1760. Interest on refunds of taxes overpaid
August 2009 – Issue 120
Companies, as provisional taxpayers, are obliged to pay provisional taxes, which are payments on account of the liability that will ultimately be assessed. Two compulsory payments of the estimated liability are made in respect of each year of assessment (at half-year and year-end), and taxpayers are entitled to make a subsequent "additional payment" to mitigate their exposure to interest in the event that the earlier payments should be considered to be less than the final anticipated liability. Should it transpire, on assessment, that the final liability is less than the amount paid, the excess becomes refundable with interest (as provided in section 89quat of the Income Tax Act).
This entire process came under close scrutiny in the matter of KNA Insurance and Investment Brokers (Pty) Ltd (In Liquidation) v South African Revenue Service and Another [2009] 71 SATC 155. The principal dispute related to whether SARS was liable to pay interest in terms of section 89quat of the Income Tax Act.
In this instance, the company had been operated fraudulently by a director with the result that, in the year ended 31 March 1999, it had sustained a loss. The director had nevertheless informed the company's auditor (who apparently assisted the company with its income tax compliance) that the company had made a substantial profit. The company, on the auditor's advice, made an additional payment of provisional tax of R6 300 000 not later than 30 September 1999 to avoid exposure to interest on underestimation of its income tax liability for the year ended 31 March 1999.
The company was placed in liquidation. The liquidator asserted that the payment of R6 300 000 had been made in error and claimed a refund of this amount from SARS. In 2002, after negotiation with the liquidator, SARS agreed to refund the amount of R6 300 000, before the company had filed a return of income for the relevant year of assessment and without making an assessment. However, no interest was paid, and after the liquidator's demand for payment of the interest was refused, application for an order compelling payment was brought.
The liquidator's case was simply that the company had made a payment of provisional tax of R6 300 000, the company had no liability for the year of assessment and as a result tax was overpaid and became refundable with interest.
SARS argued that the payment of R6 300 000 was not a payment of provisional tax. It based its case on the matter of Kommissaris van Binnelandse Inkomste v Bowman [1988] (51 SATC 159) in which it had been found that payments made in respect of amounts of fictitious income could be recovered by a liquidator as a disposition for no value. In fact, it said, no tax was ever legally payable, and the payment had been procured by the director's fraudulent misrepresentations to the auditor in order to cover up the director's fraud. The company therefore never intended to pay provisional tax. SARS had therefore agreed to refund the moneys on the basis that it had been unjustly enriched and not because the company had overpaid tax.
The Court, placing reliance on averments in the liquidator's application that the payment of R6 300 000 had been made "without any legal liability" to do so, found that the payment could not "by any language, be termed a payment of provisional tax as defined..."
The liquidator was accordingly found not entitled to the payment of interest in terms of section 89quat of the Income Tax Act.
It is interesting to consider whether the outcome may have been different had the liquidator merely filed a return of income and awaited a refund instead of making a request for refund in respect of an erroneous payment.
PricewaterhouseCoopers
