Con­trary rul­ings muddy water

Con­fu­sion on ‘pay now, ar­gue later’ rule on tax dis­putes ex­tends to high courts

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - KYLE MANDY

THE South African Rev­enue Ser­vice ( SARS) would have tax­pay­ers be­lieve that there is no room for dis­cus­sion or de­bate on the ex­is­tence or the scope of the “pay now, ar­gue later” rule, on the ba­sis that, in the case of Met­cash Trad­ing Ltd v CSARS 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-nowar­gue-later rule in the con­text of the Value-added Tax (VAT) 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.

If in doubt as to the level of con­fu­sion and mis­un­der­stand­ing re­gard­ing the pay-now-ar­gue-later rule in the con­text of in­come tax, look to the two High Court de­ci­sions, in Mokoena v CSARS, and Cap­stone 556 (Pty) Ltd v CSARS, which came to 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 ...’

There­fore, 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 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 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 tax-

a tax­payer’s obli­ga­tion to pay tax is not sus­pended merely be­cause he has lodged an ob­jec­tion or ap­peal against an in­come tax as­sess­ment

payer, 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 Tax Court — are bound by these two dis­parate de­ci­sions.

SARS has ap­par­ently not taken the Mokoena decision on ap­peal. In­deed, the re­ported judg­ment in Cap­stone makes the ex­tra­or­di­nary ob­ser­va­tion that “there was no ap­pear­ance on be­half of the Com­mis­sioner” when Mokoena’s case was ar­gued in the High Court and that Judge Spilg “was there­fore de­prived of the ben­e­fit of ar­gu­ment” in those pro­ceed­ings from any party other than the tax­payer.

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 the dis­puted 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:

The com­pli­ance 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 pay­ment of the amount in­volved would re­sult in ir­repara­ble fi-


of the nan­cial 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 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? 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 un­der 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 paynow-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 from the rule is that im­me­di­ate pay­ment of the dis­puted tax would cause “ir­repara­ble fi­nan­cial hard­ship” to the 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 the obli­ga­tion 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 been given in the final ap­peal against the as­sess­ment.

The detri­men­tal ef­fect 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.

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