Rescission of tax judgements

The Constitutional Court?recently had to consider whether a certified statement, setting out the amount of tax payable and certified by the South African Revenue Service (SARS) as correct, filed with the Registrar of the High Court was capable of being rescinded under the common law (and section 36 of the Magistrates Court Act, No. 32 of 1994).

On 15 December 2017 SARS filed with the Registrar of the High Court, Western Cape Division in Cape Town, such a statement in respect of outstanding tax debt. Such a statement may be filed, despite any objection or appeal against an assessment under Chapter 9 of the Tax Administration Act (TAA), after giving the taxpayer at least 10 business days’ notice.

The statement recorded that Barnard Labuschagne Incorporated (BLI) owed SARS ZAR 804 747 (relating to self-assessments for value-added tax, employees’ tax, unemployment insurance fund contributions and skills development levies). BLI’s challenge arose because its payments were not allocated, to the assessed taxes, by SARS (rather than because its self-assessments were incorrect).??

The effect of SARS filing such a statement was that it was treated as a civil judgment lawfully given in the relevant High Court against BLI, in favour of SARS, for the amount specified in such statement (tax judgment).?

BLI brought an application to rescind such tax judgment under the common law. BLI submitted, in the alternative, that should such a tax judgment not be susceptible to rescission pursuant to the relevant provisions of the TAA, such TAA provisions would be constitutionally invalid.?

The High Court held that the tax judgment was not susceptible to rescission and dismissed BLI’s constitutional challenge. Leave to appeal was finally granted by the Constitutional Court.

The Constitutional Court, in assessing the legal position, had regard to the following:

? that the TAA gave effect to the ‘pay now argue later’ principle (payment is not suspended by an objection or appeal in terms of Chapter 9 of the TAA unless SARS directs otherwise);

? a SARS issued document purporting to be a copy/extract of an assessment is conclusive proof of (i) the making of the assessment and (ii) that all the particulars of the assessment are correct;

? SARS is empowered to amend or withdraw any such statement filed with a court;

? the TAA provisions, despite modest changes to formulation, were substantial replicas of earlier provisions in the Income Tax Act and Value-Added Tax Act.

In dealing with the matter the Constitutional Court had regard to case law authority from 1965 to 2011.

These authorities held consistently that a tax judgment was susceptible to rescission in terms of the common law (in respect of statements filed with a Registrar of the High Court) and in terms of section 36(a) of the Magistrate’s Court Act (in respect of statements filed with the clerk of a Magistrate’s Court).

The Appellate Division?(now the Supreme Court of Appeal) held that, despite the conclusive evidence provision in tax legislation to the effect that the tax assessment is correct, the merits of a tax judgment could be contested by way of rescission based on a range of defences, such as:

? the computation of tax

? the question of the date from which interest ran; and

? the lawfulness of the levying of tax.

Such defences are also available to challenge an assessment before SARS takes a tax judgment.

The Constitutional Court exercised jurisdiction in the matter because recent High Court judgments?(the latest being the High Court judgment which was the subject of the appeal to the Constitutional Court) failed to apply binding precedent (a core component of the rule of law and which is a founding value of our constitution).?

The Constitutional Court was critical of these High Courts’ failures to distinguish the decisions by which they were bound and/or failures to suggest that the pronouncements were merely remarks made in passing.

The Constitutional Court also found that it was difficult to fathom the High Court’s statement, when refusing leave to appeal, that there were no conflicting judgments on rescindability (in light of the authorities to which the High Court in the BLI matter was referred).

The Constitutional Court dismissed each of the Minister of Finance’s contentions. These contentions, and the Constitutional Court’s responses thereto, are set out below:

? The binding decisions of the Appellate Division (Kruger II) and the Constitutional Court (Metcash) were based on different legislation and therefore not applicable. The Constitutional Court held that this would be the case only if the TAA provisions brought about substantive changes bearing on the question of rescindability. The Court noted that the Minister in any event also sought to rely on cases that dealt with repealed provisions of the Income Tax Act and Value-Added Tax Act.

? The Constitutional Court’s own pronouncement on rescission of tax judgments in an earlier case (Metcash) were non-binding observations made in passing (obiter remarks) and that the Constitutional Court was not bound by its previous decision and should not follow it. The Constitutional Court confirmed that such pronouncements were binding and that it would only depart therefrom if such pronouncements were clearly wrong (which was not the case).

? The TAA expressly allows for a tax judgment to be taken by SARS, despite a taxpayer’s objection and appeal (under Chapter 9 of the TAA), unlike the earlier regime. The Constitutional Court noted that such action was similarly not prohibited under such regime and was, in fact, contemplated thereunder. The Constitutional Court noted that the grounds upon which a tax judgment could be challenged, in rescission proceedings, would be limited to bona fide defences (other than those capable of being pursued in objection and appeal proceedings). The Court confirmed that a court hearing a rescission application would not be entitled to go behind the SARS certified statement.

? SARS had the power to amend or withdraw a certified statement which meant that the tax judgment was not final and therefore not capable of being rescinded. The Constitutional Court held that in law a judgment creditor is entitled to abandon a final judgment or waive rights thereunder in whole or in part and that did not mean that such judgment was not final. The Court also noted that a tax judgment is final as far as the relevant court and the judgment debtor are concerned. The remedy of rescission was therefore an appropriate remedy.

? The TAA deemed a tax judgment to be ‘lawfully given’ which meant that it could not be challenged on the basis of unlawfulness or invalidity. The Constitutional Court stated that this was also a feature of the previous regime and that lawfully given judgments may in any event be rescinded.

? The TAA dispute resolution provisions allow only for ‘assessments’ and ‘decisions’ to be disputed by way of objection and appeal proceedings under Chapter 9 of the TAA. The Court stated that this was also a feature of the previous regime and that rescission is of practical significance where a tax judgment can be challenged on grounds which cannot be pursued by objection and appeal (because it is only then that one can establish a bona fide defence which is a requirement for a successful rescission application).

The Constitutional Court cautioned as follows:

? the ‘conclusive evidence’ provisions in the TAA considerably narrow the scope of bona fide defences available to a taxpayer in rescission applications;

? disputes, regarding an ‘assessment’ or ‘decision’, are by way of objection and appeal proceedings under Chapter 9 of the TAA (unless a High Court regards it appropriate to grant declaratory relief on legal questions relating to assessments).

Success for BLI

In this particular matter, BLI’s grounds for challenging the tax judgment were not covered by the conclusive evidence provisions of the TAA (BLI’s grounds were not that the particulars in the self-assessments were incorrect). BLI’s challenge was also not based upon an objection or appeal against an ‘assessment’ or ‘decision’ of SARS. Rather, BLI’s dispute was that it paid the self-assessed tax amounts to SARS (which is not a decision subject to objection and appeal under any tax legislation).?

The Constitutional Court therefore held that the Western Cape High Court should have found that the tax judgment was susceptible to rescission and should have considered whether BLI made out a case for rescission at common law (the requirements for which are that an applicant (i) must give a reasonable and satisfactory explanation for its default, and (ii) must show that on the merits it has a bona fide defence which prima facie carries some prospect of success - in tax matters the focus would be on the latter requirement).The matter was re-mitted to the High Court to consider the merits of the rescission application (to be heard by a different judge in view of some adverse remarks made by the High Court about BLI).

Relevance to other taxpayers

In appropriate circumstances taxpayers would be entitled to have tax judgments, taken against them by SARS, rescinded. Taxpayers may also be able to pre-empt such action by SARS on similar grounds.

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