Criticism on SARS’s approach to the interpretation of legislation

This case is of great importance for the following reasons:

• the issues which emerged from the case are relevant to matters which extend beyond the mere application or interpretation of s205 of the TAA;
• the arguments made by SARS point to a disregard by SARS for the circumstances of the taxpayer when interpreting legislation; and
• the judgment provides some indication as to the judiciary’s view on SARS’s approach.

One of the important issues discussed in the judgment is the interpretation of the word ‘material’ in the context of s205 of the TAA. In terms of the compromise agreement, SARS would not be bound by the agreement if the Applicant, among other things, failed to make a “full, verifiable and complete disclosure of all material facts to which the compromise relates” or if he supplied “materially incorrect information to which the compromise relates”.

Section 205(a) and (b) of the TAA states that “SARS is not bound by a ‘compromise’ if:

(a)   the ‘debtor’ fails to disclose a material fact to which the ‘compromise’ relates; or

(b)   the ‘debtor’ supplies materially incorrect information to which the ‘compromise’ relates”

The TAA itself does not define the word ‘material’. Nor is there mention in s205 of the words “full, verifiable and complete disclosure” and this simply appears to have been a contractual term. From the judgment it appears that SARS argued that the word ‘material’ within the context of s205 meant that anything not disclosed by the Applicant would be material. Therefore, any misstatement or failure to make a disclosure would automatically be material. In the court’s view, if SARS’s argument was followed to logical conclusion, the word “material” would have no effect as any form of non-compliance with a compromise agreement, no matter how insignificant, would result in a breach of that agreement. It is then not clear why the word ‘material’ is necessary or used in s205. This is irrespective of whether or not an omission or misrepresentation actually caused SARS to enter into the compromise agreement. According to the court, the word ‘material’ properly construed within s205 appears to state that the misrepresentation or omission must, to a significant extent, induce SARS to enter into the compromise agreement or reject it. The court referred to the judgment of O’Connell v Flischman (1948) 4 SA 191 (T) where it was stated that, whether a term is material to a contract may be assessed by how vital the term is.

In this case SARS appears to have argued for absolute liability, regardless of the circumstances. But what happens in a case where the taxpayer is unaware of certain facts and the taxpayer or SARS only ascertains them after conclusion of the compromise agreement? What happens if there was no intention by a taxpayer to misrepresent or omit the facts, or the misrepresentation or omission was not caused by negligence on the part of the taxpayer? These are issues that the court grappled with. In the court’s view, logic would dictate that any non-compliance with the terms of the compromise agreement is not necessarily material as it would depend on the facts upon which the compromise agreement was entered into.

The matter was unfortunately referred to trial and no final judgment was therefore delivered on these aspects. However, we have come across many similar issues, in particular with regard to the interpretation of s227 of the TAA. Section 227 of the TAA contains a similar provision to the disclosure requirement in s205, only in s227 the disclosure relates to the requirements for a valid voluntary disclosure in terms of the Voluntary Disclosure Programme (VDP). The requirements for a valid voluntary disclosure include that the disclosure must be voluntary and be “full and complete in all material respects”. Again the word ‘material’ is used.

This raises the question as to what would constitute a full and complete disclosure within the context of s227. At what point can a taxpayer legitimately cease to furnish SARS with documents and information which in the taxpayer’s view is unnecessary? At what point can a taxpayer be confident that its disclosure in terms of the TAA has been full and complete in all material respects? In our view the word ‘material’ in this context is crucial, as it provides the taxpayer with some way of legitimately narrowing down the information to be provided to SARS as a taxpayer surely cannot provide SARS with all the irrelevant information at its disposal. It would further keep taxpayers from having to move mountains in order to obtain irrelevant information which SARS would not need in order to calculate the taxpayer’s tax liability.

If SARS’s argument that any non-disclosure or misstatement is automatically material succeeds, then it is unlikely that any VDP application would comply with the disclosure requirements of s227. This would certainly defeat the purpose for which the VDP was introduced, especially in the context where one is regularly dealing with taxpayers who voluntarily and for bona fide purposes wish to regularise their tax affairs. Hopefully we will get clarity on this issue if the case proceeds to trial.