Paying taxes is a vital part of maintaining the structure and stability of any nation. Tax provides the government with the resources needed to fund public services, build and maintain infrastructure, support social programs, and ensure national security. But what happens when you are unable to pay your taxes? 

When a taxpayer is unable to pay its tax obligation to the South African Revenue Service (“SARS”), the taxpayer either has the choice to enter a deferral payment arrangement wherein they can arrange for a deferred payment plan, or the taxpayer may enter into a debt compromise agreement with SARS.

What is a debt compromise agreement?
A debt compromise is a process through which a taxpayer who owes money to SARS (the "Debtor") enters into an agreement with SARS, requesting a reduction or settlement of their tax debt. The Debtor who can apply for the compromise may be a company, a natural person or a trust. This method is used by SARS to ensure that the highest net return is recovered from the amount of tax debt (“Debt”) that is owed by the Debtor.

Requirement for a debt compromise agreement
This process, however, is not a simple one. The Debtor must provide specific supporting documents along with the compromise request to substantiate why the Debtor is unable to pay the Debt. The documents required to be submitted are listed in section 201 of the Tax Administration Act 28 of 2011 (the “Act”) and include:

• The assets and liabilities of the Debtor, which represent their current fair market value.
• Any amounts which the Debtor received, as well as any expenditure which the Debtor incurred in the 12 months before the compromise request.
• All assets which the Debtor disposed of in the previous 3 years.
• The reasons for the Debtor wanting the compromise agreement.
• The reasons for the Debtor not being able to pay the tax debt.

These are only a few of the requirements set out in section 201 of the Act. It is essential to review the full list to ensure your compromise request meets all the necessary criteria. SARS will evaluate the application and decide whether to approve the compromise and enter into an agreement with the Debtor or reject it based on the merits and the supporting documentation submitted.

The Act also outlines specific circumstances under which SARS will not approve a compromise on a debtor’s tax debt.  This includes situations where the debtor entered into a compromise agreement with SARS within the three years preceding the current request. It also includes instances where the tax affairs of the Debtor are not up to date and where the compromise agreement will prejudice other creditors.  These examples illustrate just some of the circumstances under which SARS may reject a compromise request, with the Act outlining additional grounds that must be carefully reviewed.

Understanding the Act is essential to ensuring your compliance with its requirements and maximising your chances of securing a compromise agreement with SARS. It is therefore important to work closely with your tax advisor or consultant when preparing to approach SARS.


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