High Court (Gauteng Division, Pretoria) decision on whether SARS is no longer bound by a compromise agreement in the circumstances under consideration

  • This case dealt with whether the South African Revenue Service (“SARS”) was no longer bound to a compromise agreement entered into between the taxpayer and SARS in terms of the Tax Administration Act (the “Admin Act”) as a result of alleged non-disclosures and misstatements made by the taxpayer, who expressly warranted the truth of the facts furnished by him.
  • The taxpayer had been assessed to pay income tax, with interest, in the aggregate amount of R18 192 295.36 by May 2014 in respect of the 2005 to 2011 tax years. The taxpayer objected to the assessments and alleged that the amounts in question constituted donations or dividends in respect of which he declared he could not be assessed to tax. The taxpayer addressed four requests for a compromise to SARS. The taxpayer and SARS finally concluded a compromise agreement on 21 May 2014. By 1 December 2014, the taxpayer had paid the amount stipulated in the compromise agreement and therefore complied fully with his payment obligations in terms of the compromise agreement.
  • However, on 13 March 2015, SARS contended that it was no longer bound by the compromise agreement as the taxpayer had not, as was required by the compromise agreement, made full, verifiable and complete disclosure of all material facts nor kept his tax affairs current.
  • The court stated that the real dispute between the parties is how the dividends and donations received by the taxpayer should be classified. The court made the following observations regarding the applicable provisions in the Admin Act and their interpretation:
    • in terms of section 192, a compromise of a debt can only take place when the liability to pay the debt is not disputed by the debtor;
    • the effect of section 192 is that under a compromise, the taxpayer loses his right to object and appeal against an assessment, meaning that SARS cannot be allowed to enter into a compromise with a taxpayer only to later deny its validity based on unwarranted grounds;
    • SARS is obliged to secure the highest net income from a tax debt and to enter into compromises on an informed basis, which is why section 100(4) entitles senior SARS officials to require that an application for compromise be supplemented by further information;
    • in terms of section 200(4), once a senior SARS official and a debtor have signed a compromise agreement, SARS must give an undertaking that it will not pursue recovery of the balance of the tax debt;
    • only if any of the circumstances in section 205 are present will SARS not be bound to the compromise agreement; and
    • in order to determine whether a term is “material” to a compromise, one must assess whether it was a vital term, as decided in O’Connell v Flischman 1948 (4) SA 191 (T).
  • The court accepted SARS’ argument that the alleged non-disclosure regarding a certain property was intentional and that such fraud is material, but questioned why SARS had still entered into the compromise agreement even though it was aware of the taxpayer’s interest in the property.
  • The court held that, because of the factual disputes, the necessity for SARS to justify its argument regarding materiality by proving the facts that were attendant when the compromise agreement was entered into and because of the fact that one cannot decide the issue of fraud on affidavit, the matter should be referred to trial. The court indicated that it did not wish to express an opinion on which interpretation of section 205 is correct.
  • Find a copy of the judgment here.