South Africa: Western Cape High Court, Cape Town

[42]        Section 217 (3) provides as follows:

“217. Remittance of penalty for nominal or first incidence of non-compliance

(1) If a ‘penalty’ has been imposed in respect of—

(a)  a ‘first incidence’ of the non-compliance described in section 210, 212 or 213; 40 
or

(b)  an incidence of non-compliance described in section 210 if the duration of the 
non-compliance is less than five business days, 


SARS may, in respect of a ‘penalty’ imposed under section 210 or 212, remit the ‘penalty’, or a portion thereof if appropriate, up to an amount of R2 000 if SARS is satisfied that—

(i)             reasonable grounds for the non-compliance exist; and

(ii)            the non-compliance in issue has been remedied.

(2) In the case of a ‘penalty’ imposed under section 212, the R2 000 limit referred to
in subsection (1) is changed to R100 000.

(3) In the case of a penalty imposed under section 213, SARS may remit the ‘penalty’, or a portion thereof, if SARS is satisfied that—

(a)  the ‘penalty’ has been imposed in respect of a ‘first incidence’ of the non compliance described in section 210, 212 or 213, or involved an amount of less than R2 000; 


(b)  reasonable grounds for the non-compliance exist; and 


(c)  the non-compliance in issue has been remedied. (“Own emphasis”)

[43]        The Tax Administration Act provides for the remittance of administrative penalties for non-compliance under very specific and limited circumstances. Penalties can be waivered in ‘exceptional circumstances’. ‘Exceptional circumstances’ are defined in s 218(2) of the Tax Administration Act to include, inter alia, natural or human-made disasters, disruptions in services, such as natural disasters, civil disturbance, serious illness or accident, serious emotional or mental distress, SARS errors and serious financial hardship, such as, in the case of a business, an immediate danger that the continuity of business operations and the continued employment of its employees are jeopardised.  

[44]        A taxpayer can make a request for remission of penalties imposed for non-compliance including, inter alia for penalties levied for Pay-As-You-Earn (“PAYE”). Penalties which are levied are done in accordance with paragraph 14(6) of the Fourth Schedule of the Income Tax Act and are equal to 10% of the total amount of employees’ tax for the period relating to the outstanding return.

[45]        In terms of s 213 of the Tax Administration Act, the late payment of a tax debt attracts a percentage-based penalty. In the case of late payments of, inter alia, PAYE, late payment penalties amounting to 10% of the amount that is unpaid will be imposed. Such penalties may be remitted in circumstances where the penalty has been imposed in respect of a ‘first incidence’ of non-compliance, in other words, where no other fixed-amount or percentage-based administrative penalty has been used during the preceding 36 months, or, where exceptional circumstances exist, which rendered the taxpayer incapable of complying with the relevant obligation under the relevant tax Act.

[46]        Sections 89 and 89bis of the Income Tax Act also allow SARS a broad discretion to remit or reduce interest after having regard to the circumstances of the case in question.

[47]        Under the regulations issued in respect of s 75B of the Income Tax Act, SARS has a discretion to remit the whole or a portion of an administrative non-compliance penalty imposed for a first incidence of non-compliance, or if the incidence of non-compliance was remedied within seven days, in terms of s 217 of the Tax Administration Act, SARS may only remit administrative non-compliance penalties up to an amount of R 2 000.00. The remittance is further subject to being imposed in respect of the first instance of non-compliance or that the duration of the non-compliance is less than five business days.

[48]        The limited remittance in terms of the Tax Administration Act is further subject to SARS being satisfied that reasonable grounds for non-compliance exist and that the non-compliance has been remedied. In respect of percentage based penalties, the amount is also limited to R 2 000.00, that is, if SARS is satisfied that the penalty has been imposed in respect of a first incidence or involved an amount of less than R2 000.00, provided further that reasonable grounds for the non-compliance exist and the non-compliance in issue has been remedied.

[49]        SARS may also remit the administrative non-compliance penalty or a portion thereof if SARS is satisfied that one or more of the listed exceptional circumstances are present and rendered the taxpayer incapable of complying with the relevant obligation under the relevant Tax act.

[50]        The Appellant contends that it immediately remedied its non-compliance and in fact, has never in the past been late in paying its payroll taxes, or been non-compliant. It relied on the case of Attieh v The Commissioner for the South African Revenue Service [2016] ZAGPJHC 371 for the proposition that reliance by a taxpayer on the expert advice of a tax practitioner, which proved to be wrong, could amount to ‘reasonable grounds’ to justify a taxpayer’s non-compliance. In casu, the Appellant contends that the taxpayer relied upon the company’s book-keeper, given her 8-year experience in preparing cash-flow forecasts for the Appellant, and her predictions of cash inflows for the period of the first week of January 2018. It was argued that her behaviour was not risky or unreasonable but based on her historic cash flow methodology which had not failed the company in the eight years of her employment. In any event, it argued that despite the fact that the predictions were inaccurate in this instance, that her decisions were not unreasonable. Trade debtors paid less than R 200 000.00 to the Appellant on 5 January 2018. This eventuality, it argued, while not impossible, was highly improbable.

Nature of the relationship between SARS and the Taxpayer

[51]        The Respondent advanced two arguments in opposition to the contention that reasonable grounds exist which would entitle the Appellant to a reprieve in terms of s 217(3)(b) of the Income Tax Act. In the first instance, the Respondent argued that paragraph 2(1) of the Fourth Schedule establishes a fiduciary relationship between SARS and an employer. This is so because the salient points of the provision provide that an employer, who is a South African Resident, and who is liable to pay remuneration to an employee, is duty bound to deduct or withhold PAYE from such remuneration so paid to an employee; secondly, to pay such amounts to SARS within a stipulated period. It is common cause that the amounts so deducted or withheld are collected on behalf of and for the benefit of SARS.

[52]        The Respondent argued that the Appellant failed to act in a manner of the highest degree of care in so collecting and paying over the amounts due to SARS, because the Appellant failed to insulate the PAYE amounts collected from its employees, from the business income; the said amounts were mixed with business income arising from business operations; the PAYE amounts deducted or withheld were exposed to risks associated with non-payment by third parties; the non-payment of PAYE amounts to SARS was subjected to trade debtors’ behaviour, predictions of weekly cash inflows and other cash flow models and ultimately, borrowing money from third parties to facilitate the payment of PAYE to SARS. The Respondent argued that the Appellant cannot state that ‘reasonable grounds exist’ in circumstances where it treated PAYE amounts deducted or withheld, as its own and subjected such funds to the whims of its own business. Such conduct, it argued, was unreasonable and unacceptable.

[53]        The Respondent contends that paragraph 2(1) of the Fourth Schedule establishes a relationship between the Respondent and various taxpayers who happen to be employers. It provides that an employer who is a South African resident and who is liable to pay remuneration to an employee/s is duty bound to deduct/withhold from such remuneration so paid to the employee, and to pay such amount to SARS within a stipulated period. The amounts so deducted or withheld are collected on behalf of and for the benefit of SARS.

[54]        The Respondent also argued 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. Counsel for Respondent relied on Bryan A Garner, in Black’s Law Dictionary’s definition of the word ‘fiduciary’ as follows: ‘A person who is required to act for the benefit of another person on all matters within the scope of their relationship… one who owes another the duties of good faith, trust, confidence and candour and one who must exercise a high standard of care in managing another’s money or property.” They argue that all of these relationships require an unusually high degree of care. Accordingly, the Respondent argued, the Appellant and SARS were in a relationship that resembled a fiduciary relationship in material respects  and that the Appellant failed to observe the highest degree of care in relation to PAYE amounts deducted or withheld from the employees and retained on behalf of SARS by failing to insulate the PAYE amounts collected from its employees, from its business income; mixing it with business income arising from its income earning operations; exposing the amounts so deducted to risks associated with non-payments by third parties and finally, borrowing money from third parties to facilitate the payment of PAYE to SARS. The core of the Respondent’s argument is that money collected on behalf of SARS cannot be utilised as cash flow, and that such money should be insulated. Furthermore, the specific directives with regard to obligations of an Employer in s 217(b) is that paragraph 2.1 directs that the money should be paid over within 7 days after deduction, and that there is a fiduciary relationship to collect money on behalf of another.

[55]        I am not in agreement that the relationship between an employer and SARS is akin to a fiduciary relationship which would elevate the obligation by an employer to pay over monies that is collected on behalf of it to SARS – to that of, for example, principal and agent. There have been various distinctions between the accountability of a trustee to his beneficiary and the accountability of a debtor to his unsecured creditor. Under a trust-type of relationship, the beneficiary is given an equitable proprietary interest in some specific trust property or at least the right to have specific trust property administered according to the terms of a trust or legislation, whereas an unsecured creditor only has a personal right against the debtor which is unrelated to any property in the hands of the debtor. [7]

[56]        There have been instances where parties have stipulated that monies received on behalf of another should be received in a separate account, and this would be construed as a trust. See In Re Nanwa Gold Mines Ltd [1955] 1 W.L.R 1080.

[57]        Sometimes the payee occupies a special position with such well defined incidents that a payment to him is governed by a standard contract implied by law. Thus, a deposit of money with a banker, on current account, will create the relationship of debtor and creditor between the bank and the person to whose credit the money is paid. The banker does not hold the sums in a bank account on trust for his customer. Instead, the relationship between them is that of debtor and creditor. When the customer deposits money in the account, it becomes the bank’s money and the bank’s obligation to repay an equivalent sum (and any agreed interest) to the customer. See Foley v Hill [1848] EngR 837; (1848) 2 HLC 28, 9 ER 1002, where the House of Lords stated:

“The money paid into the banker’s, is money known by the principal to be placed there for the purpose of being under the control of the banker; it is then the banker’s money; he is known to deal with it as his own, he makes what profit of it he can, which profit he retains to himself, paying back only the principal, according to the custom of bankers in some places, or the principal and a small rate of interest, according to the custom of bankers in other places. The money placed in the custody of a banker is, in all intents and purposes, the money of the banker, to do with it as he pleases: he is guilty of no breach of trust in employing it; he is not answerable to the principal if he puts it into jeopardy, if he engages in a hazardous speculation: he is not bound to keep it or deal with it as the property of his principal, but he is of course answerable for the amount, because he has contracted, having received that money, to repay to the principal, when demanded, a sum equivalent to that paid into is hands.

[58]        This principle was reiterated in Grayston Technology Investment (Pty) Ltd and Another v S [2016] 4 All SA 908 (GJ), where the full bench, per Spilg J, opined that a different legal situation arises where funds standing to the credit of someone’s account have either entered that account by reason of a special relationship in terms of which the holder of the account is in fact a nominee, trustee or agent in respect of monies.[8]  It may occur where the holding of the funds in the account are to be treated as transferred to another, although they may only be paid out at some future date.[9] The court 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.[10]

[59]        The court in Grayston also noted instances in which an agent has a contractual obligation to account to the principal for all amounts received, even though the funds may be turned over to purchase other items for resale, or to cover overheads (in its business)  which portion need eventually be paid over at the end of the agreed period[11]. In this case, the money would not be received as agent for collection, nor would any portion have to be earmarked and set aside for the principal. The agent could utilise the amount received as he wished as there was no special property or interest in the funds when received, or at any time thereafter. The court held that since the principal does not acquire any rights in the funds paid by the customer, or in their proceeds, but only enjoys a personal right against the agent arising out of their agency agreement, a proper accounting, (in that case) would discharge the agent from liability for theft.[12]

[60]        I am therefore not persuaded by the Respondent’s argument that the relationship between the parties can be elevated to that of a fiduciary relationship which would preclude the Appellant from utilizing the money or obliging it to be ring-fenced.

Appropriateness of the proportionality of the penalty imposed

[61]        The Appellant further submitted that a penalty of 10% in the context of its non-compliance, which was the next business day after the due date, was not proportionate to the seriousness and duration of the non-compliance. The Respondent contends that it matters not whether the Appellant was late by one day or twenty days, for, as long as the as the Appellant had failed to pay the declared PAYE amounts within the stipulated seven-day period, the imposition of the 10% penalty is triggered.

[62]        Section 213 directs that SARS must, if satisfied that amounts due were not paid within the required period, as is required by the relevant provisions of the Income Tax Act, a 10% penalty must be implemented. The Respondent contends that SARS is directed, in a peremptory manner, to impose a penalty without any discretionary powers. I agree. In my view, if one starts to implement various degrees of penalties in relation to the various degrees of lateness, this would cause uncertainty and confusion in the office of the SARS and it would potentially expose them to a plethora of litigation and open a flood gate of challenges to reviews of decisions taken exercising discretionary powers in evaluating an appropriate penalty for the degree of lateness.

[63]        As the legislation now stands, there is certainty amongst tax-payers, that in the event of non-compliance, a penalty of 10% is levied on the amount owing to SARS, irrespective of the degree of lateness.

[64]        It is evident that on SARS’s own approach to remission of penalties in the imposition of percentage based penalties, that all penalties can be waivered in the event of a first incidence of non-compliance. The Appellant argued that it had a clean record with the SARS and that this would qualify under a first incidence of non-compliance. This contention was not disputed by the Respondent.

[65]        In my view, the facts relied upon by the Appellant in Attieh are distinguishable from this matter.  Attieh relied on the expert advice of a tax consultant in the determination of his liability for capital gains tax to SARS. In casu, given the fact the Appellant knew that payment to SARS fell at a particularly precarious time of the year, when people notoriously have fewer rand to spare after the holiday period, that they should have in fact predicted that payment by their trade debtors would be sporadic and the probabilities existed to the contrary of what the book-keeper might have predicted or anticipated. Her reliance on payments from third parties to ensure sufficient cash flow to comply with its payment obligations with SARS, was therefore unreasonable. However, that in my view is not the end of the matter.

[66]        In my view, s 217(3) envisages a mechanism to come to the assistance of an aggrieved first incidence non-complying tax payer, who has in addition, satisfied two further requirements, most notably, that they have satisfied SARS that reasonable grounds exist for the non-compliance. In my view, in this instance, a factor which SARS failed to consider, which could, in my view, render it as a reasonable ground, is the manner in which the Appellant, when it realised that it would be unable to comply with the payment instruction on 3 January 2018, attempted to rectify the deficiency.

[67]         According to the Appellant, the instructions were given to their bank to process the payment on 3 January 2018. The Appellant was able to raise in excess of R 5million to settle its liability to SARS. Naturally, given that the process of the payment occurred over a weekend, it was delayed. The Appellant could therefore only effect payment on the first business day thereafter, which it duly did.  There was no prejudice to SARS and neither was there any mala fides indicated; to the contrary, every effort was made by the Appellant to comply with its obligations to SARS. This, in my view, evidences reasonable grounds for the penalty imposed to be have been remitted, especially given the fact that it was a first incidence of non-compliance. In the circumstances, I am of the view that the appeal must succeed.

Should the matter be remitted back to SARS for reassessment and further investigation?

[68]        At the end of the hearing, the parties were requested to provide further submissions as to whether an appropriate order might be to refer the assessment back to SARS for “further investigation and assessment” of appellant’s penalty terms of s129(2)(c) of the Tax Administration Act, rather than setting it aside, or altering it.

[69]        The Appellant submitted that based on the principles set out by the Appellate Division (as it then was) in SIR v De Costa [1985] ZASCA 32; [1985] 2 All SA 335 (A) , that it would not be appropriate to remit the matter to SARS for reconsideration. It argued that the Appellant is entitled, in the circumstances, to this court’s exercise of the discretion provided for in s 217(3), should this court find that the penalty was correctly imposed, and find reason to interfere with the Tax Court’s exercise of its discretion.

[70]        In De Costa the Court discussed the view that, as SARS deals with large numbers of applications for remissions of penalties, and that SARS has yardsticks by which to go by, SARS is in a far better position to decide on an appropriate remission of a tax penalty than a Tax Court (or an Appeal Court). The proposition advanced was that an appeal tribunal ought only to interfere with SARS’ discretion regarding the remission of a penalty on narrow grounds, such as where it has been done on an incorrect basis or where there has been an unreasonable exercise of the discretion by SARS. The determination of whether the remission is unreasonable would, of course, require an Appeal tribunal to make its own value judgment as to what a reasonable remission is.[13]

[71]        The Court in De Costa however rejected the proposition that a Tax Court only had limited power to interfere with the exercise of a discretion by SARS, and found it irreconcilable with the nature of a Tax Court as a court of revision, as opposed to a court of appeal, which entails a taxpayer’s right to a rehearing of the whole matter by the Tax Court. The Tax Court is required to substitute its own “fresh” exercise of discretion on the record before it, for that of SARS, and a taxpayer is entitled to such a review of SARS’ decision.[14]

[72]        Accordingly, the Appellant submits that, in casu, should this Court find that the Tax Court had failed to properly exercise its discretion regarding the remission of the penalty in terms of s 217(3), the correct order would be to alter the determination of the extent of the penalty determined by the court a quo.

[73]        I am in agreement that a remittance of the matter to SARS would only serve to delay the matter. In any event, since I have found that there has been an unreasonable exercise of the discretion by SARS, this court is obliged to uphold the appeal and it is so ordered.

Costs

There is no reason why costs should not follow the result.

                 DS KUSEVITSKY

       Judge of the High Court, Western Cape

Division

I agree, and it is so ordered:                  

                                                                                    NC ERASMUS

        Judge of the High Court, Western Cape

Division

I agree:                                                   

                                                                                         ET STEYN

                                                                 Judge of the High Court, Western Cape

                                                                                                     Division

Counsel for the Applicant: Advocate R Marais

Instructed by: Barnaschone Attorneys

Counsel for the Respondent: Advocate O Mokgatle

Instructed by: Tax Court Litigation