Punitive Costs Award Against Revenue

It is not easy to obtain an order for costs in the tax court, still less to get a punitive one against the South African Revenue Service (SARS). The Income Tax Act provides five grounds on which costs may be awarded against either taxpayer or SARS, and it was in terms of subsection (a), "the claim of the Commissioner is held to be unreasonable", that the Gauteng tax court recently awarded, not merely costs, but costs on the attorney and client scale against SARS in ITC 1816 69 SATC 62. This is the most punitive scale of fees that a court can impose and is used only when the court wishes to express its extreme displeasure with a litigant.

The facts were that the taxpayer, a Chartered Accountant (SA), was employed as a structured finance specialist and head of the business and market development division of a company in the banking sector from November 1995. In 1999 she and her employer commenced discussions, initiated by the employer, to enter into a restraint of trade agreement, which culminated in the signing of such an agreement on 29 October 1999. On 27 October the taxpayer had signed a letter acknowledging the contents of the agreement and agreeing to be bound by its contents. The terms of the agreement were that, in return for payment of R1.1 million in two tranches of R440 000 on 25 October 1999 and R660 000 on 30 September 2001, the taxpayer agreed to a restraint of one year after she left the employment of the bank. The record does not make this clear, but perhaps the reason for the letter of 27 October was to protect the employer, having paid out the first tranche, while the agreement was being hammered into its final shape. The first payment was duly made on the agreed date and, by agreement, used partly to settle her loan of R360 000 with the employer, which she had obtained to acquire shares in the employer in terms of an employee share scheme, while the remaining R80 000 was paid into her bank account. This was the payment that attracted the attention of SARS and led ultimately to the case.

As it happened, the taxpayer was retrenched at the end of August 2001, one of the conditions of which was that she would receive the second tranche on due date.

In her 2002 tax return the taxpayer disclosed the accrual of the restraint of trade of R1.1 million and receipt of the first tranche. SARS contended that the amount had accrued in respect of services rendered or to be rendered and as such fell to be included in her gross income. SARS...