General
1475. Back-door way of compelling SARS to compromise a tax debt
January 2007 – Issue 89

Section 91A of the Income Tax Act No. 58 of 1962 (the Act) provides that the Minister may, by regulation, prescribe the circumstances under which the Commissioner may waive, write off or compromise in whole or in part any amount of tax, duty, levy, charge or other amount payable by a person in terms of any Act administered by the Commissioner where that waiver, write-off, or compromise would be to the best advantage of the State.

Draft regulations in this regard have now been published.

Where there is no dispute between SARS and the taxpayer in regard to the taxpayer’s liability for tax, and the only issue is the taxpayer’s ability to pay, this is not a "dispute" falling under section 88A and is thus incapable of resolution in terms of that provision. Any compromise between SARS and the taxpayer in such circumstances can only be achieved in terms of section 91A and the Ministerial regulations.

However, the draft regulations in terms of section 91A empowering SARS to waive a tax debt have proved a disappointment for many taxpayers. The purpose of the regulations is not to relieve taxpayers from financial hardship, but to lay down a defined process whereby SARS can write off a tax debt which, in practical terms, is irrecoverable, or where the costs of attempted recovery would probably exceed the amount recovered. The taxpayer’s hardship, or any equitable reasons why a waiver of tax would be "fair" – for example, that jobs would be preserved – are irrelevant.

A section 311 compromise provides a backdoor method of getting a tax debt written off

For a company that is in straitened circumstances with a large amount of tax owing to SARS, a section 311 compromise with its creditors offers a way of compelling SARS to write off a tax debt outside of the strictures of the regulations in terms of section 91A.

Until the decision in Namex (Edms) Bpk v Kommissaris van Binnelandse Inkomste (56 SATC 91) it was unclear whether SARS is included amongst the creditors who are bound by a compromise or arrangement between a company and its creditors that is sanctioned by a Court in terms of section 311 of the Companies Act No. 61 of 1973.

In that case, the Commissioner argued that a section 311 compromise between a company and its creditors cannot bind SARS in relation to taxes owing by the company because SARS is not legally entitled either to waive or to cede a claim for taxes, and SARS cannot be bound to a section 311 compromise or arrangement that it would be incapable of entering into on a contractual basis.

The Appellate Division disagreed, and affirmed the important principle that, at common law (hence, quite outside of the foreshadowed regulations under section 91A) SARS is entitled to abandon a claim for tax if it is satisfied that it is irrecoverable, and that SARS is thus entitled to agree to a section 311 arrangement if it will thereby not recover less than it would have received had the taxpayer company gone into liquidation.

The court went on to say (at 284; our translation; italics added) –

"Consequently, I cannot see why [SARS] cannot, at common law, validly consent to an arrangement in terms of section 311if it stands to receive no less than would be paid out by the liquidator in the event of final liquidation. There is equally no reason why, in the postulated circumstances, [SARS] even in the absence of consent, is not bound by the sanctioning of the arrangement. SARS is, indeed, not being bound to something that it could not do contractually".

It follows that there is greater scope for binding SARS to a compromise, involving a partial waiver of tax, by utilising the mechanism of section 311 of the Companies Act, than under the regulations in terms of section 91A.

Of course, where the section 311 compromise involves the cession or deemed cession of creditors’ claims to another party, the company’s tax debt is not written off. It remains intact and is enforceable by the cessionary, though the latter cannot utilise the extraordinary processes for enforcement and recovery that are available to SARS in terms of tax legislation.

PricewaterhouseCoopers

IT Act:S 88A

IT Act:S 91A

Companies Act No. 61 of 1973: s 311