SARS told to use a dra­co­nian tax law with care

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - Beric Croome

Re­ceiver can es­tab­lish an es­ti­mated as­sess­ment and ap­ply for judg­ment with­out no­ti­fy­ing the tax­payer

TAX­PAY­ERS are no doubt fa­mil­iar with the “pay now, ar­gue later” rule that was held to be con­sti­tu­tion­ally valid in the case of Met­cash Trad­ing Lim­ited v Com­mis­sioner for South African Rev­enue Ser­vice and An­other.

That case de­cided that 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 and the pro­vi­sions con­tained in the Pro­mo­tion of Ad­min­is­tra­tive Jus­tice Act.

Sec­tion 91 of the In­come Tax Act gives the com­mis­sioner the 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.

Some­times the first time the tax­payer be­comes aware of a judg­ment against him or her is when they ap­ply for a loan from a bank or a new credit card or are in­formed that their credit rat­ing is poor be­cause a judg­ment has been taken against them by SARS.

The pro­vi­sions of sec­tion 91(1)(b) of the act were con­sid­ered by Judge Spilg in the case of MA Sepataka v Com­mis­sioner for the South African Rev­enue Ser­vice in the South Gaut­eng High Court, Jo­han­nes­burg, in Au­gust last year.

It was in­di­cated in the judg­ment that on March 17 2010 the com­mis­sioner filed a no­tice in terms of sec­tion 91(1)(b) of the act with the reg­is­trar of the South Gaut­eng High Court that was ap­proved by a SARS of­fi­cial on March 16. 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 De­cem­ber 1 2005.

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 dis­closed the out­stand­ing mon­e­tary judg­ment against him.

When a tax­payer fails to sub­mit a re­turn or does not com­plete a proper tax re­turn the com­mis­sioner may es­ti­mate the tax­payer’s in­come un­der sec­tion 78 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 April 22 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.

Typ­i­cally, SARS will be­gin 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.

When 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 gives the com­mis­sioner the power to es­ti­mate as­sess­ments and to ob­tain judg­ments against tax­pay­ers based on an es­ti­mated as­sess­ment. These pow­ers are aimed at en­sur­ing that tax­pay­ers prop­erly dis­close the in­come de­rived by them for tax pur­poses.

Judge Spilg how­ever, made the fol­low­ing point:

“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 June 27 2005.

Al­though 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 Novem­ber 7 2005 with the Reg­is­trar of the South Gaut­eng High Court and judg­ment was granted against the tax­payer on De­cem­ber 1 2005.

It is stated in the judg­ment that on Au­gust 29 2007 that SARS al­lowed the tax­payer’s ob­jec­tion in re­spect of both years of as­sess­ment. Judge Spilg points out the es­ti­mate made by SARS was in­cor­rect.

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. It is in­ter­est­ing to note that Judge Spilg 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. Judge Spilg 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.

Judge Spilg 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 there­fore a nul­lity, and for this rea­son the judg­ment was set aside.

The court held that the cur­rent state­ment filed by the com­mis­sioner for judg­ment un­der sec­tion 91(1)(b) falls short of pro­vid­ing ad­e­quate safe­guards against er­rors oc­cur­ring in the fu­ture.

This view of the court must be sup­ported, as con­cerns arise when, 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 a 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 Novem­ber 7 2005.

It is hoped that SARS will take heed of the com­ments made by Judge Spilg and in­tro­duce the safe­guards in the state­ments filed in courts in fu­ture when seek­ing judg­ment un­der sec­tion 91(1)(b) of the act.

Dr Beric Croome is a tax ex­ec­u­tive at ENS.

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