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The Sanctity of Contract: Court Upholds Taxpayer–SARS Settlement Agreement

In a recent judgment between Inhlakanipho Consultants (Pty) Ltd v Commissioner for the South African Revenue Service, the High Court reaffirmed the binding nature of settlement agreements concluded with SARS, delivering an important reminder about certainty and fairness in tax administration. This principle can also be applied to settlement agreements between parties outside of SARS.

In this judgment, the taxpayer had entered into a written agreement with SARS in September 2018 to finally resolve outstanding VAT assessments and understatement penalties. The agreement recorded a final liability of just over R5.9 million, and expressly stated that payment of this amount would discharge the taxpayer’s principal obligations, leaving only interest to be calculated.

The taxpayer duly paid the agreed amount. However, SARS later contended that the payment did not settle the capital debt and continued allocating the payment across older assessments, penalties, and interest in terms of section 166 of the Tax Administration Act 28 of 2011 (“TAA”). SARS further argued that its internal accounting system did not allow payments to be allocated as stipulated in the agreement.

The Court rejected this approach. It emphasised that:

  1. The settlement agreement represented the “final agreed position” between the parties.
  2. Section 148 of the TAA requires SARS to honour settlement agreements unless they were induced by fraud or material non-disclosure.
  3. Internal administrative limitations cannot override contractual obligations.
  4. By concluding the agreement, SARS waived its entitlement to apply section 166 to the periods covered by the settlement.

The Court held that the settlement agreement was lawful, valid, and enforceable. SARS’s attempt to resile from it was unjustified and contrary to constitutional principles of certainty, fairness, and accountability. Undermining settlement agreements, the Court noted, would erode taxpayer confidence and weaken the integrity of the dispute-resolution process.

The taxpayer’s appeal accordingly succeeded.