Prescription and settlement agreements

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SAICA recently made an Annexure C submission on the problem of the prescription of assessments which are the subject of follow-on adjustments involving a dispute in an earlier year of assessment.

References in this article to sections are to sections of the Tax Administration Act 28 of 2011  (TAA) unless the context otherwise indicates.

The SAICA feedback summary dated 7 December 2023 (edited to remove cross-references and duplication) provided as follows:[1]

'Suppose there is a dispute between SARS and a taxpayer for a particular year (year 1) and the final outcome thereof results in an adjustment of amounts which will be carried forward to subsequent years (i.e., balance of assessed losses, etc). While SARS will be able to issue a revised assessment in respect of the relevant amount (i.e., a loss to be carried forward) for year 1, if the subsequent years have prescribed in terms of s 99, SARS will not be able to adjust subsequent years' amounts affected by year 1's dispute, which were carried over from the previous year.'

National Treasury's reported response was that this was a fair point and that it would be considered.

However, when there is a settlement involving, say, year 1, an opportunity presents itself to bring the prescribed years within the settlement in order to overcome the three-year prescription limit in s 99(1) by using s 99(2)(d).

Besides an assessed loss, there are a number of situations in which this issue arises, including the carry-forward of an assessed capital loss, closing stock which becomes opening stock in the next year of assessment, prepayments claimed in a year of assessment which need to be added back in the next year of assessment and adjustments involving the s 24C allowance for future expenditure, amongst others.

The rules for settlement of disputes are contained in Part F of the TAA in ss 142 to 150.

Section 142 defines 'dispute' to mean

'a disagreement on the interpretation of either the relevant facts involved or the law applicable thereto, or of both the facts and the law, which arises pursuant to the issue of an assessment or the making of a “decision" '.

 The procedure for lodging an objection and appeal against an assessment is set out in s 104 and in the dispute resolution rules provided for in s 103 and set out in GN 3146 GG 48188 of 10 March 2023. It might therefore be expected that a dispute would have to be given expression by way of an objection and appeal, although this is not stated in the above definition.

Section 99(2)(d) provides that the three-year prescription period in s 99(1) does not apply to the extent that

           '(d)       it is necessary to give effect to—

                         (i)  the resolution of a dispute under Chapter 9; or

                       (iii)  an assessment referred to in section 93(1)(d) if SARS becomes aware of the error referred to in that subsection before expiry of the period for the assessment under subsection (1);'

Chapter 9 deals with dispute resolution and includes ss 101 to 150. Section 93(1)(d) provides that SARS may make a reduced assessment if

           '(d)       SARS is satisfied that there is a readily apparent undisputed error in the assessment by—

                         (i)  SARS; or

                        (ii)  the taxpayer in a return;'

It may well happen that by the time the dispute is settled, the error in the assessments should, viewed objectively, have been readily apparent to SARS. In addition, SARS in most cases should have been aware of the issue during the three years following the relevant assessment, since it would have been aware of it in the first year which was under dispute. But let us assume that s 99(2)(d)(iii) cannot be applied. That still leaves s 99(2)(d)(i) to be explored.

Section 146 provides:

'146.   Circumstances where settlement is appropriate.—The Commissioner may, if it is to the best advantage of the state, 'settle' a 'dispute', in whole or in part, on a basis that is fair and equitable to both the person concerned and to SARS, having regard to—

(a) ​​​whether the 'settlement' would be in the interest of good management of the tax system, overall fairness, and the best use of SARS' resources; …'

Section 147(3) of the TAA provides that any settlement agreement must include details on

           '(c)       treatment of the issue in future years;'

I-CAT International Consulting (Pty) Ltd v C: SARS[2] dealt with the issue whether the assessment in the year following the year in dispute had prescribed despite being brought within the settlement agreement.

In the 2014 year of assessment, the taxpayer claimed a deduction of R17 171 433 for compensation for royalties under s 11(a) of the Income Tax Act (ITA). SARS disallowed the amount on the grounds that it was of a capital nature, representing a cancellation fee on a distribution agreement and issued an additional 2014 assessment. Its objection having been disallowed, the taxpayer lodged appeal to the tax court. SARS then raised an alternative argument that only ZAR 7 997 663 was paid in 2014 with the balance of ZAR 10 154 940 having been paid in 2015. I pause at this point to note that the balance is actually ZAR 9 173 770, a substantial shortfall of ZAR 981 170. As so often happens in tax judgments, one is left guessing whether this was simply a calculation error or whether the taxpayer incurred additional expenditure over and above the sum originally claimed in 2014.

Why SARS changed its grounds of appeal to concede that the deduction was of an income nature but not all incurred in 2014 is not explained. On the date of the tax court hearing on 28 October 2019, the taxpayer and SARS settled the appeal on the basis that ZAR 7 997 663 was deductible in 2014. The settlement, which was made an order of court, stated in clause 6 that while the amount relating to the 2015 year of assessment of ZAR 10 154 940 fell outside the tax appeal, the taxpayer could endeavour to apply to SARS under s 93(1)(d) for a reduced 2015 assessment.

The 2015 assessment had been assessed on 26 February 2016 and the taxpayer's application under s 93(1)(d) was lodged on 13 December 2019. In order to be within the three-year prescription limit, the application should have been lodged by 25 February 2019. SARS refused the request on 26 January 2021 on the basis that the 2015 assessment had prescribed, which resulted in the present high court application.

Before the high court, the taxpayer argued that the 2015 assessment had not prescribed by virtue of s 99(2)(d)(i) and (iii). SARS, on the other hand, argued that no objection had been lodged against the 2015 assessment and therefore it was not under dispute. It also did not form part of the appeal against the 2014 assessment and the tax court had no jurisdiction to deal with the 2015 assessment. SARS, so the argument went, was not obliged to accept the taxpayer's application under s 93(1)(d). This was quite a startling about face on the part of SARS. It had agreed in the settlement agreement that the taxpayer could approach it under s 93(1)(d). Why would it insert such a clause, no doubt being fully aware of the deductibility of the amount and the fact that it was readily apparent that it qualified as a deduction, only to renege on its undertaking when the taxpayer lodged its application? In the absence of an explanation, this sort of behaviour does not advance SARS's reputation.

Vermeulen AJ, however, disagreed with SARS and held that the matter indeed fell within s 99(2)(d)(i) .

The court stated the following:

'[89] It is also not a strange occurrence that parties agree to include something in a settlement and consent order that is only indirectly linked to the issues. In Eke v Parsonssupra[1] the Constitutional Court inter alia stated as follows:

"[19] … In certain instances, agreement — or lack of it — on certain terms may mean the difference between an end to litigation and a protracted trial. Negotiations with a view to settlement may be so wide-ranging as to deal with issues that, although not strictly at issue in the suit, are related to it — whether directly or indirectly — and are of importance to the litigants and require resolution. Short of mere formalism, it does not seem to serve any practical purpose to suggest that these issues should be excised from an agreement that a court sanctions as an order of court." '

The Constitutional Court then cited various authorities to support its view that settlement agreements expedite an end to litigation which was in the parties' interests and promote the administration of justice.

Vermeulen AJ observed that at the time SARS included clause 6 in the settlement agreement, it was aware that the 2015 assessment had prescribed. Nevertheless, it still included the clause even though it served no purpose, was superfluous and insignificant. Citing CIR v Golden Dumps (Pty) Ltd,[4] the court noted that to disregard the words of a statute per incuriam (without due regard to the law or the facts) is contrary to the firmly established canon of construction that a meaning must be given to every word. This principle applies equally to private documents.[5] The court thus saw no reason why this principle should not apply to clause 6 of the settlement agreement.

The court concluded that the inclusion of clause 6 in the settlement agreement was 'part and parcel of their resolution of the dispute which they dealt with under ch 9' and therefore SARS's finding that the 2015 assessment had prescribed fell to be reviewed and set aside.

In my view, the taxpayer, instead of agreeing to the insertion of clause 6, should have insisted on SARS agreeing to reduce the 2015 assessment as part of the settlement agreement. After all, what is the purpose of s 99(2)(d)(i) if not to deal with undisputed assessments that are more than three years old? If it related only to disputed assessments, they would not have prescribed because the taxpayer would have lodged objection against them in time, thus rendering the provision purposeless.

 Clause 6 unnecessarily forced the taxpayer to jump through another hoop (the undisputed readily apparent error hoop) without any guarantee that it would succeed. It is my experience and understanding that SARS will, in appropriate circumstances, include so-called prescribed assessments in a settlement agreement in order to resolve a dispute in a fair and equitable manner, particularly when the adjustments to the subsequent years are causally linked to the year in dispute.

Conclusion

Section 99(2)(d)(i) offers a valuable lifeline to taxpayers when their assessments are out of time and causally linked to a dispute in a prior tax year for which a settlement agreement is negotiated. When the error in the 'prescribed' assessment is undisputed and readily apparent, s 99(2)(d)(iii) offers a possible alternative route to a reduced assessment.