
“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”.
However not every taxpayer has the appetite for a constitutional challenge to the “pay now argue later” principle. Instead taxpayers generally wish to understand the provisions set out in the TAA dealing with a suspension of their obligation to make payment to SARS.
In this regard, the TAA provides that a taxpayer is liable to pay tax once an assessment has been raised by SARS. In terms of section 164 of the TAA, unless a senior SARS official otherwise directs in terms of subsection (3), the obligation to pay tax and the right of SARS to receive and recover tax will not be suspended by an objection or appeal or pending the decision of a court of law.
In terms of section 164(2) a taxpayer may request a senior SARS official to suspend the payment of tax or a portion thereof due under an assessment if the taxpayer intends to dispute or disputes the liability to pay that tax.
Section 164(3) provides that a senior SARS official may suspend the payment of the disputed tax or a portion thereof having regard to:
- The compliance history of the taxpayer;
- The amount of tax involved;
- The risk of dissipation of assets by the taxpayer concerned during the period of suspension;
- Whether the taxpayer is able to provide adequate security for the payment of the amount involved;
- Whether the payment of the amount involved would result in irreparable financial hardship to the taxpayer;
- Whether sequestration or liquidation proceedings are imminent;
- Whether fraud is involved in the origin of the dispute; or
- Whether the taxpayer has failed to furnish information requested under the Tax Administration Act for purposes of a decision under section 164.
Section 164(6) states that from the date that SARS receives a request for suspension and ending ten business days after notice of SARS’ decision, no recovery proceedings may be taken against the taxpayer unless SARS has a reasonable belief that there is a risk of dissipation of assets by the taxpayer.
Therefore, as soon as the taxpayer receives an assessment from SARS which it intends to challenge, it should consider making application for a suspension of payment under section 164(2) of the TAA.
The taxpayer should refer to and argue its case in terms of each of the grounds set out in section 164(3). The test is a composite one and therefore it is not necessary for a taxpayer to “pass” each of these tests.
One of the key grounds is whether payment of the amount of tax would result in irreparable financial hardship to the taxpayer.
One suspects that if a taxpayer states that the payment of the disputed tax will not result in irreparable financial hardship then SARS will simply argue that the tax should be paid. Conversely, if the taxpayer argues that the tax will result in irreparable financial hardship then SARS may be concerned that the taxpayer will not be good for the money at a later stage and therefore refuse to suspend payment.
However, this is simply one of the grounds that the senior SARS official must consider. In addition, the concept of irreparable financial hardship does not mean that the taxpayer will likely go into liquidation if it is required to make payment of the tax. Instead it covers circumstances where, for example, the taxpayer may be required to dispose of illiquid investments in a “fire sale” thereby resulting in irreparable financial hardship since the taxpayer will lose money which it is unlikely to recoup in the future.
If SARS decides not to grant the request for suspension of payment, a taxpayer cannot object and appeal against such decision. However, the exercise of the power granted to SARS to approve or refuse a request for a suspension of payment constitutes administrative action and is therefore reviewable by a court in terms of the principles of administrative law.
Review proceedings are instituted by the filing by the applicant of a notice of motion (which sets out the relief sought) supported by a founding affidavit in which all of the relevant facts are set out under oath, together with the basics of the applicant’s case. If the applicant requires the record of the decision that is being challenged, the applicant may call upon the administrator (in this case SARS) to dispatch the record within fifteen days. Once the applicant receives the record, it may amend its notice of motion and file a supplementary founding affidavit within ten days.
The respondent (SARS in this case) has fifteen days after receipt of the notice of motion or any amendment thereof within which to file a notice of intention to oppose the application, and has thirty days after receipt of the amended notice of motion or supplementary affidavit within which to file an answering affidavit in which the respondent sets out the facts on which it relies, the basics of its case in law and responds to the applicant’s case.
The applicant then has ten days within which to file a replying affidavit in which the applicant replies to the matters raised by the respondent in its answering affidavit. Further affidavits can only be filed with the consent of the court. Accordingly, all of the relevant evidence is placed before the court on affidavit and as a result witnesses are not called.
If the applicant does not require the record of decision (because it already has reasons for the decision and accordingly does not need it) then the process of asking for the record and filing supplementary affidavits can be dispensed with, resulting in a shorter and simpler procedure.
As stated above, in terms of section 164(6) of the TAA, once SARS has refused a request by a taxpayer for a suspension of payment of tax, there is an obligation on the taxpayer to pay the tax to SARS. This obligation remains, regardless as to whether or not the taxpayer is of the view that the decision by SARS constitutes unfair administrative action and makes application to court for a judicial review of such decision. Therefore, the only way in which the taxpayer can prevent SARS from taking collection steps against it, is by obtaining an interim interdict from a court prohibiting SARS from taking any steps to collect the tax pending the outcome of the review application.
An interim interdict can only be obtained by way of motion proceedings. The prescribed time periods will apply, unless it would result in the applicant not being able to obtain the required relief, in which event the applicant can bring proceedings on an urgent basis. The evidence is presented on affidavit and accordingly, no witnesses are called to give evidence. The applicant must make out its case in the founding affidavit, including establishing a basis for the urgency and expedited timetable, and must show that it will suffer irreparable harm if the tax is collected. The applicant will also have to act as expeditiously as possible in order to satisfy the court that the matter is indeed urgent.