17 November 2022 by Tax & Exchange Control Alert

Settlements and seizures in tax disputes: A recent judgment

In the context of tax dispute resolution, most disputes are intended to be dealt with by the Tax Court, a creature of statute with its jurisdiction and powers defined by the Tax Administration Act 28 of 2011 (TAA), read with the dispute resolution rules published under section 103 of the TAA.

However, disputes involving the interpretation of settlement agreements and search and seizure provisions in the TAA do not fall within the Tax Court’s jurisdiction and are heard by the High Court, such as in the matter of Wingate-Pearse v The Commissioner for the South African Revenue Service (54038/20) [2022] ZAGPPHC 732, decided on 30 September 2022.

In this matter, the High Court had to consider, amongst others, two things:

  • the interpretation of a settlement agreement concluded between Mr Wingate-Pearse (taxpayer) and the respondent (the South African Revenue Service [SARS]) in 2009; and
  • whether the taxpayer had made out a case for the return and delivery of material and goods seized during a 2005 search and seizure operation carried out by SARS.

Facts

In 2009, the taxpayer brought an urgent application to interdict SARS from enforcing the pay-now-argue-later principle.

The urgent application was settled in terms of a settlement agreement (2009 Agreement), which stated that the taxpayer would do certain things, pending his tax appeal against assessments raised by SARS. This included payment of an amount of approximately R336,000 to SARS (settlement amount), the cession in securitatem debiti of certain shareholdings, and tendering security in the form of immovable properties to SARS.

A further settlement agreement was concluded between SARS and the taxpayer in 2020 (2020 Agreement), which stated that the taxpayer had to pay an amount of R3 million in full and final settlement of the taxpayer’s outstanding payment obligations. The 2020 Agreement also required SARS to release anything held as security, once the amount of R3 million had been paid.

The taxpayer argued that the settlement amount constituted security, which had to be released to him in terms of the 2020 Agreement.

In relation to the seized goods, the taxpayer argued that these must be returned to him in terms of section 66 of the TAA.

Judgment

The settlement amount

While the taxpayer raised various arguments as to why the settlement amount should be seen as security, SARS made arguments as to why it constituted payment of a tax debt. A key issue the court had to consider was how the 2009 Agreement and 2020 Agreement should be interpreted and specifically, whether extrinsic evidence could be relied upon to interpret the agreements. SARS argued that the interpretation of whether the settlement amount constituted security or payment of a tax debt should be determined by considering extrinsic evidence, namely the surrounding circumstances and documents which preceded both the 2009 and 2020 settlements. The specific extrinsic evidence SARS asked the court to consider was correspondence between the parties pursuant to the launching of the urgent application, as part of the settlement negotiations pertaining to the 2009 proceedings.

The High Court rejected the argument that extrinsic evidence is always impermissible, in terms of the well-known parol evidence rule. Its decision was based on the approach set out in Natal Joint Municipal Pension Fund v Endumeni Municipality 2012 (4) SA 593 (SCA), which principles were also applied in more recent judgments handed down by the Supreme Court of Appeal and Constitutional Court. As the approach in Endumeni required that the text, context and purpose of a document must be considered holistically, the High Court held that it could be taken into account to the extent that it would contextualise the clause in the 2009 Agreement dealing with the settlement amount.

Ultimately, the court considered correspondence between the parties, pleadings filed by the taxpayer in the 2009 urgent application, pleadings filed by the taxpayer in a 2015 review application brought against SARS, portions of the judgment in the 2015 review application, and a 2019 judgment involving the taxpayer and SARS. As these documents referred to the 2009 settlement amount as a payment or interim payment, the High Court drew the inference that the settlement amount could not have been intended as security, considering the extrinsic evidence and both parties’ arguments. Therefore, the High Court decided that the settlement amount was a payment towards outstanding tax debt.

Seizure of goods

In relation to the seizure of goods, the taxpayer sought an order in terms of section 66 of the TAA for the return of the goods. However, based on the parties’ pleadings, the court noted that there were material disputes of fact and decided that the matter had to be referred to oral evidence.

Comment

The judgment illustrates that when it comes to interpretation of documents in a tax dispute context, the general principles of interpretation will also apply. Readers must also keep in mind that in the tax context, settlements can arise in different ways. In terms of Part F of the TAA, where there is an ongoing tax dispute arising from a taxpayer’s objection against a SARS assessment or decision, there are certain factors that need to be considered to determine whether a dispute is appropriate for settlement. Only if it is appropriate, can the dispute be settled. For example, the TAA notes that settlement may be appropriate in cases where it is a cost-effective way to promote tax compliance with a tax Act by the taxpayer concerned or a group of taxpayers. The settlement provisions in Part F of the TAA only apply where there is a factual or legal interpretation dispute arising from a SARS decision or assessment.

In other words, a dispute about the pay-now-argue-later rule (as it existed when the 2009 Agreement was concluded in the case under discussion) or about suspending the obligation to pay an amount in dispute under section 164 of the TAA, cannot be settled in terms of Part F of the TAA and a different framework would apply to the settlement. For example, the parties can conclude a settlement agreement and have it made an order of court.

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