If a taxpayer owes money to SARS and does not pay, SARS may file a certified statement with a competent court, which will be “treated as a civil judgment” (section 174 of the Tax Administration Act 28 of 2011 (“TAA”)).
Recently the Constitutional Court finally set the record straight in Barnard Labuschagne Incorporated v South African Revenue Service and Another  ZACC 8 by finding that tax judgments are rescindable.
“The position thus remains that a tax judgment in terms of the TAA is susceptible of rescission, in terms of section 36(1)(a) of the Magistrates’ Courts Act or, in the High Court, in terms of the common law jurisdiction to rescind judgments taken in the absence of the other party” [para 40]
The Western Cape High Court had previously pronounced that tax judgements cannot be rescinded, and after being refused leave to appeal in the High Court and the Supreme Court of Appeal, the Constitutional Court agreed to hear the appeal as “the question of rescindability, raises an arguable point of law of general public importance” [para 6].
In this matter, SARS obtained a tax judgment against Barnard Labuschagne Incorporated (“BL Inc”), a law practice which encountered some difficulties with SARS regarding payments which were made but were not allocated properly.
When filing its certified statement in terms of section 172(1) of the TAA (see article on tax judgements) with the Registrar of the Western Cape Division, SARS did not take into account certain payments made by BL Inc (the taxpayer). BL Inc did not argue that the assessment itself was wrong, but rather that SARS had failed to appropriate payments made to the relevant assessed taxes. This is a distinguishing factor in this case, as the former argument would put this matter squarely within the dispute resolution mechanisms provided for in the TAA.
The Constitutional Court’s discussion and comparison of tax judgments in terms of the TAA, to the provisions of the (now repealed but equivalent provisions of) Income Tax Act 58 of 1962 (“IT Act”) and Value-Added Tax Act 89 of 1991 (“VAT Act”), makes for an interesting read. Acting-Judge Rogers discussed authorities from 1965 to 2011, as well as more recent cases [see para 12 to 26].
Briefly, the Constitutional Court’s reasons for its decision that tax judgments are capable of rescission were:
- Firstly, SARS contended that the civil judgment secured by the filing of a certified statement “lacks the rights-determining character of a judicially issued judgment” [para 35].
While the Constitutional Court agreed with this contention, it also referred to Kruger v Commissioner for Inland Revenue (1966 (1) SA 457 (C)) (“Kruger I”) and Metcash Trading Ltd v Commissioner, South African Revenue Service  ZACC 21; 2001 (1) SA 1109 (CC); 2001 (1) BCLR 1 (CC) (“Metcash”), which it held was binding precedent which the High Court should have considered, but did not.
In Kruger I, the full bench of the Cape Provincial Division held on appeal that a tax judgment was indeed susceptible to rescission in terms of section 36(a) of the Magistrate’s Court Act 32 of 1944, which allows the magistrates’ court to “rescind or vary any judgment by it in the absence of the person against whom that judgement was granted”.
In Metcash the Constitutional Court, in a unanimous decision, held that tax judgments were in principle susceptible to rescission; and that there was a wide range of defences available in such rescission proceedings (despite the conclusive evidence rule).
- Secondly, SARS highlighted the Commissioner’s right to withdraw a certified statement and to institute proceedings afresh for the same tax debt [para 36].
The Court disagreed with SARS that the mere fact that the Commissioner can withdraw, is indicative of something which is not final.
Furthermore, Rogers AJ points out that a court with which the certified statement is filed “has no power to treat the tax judgement as an interim order which it may vary or discharge” and therefore in relation to the court and the taxpayer, “the tax judgment is final, not interim”. Accordingly, “availability of rescission is thus not out of place” [para 36].
- Thirdly, the Minister of Finance argued that section 174 of the TAA requires the certified statement to be treated as a civil judgment “lawfully given” in the relevant court, and therefore, this was inconsistent with the notion that tax judgments can be challenged on the grounds of unlawfulness or invalidity.
However, the Court held that a judgment can be lawfully given, even though grounds exist for its rescission [para 38].
- Finally, the Minister referred to the dispute resolution mechanisms in Chapter 9 of the TAA, read with section 105 which expressly states that a taxpayer may only dispute an assessment or ‘decision’ in Chapter 9 proceedings.
Rogers AJ however found that the ability to rescind would only really be practically significant where objection and appeal proceedings are not available. The conclusive evidence provisions in the tax legislation as well as the obligation on the taxpayer in terms of section 105, clearly limits the scope of bona fide defences available to a taxpayer in any rescission application.
For instance, the Constitutional Court held that payment of an assessment was not a ground of objection or appeal in Chapter 9, and therefore:
“If the payment dispute is not a matter required to be dealt with by way of objection in terms of Chapter 9, it is one of those “defences” which the Courts in Kruger II and Metcash had in mind as being available to a taxpayer in rescission proceedings.” [para 44].
The Constitutional Court confirmed the well-known requirements of rescission at common law:
“[F]irst, the applicant must give a reasonable and satisfactory explanation for its default; and second, it must show that on the merits it has a bona fide defence which prima facie carries some prospect of success. Because the procedure for taking a tax judgment does not call for a procedural response from the taxpayer, the focus inevitably falls on the second of these requirements.”