New case on section 164 suspension of payment requests: A good time to assess the balance between SARS’ powers and taxpayers' rights

The High Court (Gauteng Local Division) handed down judgment on 31 May 2019 in the matter of Anthony Charles Peter v C:SARS (Case No 3158/2018) in respect of the application and interpretation of section 164 of the TAA. Peter v C:SARS is one of a handful of reported and/or published judgments on the “pay-now-argue-later” rule contained in section 164(1) of the TAA and its predecessors in the Income Tax Act 58 of 1962 (ITA) and Value-Added Tax Act 89 of 1991 (VAT Act).

It is thus prudent to consider the judgment, not only with reference to the specific facts and circumstances, but also to reflect on the current application and interpretation of section 164 with particular reference to its underlying purpose and rationale.

Context: Statutory Framework

Section 164(1) states that, unless a senior SARS official directs otherwise in terms of section 164(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 pursuant to an appeal under section 133. The constitutionality of the “pay-now-argue-later” principle in respect of its predecessor in the VAT Act was discussed and confirmed in, amongst others, Metcash Trading Ltd v C:SARS 63 SATC 13.

Section 164(2) provides that 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 under Chapter 9. Notably, a taxpayer is not required to have lodged its objection before it can submit a section 164 request for suspension of payment. For example, where a taxpayer requests reasons for the assessment prior to lodging its objection, it is still well within its rights to request suspension of payment of the tax debt as a parallel process.

Section 164(3) empowers a senior SARS official to suspend the payment of tax and sets out the factors that should be taken into account when deciding whether to suspend or not. The list of factors is not exhaustive, but includes the following prescriptive factors:

• whether the recovery of the disputed tax will be in jeopardy or there will be a risk of dissipation of assets;
• the compliance history of the taxpayer with SARS;
• whether fraud is prima facie involved in the origin of the dispute;
• whether payment will result in irreparable hardship to the taxpayer not justified by the prejudice to SARS or the fiscus if the disputed tax is not paid or recovered; or
• whether the taxpayer has tendered adequate security for the payment of the disputed tax and accepting it is in the interest of SARS or the fiscus.

In terms of section 164(5) of the TAA, a senior SARS official may deny a request for suspension or revoke a decision to suspend payment with immediate effect if satisfied that:

• after the lodging of the objection or appeal, the objection or appeal is frivolous or vexatious;
• the taxpayer is employing dilatory tactics in conducting the objection or appeal;
• on further consideration of the factors referred to above, the suspension should not have been given;
• there is a material change in any of the factors referred to above, upon which the decision to suspend payment of the amount involved was based.

It should be appreciated that a taxpayer does not have rights to object and/or appeal against a decision by SARS not to suspend payment of the tax debt. Instead, taxpayers’ remedies are limited to taking the matter to the High Court on review. This is not only a costly exercise, but also provides for narrower grounds on which a court may potentially set aside the decision, being that, amongst others, no due process was followed and/or SARS did not properly consider the matter.

Peter v C:SARS

In Peter v C:SARS, SARS refused to grant the Applicant’s request to suspend payment in terms of section 164 of the TAA and the Applicant thus approached the High Court to review and set aside SARS’ decision to deny the suspension of payment request. The Applicant raised various grounds of review, including, amongst others, the following key grounds discussed below.

• That the relevant SARS Committee that made the decision was not authorised to do so given that it did not have the requisite authority and was not empowered to do so.
• That the SARS Committee acted irrationally in finding that the Applicant’s tax appeal was frivolous and vexatious and being employed for dilatory purposes.
• In taking into account that the Applicant failed to offer payment of security, the SARS Committee acted irregularly in that the Applicant was demonstrably unable to provide security.

Pillay AJ upheld the first mentioned ground of review on the basis that SARS failed to show that the relevant SARS Committee was empowered to take the decision and thus it lacked the necessary requisite authority. This is notable for taxpayers in the sense that section 164 decisions must be made by a duly delegated official, which delegation must comply with, amongst others, section 10 of the TAA. This is not always clear from the section 164 notices issued by SARS. In respect of the third mentioned ground of review, the High Court held that it must fail on the basis that the Applicant failed to provide complete and accurate financial information and thus SARS would have been unable to assess the Applicant’s net asset position with reference to whether he could provide security.

Of most interest, was the court’s finding in respect of the second mentioned ground of review. The Applicant contended that SARS’ reliance on sections 164(5)(a) and 164(5)(b) to deny the suspension of payment request due to the Applicant’s appeal being frivolous or vexatious and being employed solely to delay the process was irrational. In fact, the Applicant contended, that there were good prospects of success on appeal (in the main dispute) given the possibility of prescription of a number of years in dispute and that SARS was in fact delaying the finalisation of the appeal.

In considering the application of section 164(5)(a) of the TAA, Pillay AJ held that SARS failed to show that the Applicant’s appeal was an abuse of process or lacking any serious purpose. Instead, SARS focused on proving that the appeal was lacking in merit which was not the test for considering whether an appeal was frivolous or vexatious. On the basis that there was no evidence placed before the court to show that the appeal was an abuse of process and/or was purely intended to cause annoyance, Pillay AJ held that there was no rational connection between the decision made by the relevant SARS Committee in denying the suspension of payment in terms of the factor listed in section 164(5)(a) of the TAA, being a frivolous or vexatious appeal, and the material placed before it. Pillay AJ thus upheld this ground of review.

Given that the High Court upheld several of the Applicant’s grounds of review, Pillay AJ ordered that SARS’ decision not to grant suspension of payment was reviewed and set aside and remitted back to SARS for reconsideration. SARS was also ordered to pay costs, save for the costs incurred in respect of an interlocutory issue.

The finding of the High Court in Peter v C:SARS was notably in favour of the taxpayer and it was interesting that the court found that a taxpayer, in terms of section 164(5)(a) of the TAA, is not required to prove good prospects of success on appeal but rather that SARS must show that the taxpayer is appealing for no serious purpose and is abusing the process. It thus follows that where a taxpayer is able to demonstrate that its appeal is based on legitimate and reasonable grounds, SARS would be hard pressed to invoke section 164(5)(a) of the TAA in denying the suspension of payment request. The merits are therefore an important consideration.

SARS’ powers and taxpayer’s rights within the context of section 164 of the TAA

Given the finding of the High Court in Peter v C:SARS it is sensible to assess the balance between SARS’ powers and taxpayers’ rights in the context of section 164 requests for suspension of payment. In particular, the question arises whether section 164 is being used by SARS and taxpayers alike, within the confines of the initial purpose and rationale for the provision. This is especially important given the rationality test in our law and the grounds of review contained in sections 6(2)(f)(ii)(aa) to (dd) of the Promotion of Administrative Justice Act 3 of 2000 (PAJA), which states that a decision will be reviewable in terms of sections 6(2)(f)(ii)(aa) to (dd) of PAJA if:

(f)    the action itself – […]

(ii)    is not rationality connected to –

(aa)    the purpose with which
it was taken;

(bb)    the purpose of the empowering provision;

(cc)    the information before the administrator; or

(dd)    the reasons given for it by the administrator.

Binns-Ward J summed up the purpose and rationale for section 164 succinctly in Capstone 556 (Pty) Ltd and Another v C:SARS 74 SATC 20 wherein the following was stated:

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.

It is fundamental to the sustainability of a constitutional democracy that it has the ability to collect taxes that fund public finances. SARS performs a critical function in this regard and the empowering provisions in the TAA provide the framework for SARS to undertake this important public prerogative, including in particular the “pay-now-argue-later” principle in section 164 of the TAA. There are potentially taxpayers who object/appeal for strategic and tactical reasons, including to delay the matter in the possible hope that SARS may agree to settle the matter on terms more favourable to the taxpayer. Section 164 of the TAA therefore enables SARS to deal with those taxpayers accordingly by demanding payment upfront notwithstanding that the taxpayer disputes the tax debt.

On the other hand, taxpayers are entitled to just administrative action that is lawful, reasonable and procedurally fair and, furthermore, that the decision must be rationally connected to the purpose of the empowering provision. Where there is a legitimate dispute between SARS and taxpayers (particularly compliant, honest and reputable taxpayers), concerning the interpretation and/or application of an especially complex provision in a fiscal statute, SARS would likely be hard pressed to show that a taxpayer is employing objection/appeal procedures solely for strategic reasons. In fact, the argument would be that those circumstances are exactly what was envisaged when the suspension of payment provisions in section 164(3) of the TAA were introduced. This argument is likely supported by the judgment in Peter v C:SARS and the fact that SARS will in any event be paid interest at an attractive rate on the outstanding tax debt to the extent that the taxpayer is ultimately unsuccessful in respect of the merits. Furthermore, from a SARS perspective, the rate at which interest is charged on amounts due to SARS is always in excess of the rate charged in respect of refunds due to taxpayers.

The current, poor economic climate that may extend into the future, will likely place ever increasing pressure on SARS to consider denying requests for suspension of payment to meet budgeted targets. However, one should always balance this against taxpayers’ rights in an open and democratic society governed by the Constitution of the Republic of South Africa, 1996, which is the supreme law of the land. It will be interesting to assess whether the favourable judgment for taxpayers in Peter v C:SARS has any impact on the practical application and interpretation of section 164 by SARS.