Tax administration and the case for notice

The Gauteng Division of the High Court of South Africa recently adjudicated an urgent application launched by the taxpayer, WPD Fleetmas CC, against the Commissioner for the South African Revenue Services. Central to the issues adjudicated upon was notice: firstly, whether the taxpayer had to provide the Commissioner with notice in terms of section 11(4) of the Tax Administration Act 28 of 2011 (TAA) of its intention to launch an urgent application. Secondly, the validity of a third-party notice issued in terms of section 179(1) of the TAA.

Section 11(4) of the TAA provides that unless a court otherwise directs, no legal proceedings may be instituted in the High Court against the Commissioner, unless the applicant has given the Commissioner written notice of at least ten business days of the intention to do so. In the Fleetmas-case, the applicant did not provide notice in terms of section 11(4) to SARS, but requested in the prayer dealing with urgency, for the court to waive compliance of the one-week notice period, commensurate with the urgency of the application. 

SARS raised a legal objection, contending that the absence of a section 11(4) notice barred the taxpayer from launching the proceedings. His Honourable Justice Fourie held in his written judgment of 19 August 2020 (WPD Fleetmas CC v Commissioner: South African Revenue Services and One Other (Gauteng Division, Pretoria case no.: 31339/2020)) that the words “unless the court otherwise directs” does not require an applicant to apply on notice or in the application itself for condonation. The court further held that it appears as if the legislature empowered the court with a wide discretion to condone a failure or to “direct otherwise” which must be done in a judicial manner. In doing so, the Gauteng Division took into account the fact that the Commissioner delivered an answering affidavit, a supplementary affidavit and heads of argument, in addition to being given the opportunity to submit oral argument. The court thus found no prejudice as the matter came before it, ready to be adjudicated and it directed otherwise in terms of section 11(4) by allowing the matter to proceed and dismissing the legal objection. 

This is the first judgment where section 11(4) was interpreted and the judgment provides valuable insight in that regard. Parties are urged to follow section 11(4) where possible so as to avoid instituting proceedings where necessary. However, where urgency is of such a nature that the court can be approached without compliance or partial compliance, the wording of the subsection makes it clear that the court is vested with a wide discretion. 

A lot has been written about section 179 third party appointments and the obligations of SARS in terms of the Constitution. See inter alia Fritz (Keulder) and Legwaila The Constitutionality of Third Party Appointments – Before and After the Tax Administration Act Journal of Contemporary Roman-Dutch Law, Vol. 77, p. 53-71, 2014; as well as Van Zyl, SP The Time is Ripe to Reconsider the Pay-Now-Argue-Later-Principle -Vuyisile Zamindlela Nondabula v Commissioner: South African Revenue Service - Journal of Contemporary Roman-Dutch Law, 2018) l and furthermore, Fritz C, Nondabula v Commissioner: SARS (2018 (3) SA 541 (ECM) (27 June 2017)) De Jure (Pretoria) vol.52 n.1 Pretoria 2019) (dealt with briefly in the excursus below). Suffice at this juncture to state that it follows that subsection (5) was inserted by the legislature to provide for notice and the oppurtunity to make representations to the Commissioner.

For purposes of the taxpayer’s case in the Fleetmas-matter, the taxpayer thus relied on the ratio expressed by Lingenvelder AJ in SIP Project Managers v Commissioner SARS, (Gauteng Division, Pretoria case number 11521/2020), concerning the validity of the third-party appointment in absence of compliance with the final demand. It is evident that section 179 of the TAA is an invasive remedy available to the Commissioner.  For this reason, it was amended to include subsection (5) which provides that the taxpayer must be given notice in the form of a final letter of demand, with requisite remedies which the taxpayer may follow, including making representations to SARS where the taxpayer will suffer severe financial hardship. In the Fleetmas-case, the third-party notice was issued to the taxpayer’s customer after SARS obtained the information from the taxpayer via a section 200 compromise application by the taxpayer. Pursuant to the third-party notice, the third party paid over to SARS all the monies it had to pay the taxpayer. It was the uncontested case of the taxpayer that the amount paid over was not net profit and that it had to pay its creditors (suppliers and employees) with the bulk of the funds paid over to SARS. A final demand was sent by the Commissioner on a date subsequent to the issuance of the third-party notice, which clearly affects the validity of the third-party appointment and its results on the basis of legality. The Commissioner’s defence was a final notice dated prior to the third-party appointment, but the court found that the Commissioner did not prove that the taxpayer received it (as evidenced by screengrabs of the taxpayer’s E-filling platform). The court thus declared the third-party appointment null and void and set it aside, ordering SARS to refund the taxpayer the amount paid over to it by the customer.  

Excursus

Fritz (Fritz C, De Jure (Pretoria) vol.52 n.1 Pretoria 2019), states that one of the founding values of the Constitution contained in section 1(c) thereof is the supremacy of the rule of law, and, more specifically, the principle of legality, which forms part of the rule of law. Thus, SARS is required to act in accordance with legislative provisions such as the Constitution. Moreover, this value demands that the conduct of government, in this instance SARS, may not be arbitrary. Fritz, referring to Currie and De Waal (The Bill of Rights Handbook  (2013) 540-547) states that "arbitrary" generally involves not following a fair procedure, being irrational or having no good reason. In Nondabula v Commissioner: SARS (2018 (3) SA 541 (ECM) (27 June 2017) the court affirmed the constitutional obligations of the fiscus, as an organ of state, in terms of section 195 of the Constitution of the Republic of South Africa, 1996 (the Constitution). The court held that the fiscus must act in an accountable manner (s 195(1)(f) of the Constitution) and in a transparent manner.

Van Zyl (Van Zyl, SP The Time is Ripe to Reconsider the Pay-Now-Argue-Later-Principle -Vuyisile Zamindlela Nondabula v Commissioner: South African Revenue Service - Journal of Contemporary Roman-Dutch Law, 2018) (l), in discussing the Nondabula case sets out the legal position that the Commissioner (and by implication SARS) is a creature of statute. As a result, the actions of the State are limited to the four corners of the statutory provisions that empower it (as held in Nondabula). Van Zyl refers to Competition Commission of South Africa v Telkom SA Limited 623/2008) [2009] ZASCA 155 where Malan JA ruled that: “the principle of legality entails that no public power may be exercised and no function performed beyond that conferred by law” (para 12; see also Masetlha v President of the Republic of South Africa 2008 1 SA 566 (CC) para 80).

As the Commissioner is an organ of state, it is subject to section 195 of the Constitution. Section 195(1)(f) of the Constitution requires that public administration, of which the Commissioner is part, must be accountable to the values of the Constitution. The Davis Tax Committee echoed the principle of tax certainty in that the manner in which taxes are collected and the calculation of tax liabilities should be certain. Tax rules and procedures should thus be transparent and applied consistently. In ensuring tax certainty, tax administration should also be congruent with the values of public administration as articulated in the Constitution. (Van Zyl supra referring to the Davis Tax Committee Final report on macro analysis of the tax system and inclusive growth in South Africa (2014) 10). These values include inter alia a high standard of professional ethics; impartiality, fairness, equity and lack of bias; being accountable; being transparent, and being representative (Van Zyl). 

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FJ Labuschagne LL.B, LL.M (Corporate), LL.M (Tax), LL.D is an advocate at the Johannesburg Bar and a member of The Maisels Group of Advocates in Sandton. He also lectures on postgraduate level at the Faculty of Law, Department of Mercantile Law, University of Pretoria. The taxpayer in the above matter was represented by Weavind and Weavind Attorneys in Pretoria. Labuschagne was on the brief for Weavind and Weavind.