Shedding some light on default judgements in the tax court: part 2 of 2
Introduction
This is the second instalment in our 2-part series of articles where we analyse two tax court judgements where an application for default judgement was applied for by the taxpayer. The aim is to show why the one taxpayer was successful while the other was not. This article focusses on the second case. It is our view that these two perfect opposites will offer some clarity to taxpayers on what the court expects when seeking a final order against SARS – to ensure that you approach such an application with certainty.
The second case: Taxpayer N v The Commissioner for the South African Revenue Services in Case no: 2022/37 (Taxpayer N)
Judgement in this matter was handed down on 23 March 2023. The facts of the case are that after the South African Revenue Service (“SARS”) conducted verification into the taxpayer’s PAYE affairs it issued internal revised notices of assessment in relation to all the one-month periods from April 2019 until February 2021. These assessments resulted in a tax liability of R 873 605.86, and they related to the entitlement of the taxpayer to claim the Employment Tax Incentive (“ETI”) allowances in terms of the Employment Tax Incentive Act, Act 26 of 2013.
The taxpayer objected to the assessments and the objection was disallowed timeously. The taxpayer then appealed against the assessments, furthermore, neither party elected to refer the matter to Alternative Dispute Resolution which meant that SARS’ Rule 31 statement became due 45 days after the taxpayer appealed the assessment.
Approximately 6 months later SARS had still not delivered its Rule 31 statement which prompted the taxpayer to apply for default judgement in terms of Rule 56(1)(a). SARS failed to file its Rule 31 statement within the 15 day limit provided for in the default notice. The taxpayer then applied for a final order in terms of section 129(2)(b) of the Tax administration Act 28 of 2011 (“TAA”) where it asked the court to uphold its appeal against the assessments raised by SARS. In response, and 133 days late, SARS filed its Rule 31 statement, and in opposing the taxpayer’s application for default judgement sought condonation for the late filing of its Rule 31 statement. The condonation application was later abandoned as it was unnecessary, however the default judgement application remained, and it was thus up to SARS to show good cause in order to successfully oppose it.
In terms of Rule 56(2), SARS needed to show good cause in order for the court not to grant a final order in favour of the taxpayer in terms of section 129(2) of the TAA.
In addressing good cause, the taxpayer advanced argument that the explanation for the delay in filing the Rule 31 statement was insufficient, was incomplete, failed to cover the entire period of delay and was not reasonable. The taxpayer relied on paragraph 33 of Van Wyk v Unitas Hospital and Another (Open Democratic Device Centre as Amicus Curiae) 2008 (2) (SA 472 (CC) (“Van Wyk v Unitas”) which said that “Prospects of success pale into insignificance where, as here, there is an inordinate delay coupled with the absence of a reasonable explanation for the delay.”
The court rejected this argument as it was a piecemeal approach in relation to the case law the taxpayer relied on. At paragraph 14 the court held that Van Wyk v Unitas also stated that a condonation application must be in the interests of justice and that this includes not only an enquiry into the extent and cause of the delay but also the importance of the issue to be raised and the prospects of success. Furthermore, at paragraph 15 and 16 the court held:
“Van Wyk v Unitas considered the merits of the matter when determining whether good cause was established, in addition to the period of delay and the explanation for it. It may be that the court did not attach much weight to the prospects of success, but this does not mean that it wasn’t considered when determining whether good cause was established… Consequently, Van Wyk v Unitas is not authority for the submission that only the degree of the delay and the sufficiency or insufficiency of the explanation for such delay may be considered when determining whether good cause was established or not.”
The court then went on to cite other case law that indicated that the issue to be raised and the prospects of success form part of the enquiry when interrogating good cause and rejected the proposition that lateness is the only factor to be considered when determining if good cause is established.
In deciding whether good cause was established by SARS, the court found that there was no adequate explanation for the delay in furnishing the Rule 31 statement and that SARS’ communication with the taxpayer was not what it was supposed to be.
However, when evaluating the merits of the case, which is, in effect, an evaluation of the prospects of success, the court found that there was a material dispute of fact in that the taxpayer alleged that it was entitled to the ETI allowance while SARS disputed this, and that this dispute of fact was not capable of being fully ventilated with the papers before the court because the taxpayer had not been forthcoming with requests from SARS to provide proof of its entitlement to claim the ETI allowance, as it was required to provide under Rule 7(2)(b)(iii). This is evident at paragraphs 30, 31 and 35 of the judgement where the court held:
“It is not disputed on the papers before me that the respondent (SARS), on more than one occasion, requested the appellant (the taxpayer) to submit documentation and information with regards to whether the appellant’s employees qualified for purposes of section 1 read with section 6 of the ETI act to enable the appellant to claim the disputed ETI allowances and that the respondent failed and/or refused to furnish same… As the respondent’s counsel argued during the hearing, the assessments in issue relate to self- assessments in terms whereof the employer claims allowances. Therefore, the appellant, as the employer should be in possession of the requested documentation and information and be in a position to furnish the respondent with same… If the respondent’s grounds of assessment and grounds for opposing the appellant’s appeal are upheld, it would show that the appellant fraudulently claimed allowanced in terms of the ETI, to which it was not entitled. As the appellant elected not to meaningfully engage with the merits of the matter, the respondent’s grounds of assessment and for opposing the appeal stand largely undisputed, at this stage.” (Emphasis added)
In light of the above, more specifically, the fact that there were no merits and/or prospects of success to decide on due to the taxpayer’s behaviour, the court decided the matter in favour of SARS.
Comment
The reason why SARS was successful in Taxpayer N is because the taxpayer had acted in a manner that prevented SARS from crafting a sufficient Rule 31 statement, thus preventing the dispute from being crystalised. In part 1 of our 2-part series the taxpayer ensured that it had complied with all the rules and gave SARS all the opportunities it needed to form an argument, which it could not. This is the difference between these two cases and it is the clarity that this 2-part series sought to unearth.
When seeking a final order against SARS in terms of Rule 56 read with section 129 of the TAA, lateness is not the only factor to be considered but the issues in dispute are also of importance. Where the taxpayer has given SARS the opportunities to address those issues in dispute and it has not, it is in that instance that the advantage lies with the taxpayer, unless of course, there is a reasonable explanation for the delay.
Mabhelandile Ntuli Attorneys are registered tax practitioners who provide assistance on a range of tax matters. We approach tax and legal issues with certainty.