Challenging SARS judgment debt

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Challenging SARS judgment debt

• 21 April 2022
• Tax Administration
• PWC

The Tax Administration Act contains provisions which effectively enable SARS to convert a tax debt into a judgment debt. This procedure enables SARS to execute the ‘judgment’ using the services of officers of the court to attach property in execution. The Constitutional Court has recently delivered a decision which confirms that taxpayers retain the right to challenge a tax judgement after it was granted.

In the matter of Barnard Labuschagne Inc v South African Revenue Service and Another [2022] ZACC 8 (11 March 2022), SARS had alleged that the taxpayer (referred to in the judgment as ‘BLI’) was indebted to it in respect of amounts related to value-added tax, PAYE, UIF contributions and skills development levies. BLI did not dispute the correctness of the assessments (which were self-assessments). It asserted that SARS had failed to allocate payments that it had made to the taxes in question.

In December 2017, pursuant to section 172(1) of the Tax Administration Act (TAA), SARS had filed with the Registrar of the High Court, Western Cape Division, a certified statement which recorded that BLI owed it the amount specified in the notice. Section 174 of the TAA provides that a certified statement filed in this manner ‘must be treated as a civil judgment lawfully given in the relevant court in favour of SARS for a liquid debt for the amount specified in the statement’. For convenience, the effect of the filing of the statement is referred to as a ‘tax judgment’.

Generally, in legal proceedings, where a judgment is taken in the absence of the debtor an aggrieved person (i.e. the debtor) may seek and obtain rescission of the judgment if it may be shown that the judgment was taken without his knowledge, that the judgement was erroneously granted and that there is a reasonable defence to the action. BLI brought an application for rescission of the judgment in the High Court.

The application was dismissed. The High Court accepted SARS’ argument that a tax judgment is not susceptible to rescission. BLI’s alternative ground, that the provisions of the TAA that permitted SARS to take a judgment that was not rescindable are unconstitutional and should be declared invalid was also rejected.

BLI filed an application with the High Court for leave to appeal against its decision. The High Court dismissed the application. The taxpayer then applied for leave to appeal in the Supreme Court of Appeal, which also dismissed the application. Application for leave to appeal was then made to the Constitutional Court.

Stare decisis

The Constitutional Court will not hear a matter unless it has jurisdiction. Before the Constitutional Court will adjudicate the merits of a dispute, applicants must first establish that the Court has jurisdiction.

The judgment of Rogers AJ (who delivered the unanimous decision of the Court) confirmed jurisdiction (at paragraph [6]) in these terms:

‘BLI’s application, on the question of rescindability, raises an arguable point of law of general public importance. This is because several recent High Court judgments, of which the High Court’s judgment in the present matter is the third, appear to have failed to apply binding precedent, a core component of the rule of law, which is a founding value of our Constitution. This is an issue which this Court must redress. We thus have jurisdiction.’ (Footnotes removed)

Certainty in law is a fundamental principle underpinning our legal system. The meaning and application of our law is established through the process of judicial interpretation. The rule of law requires that judicial officers must observe and apply the principles of stare decisis. Simply stated, there is a hierarchy of authority of the courts. A subordinate court is bound to apply the principles embodied in judgments of superior courts. The principles must go to the reason for the decision (‘ratio decidendi’) and must not be observations made in passing (‘obiter dicta’). A court is bound to apply the principles from decisions which it has made in the past where the issue has not yet been decided in a higher court, unless it is clear that the decision in question was wrong. Where courts are of equal authority (for example, divisions of the High Court), one court is not bound to apply the previous decisions of another court of equal authority. In the case of courts of superior jurisdiction (for example the Supreme Court of Appeal) the court is bound to apply its previous decisions unless the decision was wrong.

Before a court may depart from an earlier decision of the same court, it must be satisfied that the earlier decision is clearly wrong.

In accepting jurisdiction, the Constitutional Court gave clear notice that judicial officers must consider all relevant cases to which they are referred by litigants and, if the circumstances of the matter are not so different as to justify a departure, apply the principles enunciated in those judgments that have binding authority.

The judgment makes it clear that the Constitutional Court found that it had jurisdiction under the Constitution because of a breakdown in the rule of law.

The available precedent

The judgment on the merits proceeded by examining the judicial precedent that had been placed before the High Court granted in the initial application. Before so doing, Rogers AJ set out the relevant provisions of the TAA and the predecessor provisions that had been contained in the Income Tax Act (‘ITA’) and the Value-added Tax Act (‘VATA’) prior to the enactment of the TAA. Certain of the judgments to which the High Court had been referred had involved interpretation of the predecessor provisions. The provisions of sections 172, 174, 164(1), 175 and 176 of the TAA were found to have replicated the essential features of provisions of the ITA and VATA on which the earlier decisions had been based and which were repealed when the TAA came into force. These were:

• Sections 91(1)(a), 91(1)(bA), 92 and 94 of the ITA; and
• Sections 40(2)(a), 40(2)(b), 40(5) and 42 of the VATA as well as section 36 of the VATA.

The decisions to which the High Court had been referred were systematically analysed.

In Kruger v Commissioner for Inland Revenue 1966 (1) SA 457 (C) (referred to as ‘Kruger I’), the full court found that a tax judgment obtained under the ITA was rescindable in terms of section 36 of the Magistrates Courts Act which empowered a Magistrate’s Court to ‘rescind or vary any judgment granted by it in the absence of the person against whom that judgment was granted’. The taxpayer in that matter failed in the appeal on procedural grounds.

A subsequent appeal involving the same parties was heard by the Appellate Division in Kruger v Sekretaris van Binnelandse Inkomste 1973 (1) SA 394 (A) (‘Kruger II’). In that matter, the principal argument for the Secretary had been that the judgment could not be rescinded because section 94 of the ITA provided that the assessment was conclusive evidence of the facts. Rogers AJ observed (at paragraph [14]:

‘In response to this argument, Jansen JA said that the taxpayer’s counsel had rightly not argued that Kruger I was wrong in holding that a tax judgment was rescindable. As to the limits imposed by section 94, Jansen JA said that the “conclusive evidence” only related to the making and correctness of the assessment. “Assessment” was a defined term. Various matters going to the merits of a tax judgment could still be contested, for example the computation of the tax, the question of the date from which interest ran, and the lawfulness of the levying of tax. Notwithstanding section 94, therefore, there was a wide field of defences available to a taxpayer in rescission proceedings. (Footnotes removed)

In Traco Marketing (Pty) Ltd v Minister of Finance 1998 (4) SA 74 (SE) (‘Traco Marketing’) it was held that a common law right to rescission exists in the case of a tax judgment taken in terms of section 40(2)(a) of the VATA. The application failed for lack of cause and not on the principle of rescindability.

In Barnard v Kommissaris van Binnelandse Inkomste, unreported judgment of the Cape Provincial Division, Case No A127/97 (19 May 2000) (‘Barnard’), the Cape Provincial Division determined that a Magistrate had jurisdiction to entertain an application for rescission of a tax judgment taken in terms of section 40(2)(a) of the VATA and referred the matter back to the Magistrate.

The Constitutional Court was called upon in Metcash Trading Ltd v Commissioner, South African Revenue Service 2001 (1) SA 1109 (CC) (‘Metcash’) to consider whether sections 36, 42(2)(a) and 42(5) of the VATA should be declared unconstitutional because they denied a person’s right to approach the courts. The Constitutional Court found that the provisions were not unconstitutional. Rogers AJ summarised the view of the Constitutional Court at paragraph [18]:

‘Kriegler J said that the decisions in Kruger I and II provided “clear judicial authority” at odds with the applicant’s argument. In these cases the courts found (a) that a tax judgment was in principle susceptible of rescission; and (b) that despite the “conclusive evidence” section of the IT Act, there was a wide field of defences available in rescission proceedings.’

In considering the principles set out in Metcash, Rogers AJ (at paragraph [27]) explained why Metcash was a relevant precedent, and that the principle that rescission was an available remedy was integral to finding that the provisions in the VATA were not unconstitutional:

‘The fact that tax judgments are susceptible of rescission, and that certain defences remain available to a taxpayer in rescission proceedings, was an integral part of this Court’s reasoning in finding that the cumulative effect of the statutory provisions was not constitutionally repugnant.’

The Gauteng High Court found, in Mokoena v Commissioner, South African Revenue Service 2011 (2) SA 556 (GSJ) (‘Mokoena’) that Kruger II and Metcash were authority for the proposition that a tax judgment is rescindable.

Rogers AJ then turned to the judgments that were considered by the High Court. He noted at paragraph [22]:

‘The High Court was referred to the authorities discussed above yet did not deal with them. Instead, so BLI complains, the High Court followed more recent provincial decisions which were adverse to BLI’s contentions on rescindability.’

The High Court, Western Cape Division, in Capstone 556 (Pty) Ltd v Commissioner, South African Revenue Service 2011 (6) SA 65 (WCC) (‘Capstone’) had found contrary to Mokoena (as it was entitled) on the issue of the right to challenge a tax judgment pending objection and appeal. It found that a tax judgment was ‘not in itself a judgment in the ordinary sense … [and] does not determine any dispute between the taxpayer and the Commissioner’. In so finding, the Court did not deal with the question of rescindability nor did it question that a tax judgment was, in principle, rescindable.

The judgment in Modibane v South African Revenue Service, unreported judgment of the South Gauteng High Court, Johannesburg, Case No 09/9651 (20 October 2011) (‘Modibane’), which Rogers AJ summarised (at paragraph [23]):

‘The Court quoted the passage in Capstone mentioned in the previous paragraph as if it were authority for the proposition that a tax judgment is not rescindable, and did not refer to the Kruger cases or Traco Marketing. Although the Court cited Metcash, it only mentioned the paragraphs dealing with the “pay now, argue later” rule; it did not heed paragraphs 65 and 66, which approved the Kruger cases and accepted that tax judgments are in principle rescindable. The Court mentioned Mokoena, but only to say that, like Capstone, it disagreed with it. As I have said, Capstone does not provide authority for the view that a tax judgment is not susceptible of rescission.’

The third and final recent judgment relied upon in the High Court was South African Revenue Service v Van Wyk, unreported judgment of the Free State High Court, Bloemfontein, Case No A145/2014 (5 June 2015) (‘Van Wyk’). This matter dealt with the application of the TAA. Rogers JA noted that the High Court stated in its judgment that ‘the Magistrate’s Court was not entitled to entertain the rescission application “as it was not a civil judgment in the ordinary sense” and that the certified statement “could not be regarded as having the character of a judicially delivered judgment”’. Again, it is noted that the Kruger decisions were not cited and citations from Metcash did not make reference to the issue of rescindability.

The decision

The decision required an examination of the rejection by the High Court of the alternative arguments presented by BLI. The first was that it was entitled to claim rescission of the tax judgment and the second was that, if it was denied the right to claim rescission, the relevant provisions of the TAA were unconstitutional.

On the issue of the right to apply for rescission, Rogers AJ found at paragraph [27]:

‘The courts in Modibane and Van Wyk were bound by the decisions in Kruger II and Metcash. Since Kruger II was not mentioned at all, and since the relevant passages in Metcash were overlooked, there was no attempt to distinguish them or to suggest that the pronouncements on rescindability were non-binding observations made in passing (obiter dicta). While it might be argued that the discussion of rescission in Kruger II was obiter, the same cannot be said of Metcash.’

The fact that the TAA grants a power to SARS to withdraw or amend a tax judgment under sections 175 and 176 of the TAA had been relied upon by the High Court to indicate that a tax judgment is not a final judgment. Rogers AJ pointed out that the power to withdraw a tax judgment and to replace it, which had been afforded under the ITA and the VATA prior to their repeal on promulgation of the TAA, was practically to the same effect as a power to amend and had been a power which SARS was able to exercise when the earlier matters had been decided. In effect, the express power to amend did not alter powers that SARS had been able to exercise in relation to tax judgments.

The judgment underscored the requirement that the statements in court decisions must be carefully examined to establish whether they are integral or incidental to the reason for the decision. The High Court had failed to appreciate that the findings of the Constitutional Court on rescindability were binding precedent when it referred to them as obiter dicta. The judgment states (at paragraph [30]):

‘The reasoning in Metcash on rescindability was not “merely . . . an observation”, it was an integral part of this Court’s reasoning. And Metcash in turn endorsed the two judgments in Kruger. 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.’

In response to a suggestion that the Constitutional Court is not bound to follow its own decision in Metcash, the judgment records, at paragraph [34]:

‘… this Court will not depart from an earlier binding statement of the Court unless satisfied that the earlier statement was “clearly wrong”. In applying this rule of precedent to itself as the country’s apex Court, the Court must tread with caution: it “must not easily and without coherent and compelling reason deviate from its own previous decisions, or be seen to have done so”.’ (Footnotes removed)

At paragraph [37], Rogers AJ was astute to explore the provisions in the TAA which limit the circumstances in which an application for rescission of a tax judgment may be instituted. Section 170 provides that a certificate on which a tax judgment is issued is conclusive evidence of an assessment. Section 104 limits the issues upon which a taxpayer may file an objection. If a taxpayer’s grievance falls within the scope of section 104(2), then section 105 stipulates that the procedure that must be followed is the dispute resolution process set out in Chapter 9 of the TAA, unless the High Court otherwise directs. The combined effect of these sections is that, in rescission proceedings, it will be difficult for a taxpayer to demonstrate that there is a bona fide prospect of success where the dispute is subject to objection and appeal.

The BLI appeal was not against an assessment. Nor was it against a decision against which a taxpayer may object, as specified in section 104 of the TAA. Rogers AJ concluded (at paragraph [39]):

‘Rescission is only of practical significance where a tax judgment is impeached on grounds which cannot be pursued by objection and appeal, because it is only in such cases that an applicant for rescission can potentially establish a bona fide defence.’

Then, recognising that the basis for the rescission application related to whether the amounts in dispute had been paid, Rogers AJ made it clear that no statutory relief was available (at paragraph [42]):

‘There is no provision in any relevant tax legislation stating that a dispute about whether an assessment has been paid is subject to objection or appeal.’

The inevitable decision, at paragraph [46], was succinct:

‘It follows that the High Court should have found that the tax judgment was susceptible of rescission and should have considered whether BLI had made out a case for rescission at common law. This Court recently repeated the well-known requirements: first, the applicant must give a reasonable and satisfactory explanation for its default; and second, it must show that on the merits it has a bona fide defence which prima facie carries some prospect of success.

The judgment did not undertake a review of the failure by the High Court properly to address the constitutional challenge. In view of the principal finding that a tax judgment is indeed rescindable, the constitutional issue was not addressed further.

The matter has therefore been referred back to the High Court for consideration. Now that it is settled that the tax judgment is, in principle, rescindable, the High Court is required to consider whether BLI has reasonable grounds.

The takeaway For taxpayers The filing of a certificate in terms of section 172(1) of the TAA is a step that is typically not taken lightly by SARS. It is usually the final throw of the dice when collection of a tax debt has proven difficult owing to obdurate refusal to pay on the part of the taxpayer. That said, sight should not be lost of the right of a taxpayer to retain certain remedies, such as the objection and appeal processes under the TAA or to apply for the rescission of a tax judgment by SARS. Where taxpayers are confronted by a tax judgment which has been obtained against them in their absence, they should be aware that they are still entitled to apply for rescission of the tax judgment if they can show that the tax judgement was granted erroneously or that they have reasonable ground for raising such a challenge. For a challenge to be successful, the challenge must not relate to the merits of the assessment (i.e., the amount of the assessment and the grounds on which it was made). Those issues must be pursued by way of objection and appeal. If there are other grounds for challenging the taking of the tax judgment, a taxpayer is entitled to consider and, if satisfied that there is a bona fide defence which, on the face of it, reflects a prospect of success, bring an application for rescission of the tax judgment.

For tax advisors A second takeaway is the masterclass that the judgment provides, in addition to stressing the function of precedent in the rule of law, by way of a comprehensive review of relevant authority on the legal issue in dispute and the distillation from each authority of the principles of law on which the decisions were based. In the precedent reviewed, it is noteworthy that the applicant was not always successful in its case, but the legal principle underpinning all of the cases referred to was that a judgment is in principle rescindable and that this principle extends no less to tax judgments. It is evident that experienced legal minds in the High Court and the Supreme Court of Appeal erred in their treatment of the principles of stare decisis in evaluating the applications by BLI for leave to appeal. This is a cautionary reminder of the high degree of care that must be taken by tax practitioners when advising clients on tax positions. Advice is typically provided on the basis that positions espoused by the advisor would ‘more likely than not’ be upheld if the matter were to proceed to court. Failure to identify or apply relevant precedent appropriately may place the practitioner’s evaluation of the likelihood of success in question.

This article first appeared on pwc.co.za.

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