24 March 2022 by and Tax & Exchange Control Alert

Revoked! Beware both tax judgments, and courts that do not heed authority

A revenue authority must be given “teeth” to execute its mandate. One of these “teeth” is found in sections 172 to 174 of the Tax Administration Act 28 of 2011 (TAA).

Essentially, in terms of these provisions, if a taxpayer owes SARS a tax debt, SARS may file a certified statement with a competent court. Once endorsed, this statement is then treated as a civil judgment against the taxpayer. Notably, even if the taxpayer has objected to the debt or has taken it on appeal, SARS may still, in certain circumstances, proceed to file the statement. This is supported by section 164(1), better known as the “pay now, argue later” rule (another “tooth” of the taxman).

Since this certified statement is effectively a civil judgment, what remedy would a taxpayer have if, for example, SARS files a statement but the debt reflected in the statement did not consider amounts already paid to SARS to reduce the debt? This happened in the case of Barnard Labuschagne Incorporated v SARS & Another [2022] ZACC 8 which we discuss in this article.

Background

In this judgment, delivered by a unanimous bench of the Constitutional Court (ConCourt), the applicant, Barnard Labuschagne Incorporated (BLI), owed SARS outstanding tax money. Accordingly, BLI made several payments to SARS. Nevertheless, on 15 December 2017 SARS filed a certified statement in terms of section 172(1) of TAA with the Registrar of the High Court in Cape Town, recording that BLI owed SARS R804,747.

The ConCourt refers to the certified statement as a “tax judgment” and we accordingly follow this nomenclature throughout this article.

BLI then brought an application in the High Court to rescind the tax judgment (i.e. to revoke it). BLI based its application on the fact that the judgment was wrong since SARS failed to reduce the initial amount owed considering BLI’s payments.

SARS’ main opposition was that a tax judgment is not capable of rescission. BLI responded by contending that if a tax judgment is not susceptible of rescission, then sections 172 and 174 of the TAA are constitutionally invalid. To avoid prolixity and to retain focus on the matter of rescission, the constitutional challenge is not discussed in this article.

The High Court agreed with SARS and held that the tax judgment against BLI was not susceptible of rescission. Thereafter, the High Court and the Supreme Court of Appeal refused to grant BLI leave to appeal; which resulted in BLI turning to the ConCourt.

Constitutional Court’s Findings

As a point of departure, the ConCourt considered the historical development of certain tax statutes as precursors to the current form of the TAA. Once the ConCourt was satisfied that the TAA was contextualised, it turned to notable cases that dealt with rescission of tax judgments.

The ConCourt considered, amongst others, the following cases:

1   Kruger v Commissioner for Inland Revenue 1966 (1) SA 457 (C) (Kruger I). In this case the High Court in Cape Town heard an appeal against a decision of a Magistrates’ Court which refused to rescind a tax judgment. The High Court held that a tax judgment was susceptible of rescission in terms of section 36(a) of the Magistrates’ Courts Act.

  1. The same parties in Kruger I later litigated in the Appellate Division (as it was then) in Kruger v Sekretaris van Binnelandse Inkomste 1973 (1) SA 394 (A) (Kruger II). In this case the taxpayer sued the revenue authorities for recovery of money he paid “under duress” pursuant to the tax judgment in Kruger I. In its judgment, the Appellate Division emphasised its view that tax judgments were rescindable. The court cited, as examples, certain grounds which may give rise to a rescission application (including incorrect computation of tax, the date from which interest runs, and the lawfulness of the levying of tax).

3   A few years later, the Constitutional Court in Metcash Trading Ltd v CSARS [2000] ZACC 21 (Metcash) unanimously confirmed, in line with the decisions in the Kruger judgments, that –

3.1  A tax judgment was, in principle, capable of rescission; and

3.2  despite the “conclusive evidence” provisions of the Income Tax Act (now contained in the TAA), that the correctness of any assessment on which such certified statement is based, cannot be questioned, there are numerous defences available in rescission proceedings against tax judgments.

The ConCourt also considered the cases relied upon by SARS in its defence. Whilst the ConCourt found that generally these cases did not deal with the rescindibility of tax judgments, SARS relied upon an unreported 2015 case, SARS v Van Wyk (Case No A145/2014), where the High Court held that a Magistrate’s Court was not entitled to hear a rescission application in respect of a tax judgment. The High Court reached a similar decision again in the 2021 judgment of Hamid v SARS (Case No 3280/2017) (in terms of the Customs and Excise Act 91 of 1964).

The ConCourt criticised the fact that these recent High Court decisions did not apply the decisions in Kruger II and Metcash, which bound it in terms of the rules of precedent. Essentially, a court is required, by the rules of precedent, to follow a binding statement in an earlier judgment of the (higher) court unless satisfied that the earlier statement was clearly wrong.

Turning to the High Court bench that heard BLI’s initial application, the ConCourt found that the High Court was bound by, amongst others, Kruger II and Metcash. Furthermore, the High Court’s view that a tax judgment was not final is irrelevant – this was apparent from the various cases. The ConCourt held that even though the TAA empowers SARS to amend or withdraw a tax judgment, this does not materially change its legal character. The ConCourt noted that the court with which the tax judgment is filed, on the other hand, has no power to treat it as an interim order, and thus availability of rescission is befitting.

The ConCourt found it unacceptable that the High Court did not discuss the relevant cases – despite the parties bringing them to the court’s attention. The ConCourt further declared that, “observance of the rules of precedent is not a display of politeness to courts of higher authority; it is a component of the rule of law, which is a founding value of the Constitution”.

The appeal was upheld with BLI’s application for rescission referred back to the High Court to be heard before a different judge to determine the merits of the application.

Conclusion

This case is important for two principal reasons:

  • The Constitutional Court has again confirmed – this time in light of the TAA – that a tax judgment (ie a section 172 certified statement) can be rescinded by a competent court of law; and
  • Our courts must give effect to precedent. They are not entitled to disregard superior court judgments unless the previous statement was clearly wrong.

It is ironic that SARS has chosen to oppose this case, since on its own version in the SARS Dispute Resolution Guide (paragraph 11.5.7) published at the time that the TAA was created, SARS states: “If the rules do not provide for a procedure in the tax court, then the most appropriate rule under the Rules of the High Court made in accordance with the Rules Board for Courts of Law Act and to the extent consistent with the [TAA] and the rules, may be utilised by a party or the tax court.” This would allow a taxpayer to apply for rescission of a tax judgment in any event.

We welcome the ConCourt’s considered and detailed judgment. It provides certainty to taxpayers; knowing that in cases where the judgment can be defended outside the “conclusive evidence” provisions, a taxpayer may bring an application for rescission of a tax judgment.

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