While the alternative dispute resolution (ADR) process is intended to be a faster and more cost-effective resolution mechanism, its 'without prejudice' nature carries significant implications. Any positions taken or concessions offered during ADR discussions do not legally bind the parties in subsequent litigation. This characteristic allows for open and frank negotiation, fostering an environment where parties can explore settlement options without fear of prejudicing their formal legal standing if an agreement is not reached.
Where ADR does not resolve the dispute, the taxpayer must formally initiate the next steps of the dispute by filing a notice of proceeding to the Tax Court within 20 business days of the termination of ADR for appeals where the tax in dispute is more than ZAR 1 million.
- The South African Revenue Service (SARS) then has 45 business days from the notice to deliver the rule 31 statement of grounds of assessment and opposing appeal (rule 31 statement).
- In turn, the appellant/taxpayer has 45 business days to respond by delivering the rule 32 statement of grounds of appeal (rule 32 statement).
- SARS then has 20 business days to reply to the taxpayer's rule 32 statement.
Legal counsel for SARS may request an extension to file the rule 31 statement. It is common for the taxpayer to grant such a concession. However, if SARS has not requested an extension and the 45 business days have passed, we recommend that the taxpayer first engages SARS by email or in a letter to let SARS know of the lapse of the 45 business days. If SARS still does not respond, the taxpayer can then file a rule 56(1)(a) notice of its intention to apply for default judgment against SARS if SARS does not remedy the default (by filing the rule 31 statement) within 15 business days of delivery of the rule 56(1)(a) notice.
The recent decision from the Supreme Court of Appeal (SCA) in the Virgin Mobile case underscores the importance of paying attention to these timelines once the dispute process proceeds to the Tax Court.
In the Virgin Mobile SCA decision, SARS had not filed its rule 31 statement within 20 business days and the taxpayer had filed the rule 56(1)(a) notice of its intention to apply for default judgment. SARS filed its rule 31 statement 5 business days later, within the 15-day period allowed by rule 56(1)(a) notice. The SCA was faced with the question of whether it was necessary for SARS to apply for condonation for filing the rule 31 statement later than the 45 business days provided for in rule 31 but within the 15 business days provided for in the rule 56(1)(a) notice.
The SCA held in favour of SARS, finding it was not necessary to apply for condonation for the late filing since it had filed the rule 31 statement within 15 business days of the rule 56(1)(a) notice. The function of rule 56 is coercive, not punitive. As the court noted, "It is aimed at facilitating finality of the dispute by coercing compliance. Once compliance has been achieved, the Rule will have served its purpose."
Practically, this means that SARS may have more than 45 business days to file the rule 31 statement. SARS can file the rule 31 statement even after being given rule 56(1)(a) notice and the expiry of the 15 business days, provided default judgment has not been granted to the taxpayer.
It is thus important for taxpayers to keep track of the 45 business days deadline. First advise SARS of the lapse of the 45 business days. If there are still prolonged delays, file the rule 56(1)(a) notice soon after as there is the added complexity of getting a court date for the rule 56 hearing which can take more than a year given the case load of the Tax Court.
