In a judgment handed down on August 23, 2021, a full bench of the High Court, Western Cape Division, held that there had been an “unreasonable exercise of the discretion” by the South African Revenue Service (Sars) in considering a taxpayer’s grounds for requesting a remittance of a penalty of R1 064 607.69, which had been levied for the late payment of employee pay-as-you-earn (PAYE) tax. Costs were awarded against Sars.
The taxpayer, Peri Formwork Scaffolding Engineering (Pty) Ltd, paid the PAYE collected of R10 648 340.93 over to Sars on Monday, January 8, 2018, when the payment was ostensibly due on Saturday, January 6, 2018. In terms of the Tax Administration Act, the payment should have been made on the Friday.
The taxpayer requested the remittance of the penalty. Sars rejected this, as well as the taxpayer’s subsequent appeal. The taxpayer lost the matter in the Tax Court, and then appealed to the High Court.
The right to be heard
The audi alteram partem rule, which stands for ‘hear the other side’, is a fundamental legal principle.
This is enshrined in the Constitution of South Africa, which provides that all administrative action must be lawful, reasonable and procedurally fair.
The Promotion of Administrative Justice Act sets out the duties of administrators regarding procedural fairness, including that an administrator shouldn’t make a decision that adversely affects someone without consulting them first, and that the decision must be free from any impartiality, bias or prejudice.
A taxpayer must be able to put its case forward, which requires Sars to hear it, and to carefully consider it.
In other words, Sars must apply its mind to the facts, free from any impartiality, bias or prejudice.
Sars was required to consider the taxpayer’s reasons that were put to it in requesting a remittance of the penalty, and was required to weigh these up and apply its mind to whether these constituted reasonable grounds to waive the penalty.
This was the taxpayer’s first incidence of non-compliance, and on realising that it was short of cash, immediately took steps to remedy the situation. In the end, the taxpayer was late by only two days.
Did Sars consider the taxpayer’s grounds with bias and prejudice? Was Sars’s behaviour driven by the fact that this was close to the end of the financial year; was its behaviour driven by the need to collect revenue?
The taxpayer argued:
- That it had experienced cash flow problems. The taxpayer’s bookkeeper was expecting payments from debtors in early January, which did not materialise. The PAYE was due and payable to Sars within seven days after the end of December 2017.
- That it immediately took steps to raise the funds, and managed to raise in excess of R5 million. The weekend delayed the receipt of funds into the taxpayer’s bank account to the Monday, at which point the taxpayer immediately paid Sars.
- That its method in calculating the number of days in which payment to Sars should be made, established that payment was only due on January 8.
Sars dropped the Tax Court’s reference to a provision in the Fourth Schedule to the Income Tax Act which had been repealed in 2011, but which led to the Tax Court’s finding that a taxpayer had a fiduciary duty to Sars in collecting the PAYE and paying this over to Sars.
In the High Court, Sars submitted that Paragraph 2(1) of the Fourth Schedule establishes a “relationship between Sars and the various taxpayers who happen to be employers”.
For the benefit of understanding, I briefly summarise this paragraph, which provides that every employer who is a resident, and who pays or becomes liable to pay employees’ tax, must pay the amount so deducted or withheld to the commissioner of Sars within seven days after the end of the month during which the amount was deducted or withheld.
Sars deduced that this led to a relationship between Sars and the taxpayer, on the basis that the taxpayer must pay over the employees’ tax withheld to Sars.
Sars then expanded on this relationship, and submitted to the High Court that the relationship between the taxpayer and Sars is “akin to a fiduciary relationship in that the taxpayer is required to act for the benefit of Sars”.
In support of its contention, Sars then relied on the definition of ‘fiduciary’ in Black’s Law Dictionary.
It is somewhat surprising that Sars resorted to a law dictionary for a definition of fiduciary, as a fiduciary is amply covered in our case law, particularly case law pertaining to company, trust and labour law. However, Sars would still have had to demonstrate how this established a fiduciary relationship between the taxpayer to Sars.
Sars argued that the taxpayer had failed in its fiduciary duty, which required the taxpayer to “observe the highest degree of care” in relation to the PAYE deducted, insulate this amount, not mix it with other business income, and not subject this money to “risks associated with non-payments by third parties”. Further, Sars contended that the taxpayer shouldn’t have to borrow money from third parties to pay Sars.
High Court findings
Calculation of the days
The High Court ruled against the taxpayer’s arguments that it had paid Sars in time, stating that the rules set under the Tax Administration Act are clear, and that if the last day of a period in which the taxpayer is meant to make payment falls on a Saturday, Sunday or public holiday, the payment must be done on the last business day before such Saturday, Sunday or public holiday.
Fiduciary relationship between the taxpayer and Sars?
The High Court disagreed with Sars’s contention that there was a fiduciary relationship between the taxpayer and Sars, opining that there have been “various distinctions between the accountability of a trustee to his beneficiary and the accountability of a debtor to his unsecured creditor”.
The High Court referred to the 2016 judgment of Grayston Technology Investment and Another v S, where the full bench was of the view that “Grayston stood in the shoes of an agent in respect of either a statutory or civil law obligation of debtor and creditor, pursuant to which relationship it attracted an obligation to pay over in specie to Sars or to account for the money actually received or its proceeds”.
The High Court clarified that the taxpayer was not precluded from utilising the PAYE money or obliging it to be ring-fenced.
Did the taxpayer have reasonable grounds for the remittance of the penalty?
The High Court found that:
- The taxpayer had a clean record with Sars and this was the first instance of non-compliance.
- When the taxpayer realised that it would be short of funds it immediately took steps to rectify this. The process of the payment of the additional funds raised by the taxpayer occurred over the weekend, and was therefore delayed.
- The taxpayer therefore had reasonable grounds for the penalty imposed to be remitted.
The court held that the taxpayer’s appeal must succeed, and the penalty be remitted.
Punish those who are outside the system
A penalty should be imposed where a taxpayer has not only abused the tax system, but does so consistently.
A law abiding taxpayer should not be dealt with so harshly where it missed the deadline for a payment for the first time, and where it could provide reasonable grounds for doing so. It appears that the taxpayer’s grounds for the remittance of the penalty were not considered.
Unfortunately, South Africans have now been exposed to three years of state capture revelations at the Zondo Commission of Inquiry.
There have been accounts of many criminals who have garnered hundreds of millions out of their corrupt activities, pay no tax, run business that are not registered for value-added tax or income tax, have stored their millions in trusts that don’t pay tax, and are still walking free.
This harsh treatment of a compliant taxpayer who made an error in calculating its cash flow, leaves a bad taste.