This article considers certain aspects of the rules governing objections and appeals and particularly whether a taxpayer will succeed with his/her request that the payment of the tax be postponed pending the finalisation of an objection and appeal.
Objection and Appeal
The rules regulating the lodging of objections and noting appeals have been significantly amended. This occurred by way of the promulgation of regulations under section 107A of the Act, which took effect on 1 April 2003. Those rules are applicable to all fiscal disputes, and aspects relating thereto will now be considered.
Postponement of Payment of Tax Pending the Finalisation of an Objection and Appeal
One of the issues that must be considered at the time that a dispute arises on an assessment is whether the taxpayer is legally required to pay tax due per the assessment or whether he/she should seek a postponement of payment of the tax reflected as due.
Section 88 of the Act deals with the payment of the tax pending an appeal in the following terms:
“The obligation to pay and a right to receive and recover any tax chargeable under this Act shall not, unless the Commissioner so directs, be suspended by any appeal or pending the decision of a court of law under section 86A, but if any assessment is altered on appeal or in conformity with any such decision or a decision by the Commissioner to concede the appeal to the Tax Board or to the Tax Court or to such court of law, a due adjustment shall be made, amounts paid in excess being refunded with interest at the prescribed rate, such interest being calculated from the date approved to the satisfaction of the Commissioner to be the date on which such excess was received and amounts short-paid being recoverable with interest calculated as provided in section 89.”
The above section thus regulates the question of whether a taxpayer is legally required to pay an assessment against which an appeal has been lodged.
Unfortunately, the section does not deal with the intervening period, i.e. from the date upon which the taxpayer receives an assessment and lodges an objection thereto until such objection is disallowed. This point had been raised with the Commissioner: SARS previously, but it has still not been addressed in the Act. Usually, the Commissioner will deal with the request for postponement of payment of tax even though the case is still on objection under the provisions of section 88 of the Act.
The legal requirement to pay tax in dispute is referred to as the “Pay Now, Argue Later” rule, which has been considered by the courts on a number of occasions.
The fiscal statutes provide that even though a taxpayer has lodged an objection against an assessment, or has noted an appeal against the disallowance of an objection to an assessment, they must pay the tax reflected as due. The provisions found in section 88 of the Act are similar to those contained in section 36 of the Value Added Tax Act and other provisions contained in the various fiscal statutes in
the country.
Thus, the Commissioner is legally entitled to insist that the taxpayer pays the tax due according to the assessment whether the taxpayer has accepted that assessment or has noted an objection thereto.
In Metcash Trading Ltd vs The Commissioner: SARS and the Minister of Finance (63 SATC 13) the Constitutional Court stated that the provisions of the Value Added Tax in dispute make up the “Pay Now, Argue Later” rule and comprise:
- payment of an assessment is not suspended by an appeal;
- the Commissioner may enforce payment of the unpaid tax by filing a statement with the Court, which acts as a civil judgment; and
- places the correctness of the assessment beyond challenge in any proceedings to collect the tax reflected as due.
Under the provisions of the various sections in the Act and the VAT Act, the Commissioner may, in certain cases, agree to a postponement of the payment of the tax in dispute. Unfortunately, the legislation does not itself contain guidelines of when the Commissioner will exercise his discretion in favour of the taxpayer.
In those cases where the taxpayer exhausts the appeal procedures available, and the Court confirms the tax reflected as due and payable, the taxpayer will remain indebted to the Commissioner. The Commissioner, however, may insist that the taxpayer pays the tax reflected as owing, even though the taxpayer has noted an appeal against the disallowance of an objection to an assessment.
Taxpayers have sought to argue that the “Pay Now, Argue Later” rule violates the right of the taxpayer to have the case for postponement of payment adjudicated by a court of law. Alternatively, taxpayers have sought to show that the rule violates their right to administrative justice (see for example Smart Phone SP (Pty) Ltd vs ABSA Bank Ltd and Another 2004 (3) SA 65 (W) and Contract Support Services (Pty) Ltd vs Commissioner : South African Revenue Services and Others 1999 (3) SA 1133 (W)).
In the Metcash case, the High Court decided that the recovery procedures contained in the VAT Act violated the taxpayer’s right of access to court contained in section 34 of the Final Constitution and referred the decision to the Constitutional Court. The Constitutional Court therefore had to balance the need for SARS to have legislation to enforce paying tax, thereby ensuring the proper collection of taxation and the rights of taxpayers.
The counsel for Metcash argued that the provisions of the VAT Act ousted the power of the court to intervene in the dispute regarding postponement of payment with SARS. Counsel sought to have the specific provisions contained in the Value Added Tax Act set aside as taxpayers could not approach the court for relief, namely that sections 36(1), 40(2)(a) and 40(5) of the Value Added Tax Act 89 of 1991 should be held invalid vis-à-vis the Constitution.
Kriegler J, in delivering the court’s decision, emphasised that the court was considering the provisions of the VAT Act and not any other fiscal statute. He illustrated the mechanics of the VAT system whereby the vendor charges customers VAT and must pay it over to SARS. The vendor in turn must pay VAT on goods and services acquired by it and can, to the extent allowed under the VAT Act, recover such VAT against the VAT due to SARS. The VAT payable by a vendor to SARS is a particular tax that stands on its own footing. Kriegler J stated
as follows:
“[16] The first significant point to note is that VAT, quite unlike Income Tax, does not give rise to a liability only once an assessment has been made. VAT is a multi-stage tax, it arises continuously. Moreover VAT vendors/taxpayers bear the ongoing obligation to keep the requisite records, to make periodic calculations of the balance of output totals over and above deductible input totals (and any other permissible deductibles) and to pay such balances over to the fisc. It is therefore a multi-stage system with both continuous self-assessment and predetermined periodic reporting/paying.
[17] An even more important feature of VAT, particularly in contradistinction to income tax, is that vendors are in a sense involuntary tax collectors. In principle VAT is payable on each and every sale; the VAT percentage, the details for its calculation and the timetable for periodic repayment are statutorily pre-determined, and it is left to the vendor to ensure that the correct periodic balance is calculated, appropriated and paid over in respect of each tax period. By like token, the regularity of VAT payments on the one hand ensures a steady and generally more accurately predictable stream of revenue via a multi-stage taxation that is perceived as resting less heavily on the taxpayer, but on the other hand it does require a great deal of book-keeping by vendors and policing by the revenue authorities.”
The judge drew a clear distinction between Value Added Tax, a self-assessment system, versus income tax, which requires SARS to assess tax returns submitted. A question I raise is: if the matter before the court was not a VAT matter, but an income tax matter, would the court reach the same conclusion? The Business Day dated 17 May 2002 on page 1 thereof contained an article reporting that the High Court had once again upheld the “Pay Now, Argue Later” rule in an income tax matter. The case upon which the report was based was David C King vs The Commissioner for the South African Revenue Service. (Not reported, Case No. 12508/02 Transvaal Provincial Division).
Kriegler J considered whether the provisions contained in sections 36(1), 40(2)(a) and 40(5) of the Value Added Tax Act ousted the taxpayer’s right of access to the courts in the country. The court decided the following:
“[72] The first three issues identified above have now been analysed. This analysis indicates that ss36(1), 40(2)(a) and 40(5) of the Act do not oust the jurisdiction of the courts of law. To the extent that it can be argued that section 40(5) does indeed limit an aggrieved vendor’s access to an ordinary court of law, such limitation is justified under section 36 of the constitution.”
Thus, in respect of the constitutional challenge, the Constitutional Court reversed the court a quo’s decision.
The Commissioner’s counsel in the Metcash case stated the following at paragraph 5.61 of its Heads of Argument:
“The Commissioner, on application would obviously be required to exercise a proper discretion and would be subject to the discipline of administrative law.”
(This is available on the Constitutional Court website at the address
http://www.concourt.gov.za.)
The Constitutional Court needed to consider the discretion granted to the Commissioner to postpone paying tax pending an appeal as enshrined in section 36 of the Value Added Tax Act, Act 89 of 1991. This provision is for all practical purposes identical to that contained in section 88 of the Act.
Kriegler J dealt with the exercise of the discretion contained in section 36 of the Value Added Tax Act, as follows:
‘[42] The Commissioner, in exercising the power under s36, is clearly implementing legislation and as such the exercise of the s36 power constitutes administrative action and falls within the administrative justice clause of the constitution. I cannot agree with Snyders J to the extent that she considered the exercise of the discretion conferred upon the Commissioner in s36 of the Act not to be reviewable. The Act gives the Commissioner the discretion to suspend an obligation to pay. It contemplates, therefore that notwithstanding the “pay now, argue later” rule, there will be circumstances in which it would be just for the Commissioner to suspend the obligation to make payment of the tax pending the determination of the appeal. What those circumstances are will depend on the facts of each particular case. The Commissioner must, however, be able to justify his decision as being rational. The action must also constitute “just administrative action” as required by s33 of the constitution and be in compliance with any legislation governing the review of administrative action.’
I contend the Commissioner cannot summarily dismiss a taxpayer’s request for the postponement of tax pending the hearing of an appeal. Under the principles of administrative law, he must properly exercise the discretion granted by taking account of all relevant facts.
It is unfortunate that both the Income Tax and VAT Acts do not prescribe what factors the Commissioner shall consider in exercising the discretion granted to him.
Media Release 27 of 2000 issued by the Commissioner under the Metcash Constitutional court judgement stated that the Commissioner might, depending on the particular facts of the case in question, consider the following:
“Where a payment of the whole of the amount at issue would cause grave and serious hardship which could not be reversed if the taxpayer were to succeed in his appeal, and the circumstances of the case give rise to reasonable doubt;
Other relevant circumstances, for instance, certainty that the amount at issue will be paid were the appeal to fail.”
I suggest that the fiscal statutes should contain clear guidelines stating what reasons the Commissioner must consider in deciding whether to agree to a postponement of tax pending an appeal. Support for this view is contained L. Olivier “Tax Collection and The Bill of Rights” Tydskrif van Suid Afrikaanse Reg, TSAR 2001.1 193 at 200.
BJ Arnold in an opinion (BJ Arnold opinion prepared for the Commissioner for Inland Revenue (attached as Annexure H to the Affidavit of the Commissioner for Inland Revenue in an application to the Constitutional Court, CCT/22/96, at paragraph B.1.3.5 at pages 23 and 24) recommends certain changes to section 88 of the Income Tax Act 58 of 1962 in the following terms:
‘Under section 88 of the South African Income Tax Act, the Commissioner has the authority to suspend the payment of tax pending an appeal. It might be appropriate to consider setting out in the legislation the factors that the Commissioner must consider or the conditions which must be met in order for the Commissioner to exercise his discretion. Also, it might be appropriate to provide taxpayers with a right of appeal if the Commissioner does not exercise his discretion. The Commissioner’s discretion in this regard is important because there may be legitimate circumstances in which taxpayers cannot pay their taxes pending an appeal without significantly adverse consequences. Also, it might be appropriate in certain circumstances for taxpayers to be entitled to provide security for the taxes owing in lieu of payment.’
I accept that the Commissioner has a reasonable concern that taxpayers may seek to lodge a trivial objection to postpone the inevitable payment of the tax due. The question of frivolous appeals is a cause for concern in Australia also, see Wayne Gumley and Kim Wyatt “Are the Commissioner’s Debt Recovery Powers Excessive?” 25 Australian Tax Review 186 at 201 (December 1996). A practical difficulty arises in deciding which objections are frivolous and those that are not. See for example Motsepe v Commissioner for Inland Revenue 59 SATC 245 [1997]. I believe that the Commissioner needs the power to insist on timeous payment of the tax where a taxpayer lodges a trivial objection, failing which payment the fisc would be in an invidious position.
VAT, in reality, represents amounts collected by a vendor that are due to the State. However, income tax represents an amount payable only once SARS assesses the tax return submitted by the taxpayer. If the Commissioner wishes to enforce payment of income tax unreasonably, pending the hearing of a tax appeal, the aggrieved taxpayer should consider bringing an action in court, based on the principles of administrative law. It may not be necessary to attempt to show that section 88 of the Income Tax Act is unconstitutional. The Commissioner must properly exercise his discretion and a taxpayer can challenge the exercise of that discretion, or failure to exercise such discretion, in the courts. This would be based on the principles of administrative law and particularly the right to administrative justice contained in section 33 of the Final Constitution read together with the Promotion of Administrative Justice Act, Act 3 of 2000. Where the taxpayer can satisfy the court that the Commissioner has acted without justification the court will require that the discretion is properly exercised. Although the Constitutional Court has upheld the “pay now argue later” rule contained in the VAT Act, a taxpayer can still challenge the decision to enforce payment in a court of law. The grounds for such challenge will be based on a violation of the rules of administrative justice. If a taxpayer can show that the Commissioner has acted unreasonably, a court will set the Commissioner’s decision aside. Depending on the facts, this may be the most suitable remedy available to the taxpayer.
In Metcash, the court referred to the provisions of fiscal statutes in other countries and indicated that most other countries, which have a VAT system, follow the “pay now argue later” rule. This is not the case with income tax. In “Taxpayer’s Rights and Obligations: A Survey of the Legal Situation in OECD Countries”, a survey of twenty-two countries evaluated whether there is a suspension of tax payments when an assessment is under appeal. The survey, conducted in 1990, concluded that, of the twenty-two countries surveyed, two-thirds allowed for postponing tax due, pending the hearing of an appeal. This was subject to fulfilment of certain specific conditions. Fifteen countries imposed conditions, while five countries indicated it was unnecessary to comply with any conditions. New Zealand, for example, requires payment of one half of the disputed tax with the balance postponed. In Australia, taxpayers must negotiate with the fiscal authority to suspend payment. [ATP Weekly Bulletin, 12 April 2002, No. 15, 573 which at paragraph 571 refers to an Australian judge’s comments, namely Heerey J “it is a case of pay now, litigate later” regarding s14 ZZM of the Taxation Administration Act 1953 (Cth) and the Commissioner’s power to recover tax pending review proceedings. See also Wayne Gumley and Kim Wyatt “Are the Commissioner’s Debt Recovery Powers Excessive?” 25 Australian Tax Review 186 and 189 (December 1996)]. Italy and Turkey pointed out that, under no circumstances, did they postpone the recovery of the tax until finalising the appeal. In Portugal, the taxpayer must furnish a guarantee in settlement of the tax due, resulting in postponement of the tax.
In an opinion prepared for the South African Commissioner, the Canadian B J Arnold compared the constitutionality of section 88 of the Income Tax Act with Canada’s statutory provisions. Arnold confirms that taxpayers in Canada do not have to pay taxes owing when the tax payable is in dispute. He points out that, with certain large corporations, the Canadian Revenue can take immediate collection action for one half of the tax assessed until the ninety-day period for filing an objection has passed. The Canadian Revenue collects the balance of the tax after the ninety-day period for lodging of objections has passed, even though the corporation may appeal against the assessment issued. Arnold concludes that section 88 of the Tax Act: “is both reasonable and justifiable in a democratic society”. Further, Arnold states as follows:
“If taxes payable under dispute do not have to be paid by taxpayers, there is a clear incentive for taxpayers to dispute tax assessments that they would not otherwise dispute. It is very difficult for the courts or the tax authorities to decide whether or not disputes are frivolous. If taxes are not paid when assessed, there is also the problem of the taxpayers not having the necessary funds to pay the taxes when the litigation is finally resolved and the taxes are found to be due and payable.
Obviously, if the taxpayer is successful in disputing the amount of tax assessed, the amounts should be refunded with interest so that, as much as possible, the taxpayer is restored to the situation he would have been in if the tax had been correctly assessed in the first place.”
The nature of VAT and income tax is different, but an aggrieved taxpayer still has the inherent right to seek relief from the court where SARS has abused its powers. It is unlikely that the Constitutional Court would hold that section 88 of the Act is unconstitutional in that a taxpayer can still approach a court for relief. Further, section 36 of the Final Constitution permits limiting a taxpayer’s rights. A court must enquire whether the Commissioner has complied with his obligations under the right to administrative justice contained in section 33 of the Final Constitution. I would advise an aggrieved taxpayer to challenge a decision made on administrative legal grounds, as opposed to seeking the striking down of the “Pay Now, Argue Later” provisions contained in the various fiscal statutes.
Unfortunately, the Act does not currently deal with the payment of tax pending a decision on an objection lodged against an assessment. In “Effect of Lodging an objection on payment of tax”, The Taxpayer, September 1964 167 and 168 the view is expressed that “…payment of tax cannot be enforced pending the Secretary’s decision on an objection lodged timeously”. Clearly, section 88 of the Act allows for postponing tax until the hearing of an appeal. The Act is deficient because it does not deal with the intervening period, that is, from the date of lodging an objection until the Commissioner decides whether to allow or disallow the taxpayer’s objection. In practice, the Commissioner will, depending on the circumstances, grant an extension of time to pay the tax pending a decision on the objection. I am of the opinion that the Act and other fiscal statutes should be amended to deal with the intervening period from the date of lodging an objection until the Commissioner decides to allow or disallow the objection.
Thus, if the Commissioner fails to consider properly the taxpayer’s request for postponement of payment of tax, such decision could and should be challenged on the grounds that it is violates the taxpayer’s right to administrative justice.
It must be remembered that, before the Commissioner can commence recovery proceedings, an assessment must have been issued in accordance with the decision of the Court in Singh v Commissioner: SARS referred to earlier.
The next article in the series will deal with the manner in which the number of days in which to lodge an objection are to be calculated and certain aspects of the rules governing objections and appeals.
Beric Croome BCom, BProc, LLB, FCMA, H Dip Tax Law (cum laude), CA(SA) is an Advocate of the High Court of South Africa and a Tax Executive at Edward Nathan Sonnenbergs Inc.
