Compromise of Tax Debts with SARS – Do you Qualify?

In these tough economic times, more and more taxpayers are struggling with cash flow and are unable to settle tax debt due to SARS. Compounding this issue is the continuous phone calls, emails and sms’s from SARS collections department, threatening legal action if the debt is not paid.
 
Section 200 of the Tax Administration Act (“TAA”) deals with the Compromises on Debt owed by individuals, trusts, close corporations and companies. It allows a senior SARS official to compromise a tax debt which could be comprised of taxes, penalties, interest and even additional tax if certain requirements are met.
 
The term “compromise” is defined in section 192 of the TAA as an agreement:

  • That is entered into between SARS and the debtor (“Taxpayer”);
  • Where the debtor undertakes to pay an amount, which is less than the full amount of the tax debt due to SARS;
  • In full settlement of the tax debt;
  • SARS undertakes to permanently write off the remaining portion of the tax debt.

The purpose of a compromise is to secure the highest return from the recovery of the tax debt where a taxpayer is unable to pay the full amount, taking into consideration good management of the tax system and administrative efficiency.
 
A request for a compromise must be initiated by the taxpayer or by a registered Tax Practitioner acting on behalf of the taxpayer. In order for SARS to consider a compromise, detailed financial information in respect of the affairs of the taxpayer must be submitted.
 
This includes the following:

  • Assets and liabilities of the taxpayer at current market value;
  • Amounts received by or accrued to and expenditure incurred by the taxpayer during the 12 months preceding the request for a compromise;
  • List of assets disposed of by the taxpayer in the preceding three years;
  • Details of any future interest in assets;
  • Details of any assets the taxpayer alone or in part has a direct or indirect appointment over;
  • List of connected persons to the taxpayer;
  • A three-year financial plan including an income and expense projection for the taxpayer;
  • Full background of facts and reason why a compromise is being sought.

A compromise may not be entered into where:

  • The taxpayer was party to an agreement with SARS to compromise an amount of debt within a period of three years before the current request for compromise;
  • The taxpayer’s tax affairs are not up to date;
  • Another creditor has communicated its intention to, or has, initiated liquidation or sequestration proceedings against the taxpayer;
  • The compromise will prejudice other creditors, or if the other creditors will be placed in a position of advantage relative to SARS;
  • It may adversely affect broader tax compliance;
  • The taxpayer is a company or trust and SARS is unable to take action against or recover the debt from the personal assets of the persons related to the entity.

It is important to note that SARS is not bound by a compromise agreement signed between the parties if the following transpires:

  • The taxpayer fails to disclose a material fact in which the compromise relates;
  • Material incorrect information was furnished to SARS;
  • The taxpayer fails to comply with the conditions contained in the compromise agreement;
  • The taxpayer is liquidated before all the conditions in the compromise agreement have been fulfilled.

If you require assistance in considering whether you can utilise the route of a compromise application to bring financial relief, give your local Moore Stephens office a call.