Dispute resolution - Is it time to settle?

Either SARS or the taxpayer may initiate a settlement procedure, but neither party has the right to require the other to engage in a settlement procedure.

It is imperative for taxpayers to know at which point in the dispute reaching a settlement with SARS becomes appropriate, as this can save time, litigation costs and the utilisation of resources. Settlements can be a useful tool where a taxpayer weighs up the amount of tax at stake, legal arguments, facts and evidentiary difficulties / insufficient documentary evidence against one another and foresees difficulties in this regard. For taxpayers, this is important, as the taxpayer bears the onus of proving that:

  • an amount, transaction, event or item is exempt or otherwise not taxable;
  • that an amount or item is deductible or may be set off;
  • the rate of tax applicable to a transaction, event, item or class of taxpayer;
  • that an amount qualifies as a reduction of tax payable;
  • that a valuation is correct; or
  • whether a ‘decision’ that is subject to objection and appeal under a tax Act is incorrect.

A settlement may not be entered into if SARS is of the opinion that it is not to the best advantage of the state to settle a dispute if, in the opinion of SARS, the circumstances laid out in section 146 of the TAA (set out below) do not exist and a taxpayer has intentionally evaded tax or committed fraud, or where the settlement would violate the law or practice generally prevailing. Additionally, if a taxpayer has failed to comply with the provisions of a tax Act and the non-compliance is serious, SARS is precluded from settling the matter. Settlement is also inappropriate if it is in the public interest to have judicial clarification of the issue and the case is appropriate for this purpose or the pursuit of the matter through the courts will significantly promote taxpayer compliance with a tax Act and the case is suitable for this purpose.

Section 146 of the TAA provides for the circumstances where a settlement is appropriate and where it is fair and equitable to both parties, having regard to:

  • whether the settlement would be in the interest of good management of the tax system, overall fairness and the best use of SARS’ resources;
  • SARS’ cost of litigation in comparison to the possible benefits with reference to the prospects of success in court;
  • whether there are any complex factual issues in contention or evidentiary difficulties, which may make the case problematic in outcome or unsuitable for resolution through the alternative dispute resolution procedures or the courts;
  • a situation in which a participant or a group of participants in a tax avoidance arrangement has accepted SARS’ position in the dispute, in which case the settlement may be negotiated in an appropriate manner required to unwind existing structures and arrangements; or
  • whether the settlement of the dispute is a cost-effective way to promote compliance with a tax Act.

For a taxpayer to settle a dispute with SARS they must, at the very least, show that they meet at least one of the criteria set out above.

According to section 147 of the TAA, a participant in a settlement procedure must disclose all relevant facts during the discussion phase of the process of settling a dispute. The settlement is conditional upon full disclosure of material facts known to the person concerned at the time of settlement.

A dispute that has been settled must be evidenced by an agreement in writing between and signed by SARS and the taxpayer, in the prescribed format and must include:

  • how each particular issue is settled;
  • the relevant undertakings by the parties;
  • the treatment of the issue in future years;
  • the withdrawal of objections and appeals; and
  • the arrangements for payment.

Record of the settlement agreement must be retained by a taxpayer, as it represents the final agreed position between SARS and the taxpayer and is in full and final settlement of all or the specified aspects of the dispute.

SARS has a legal obligation to adhere to the terms of the agreement unless material facts were not disclosed, there was fraud or misrepresentation of the facts.

Where the taxpayer or the person concerned does not pay the amount due pursuant to the agreement or otherwise fails to adhere to the agreement, SARS is empowered to regard the agreement as void and proceed with the matter in respect of the original dispute, alternatively, enforce collection of the ‘settlement’ amount under the relevant collection provisions of the TAA in full and final settlement of the dispute.

Key takeaways

It is imperative for taxpayers to know at which point in a tax dispute to propose or consider reaching a settlement with SARS, as this impacts the taxpayer’s time, resources and litigation costs.

It is possible for taxpayers to initiate the settlement of a tax dispute (this can also be raised during an ADR process with SARS).

There is a specific set of circumstances where settlement would be regarded as inappropriate and a specific set of circumstances where settlement would be regarded as appropriate. The taxpayer must satisfy all relevant criteria for purposes of settling the matter.

Failure to adhere to a settlement agreement could result in the agreement being regarded as void, with the original dispute being revived and/or collection of the amount of tax owing being pursued by SARS.

Where taxpayers are unable to continue disputing a matter, they must be proactive and communicate with their tax advisers to assess whether a settlement of the matter will be appropriate.

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Webinar Commentary

For an update on the latest legislative amendments and court rulings access our Monthly Tax Update webinar-on-demand presented by Prof Jackie Arendse here.

Further webinar commentary on Dispute Resolution is also available on our Tax Administration Webinar-on-Demand Series, which is a series of videos covering the main aspects of the Tax Administration Act and the general tax administration provisions that have to be managed by taxpayers and tax practitioners. 

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