Need to apply for a tax compromise? Here are the three tests you need to pass before SARS will grant it to you

Simangele Mzizi, Fsp Business, 28 Jan. 2015

Tags: sars, tax compromise, tax debt compromise, applying for a tax compromise

If you’re applying for a tax compromise because you’re struggling with your outstanding debt, SARS won’t approve your application right away.

It won’t give a compromise just because you want to avoid tax. And that’s why it performs certain tests to determine if you really can’t pay your debt and need the compromise.

Read on to find out the three tests SARS will perform and the tips you can use to pass them.

Before we get to the tips, let’s clarify what a tax compromise is

The Practical Tax Loose Leaf Service explains that a tax compromise is a request to SARS, asking it to “park” any outstanding tax debt, if you’re in financial distress. By parking the debt, SARS agrees not to demand payment.
Whether SARS parks all or only part of your tax debt depends on your financial situation and how much it can realistically recover.
SARS stresses that a tax compromise is only for taxpayers who genuinely can’t pay their tax debt. And who won’t be able to pay it at all in the near future (within 12 months).
You can’t use it as a tool to get out of tax when you just don’t have money in the bank at the moment. Or when you need to spend the money you have on other things, like paying rent.
Now that it’s clear what a tax compromise is, take a look at the tips you can use to pass the tests SARS will perform.

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To pass the three tests SARS performs before it accepts your application, use these three tips

When you apply for a tax compromise, SARS will perform these tests using your financial information:
  1. A solvency assessment test
  2. A liquidity assessment test; and
  3. A responsible third party test.
To stand up to these tests, use these tips:

Tip 1: When SARS performs a solvency assessment, it wants your Total Assets to be more than your Total Liabilities. To SARS this result means you’re solvent and can pay your debt.
So if you have a positive solvency ratio (i.e. assets > liabilities), chances are SARS will deny your application and tell you to pay.
To make sure it doesn’t, drive the point home that the benefits of a tax compromise greatly outweigh any other avenue it might consider.
You can tell SARS that if, for example, your company enters into business rescue, this will have an impact on SARS. It will be a concurrent creditor. And end up with far less than it would by agreeing to a tax compromise.
You can also tell SARS that you’ve already secured existing debts with your assets. And that it won’t get anything from the sale of the assets until you settle the secured debts. So it’s best to agree to a compromise.
Tip 2: With the liquidity assessment test, SARS wants your Current Assets to be more than your Current Liabilities. And if it finds this is the case, it might dispute your urgent need to settle current liabilities and demand you pay it.
To pass this tax compromise test, prove to SARS that settling these liabilities is necessary for you to continue trading.
And, if SARS demands you convert all your current assets into cash to pay it, prove to it that this would be difficult and will be unfair to your business. Or that it will take a long time to do so.
Tip 3: When SARS performs a responsible third party test, it wants to see if there’s anyone else it can hold liable and who can pay your tax debt.
The third party scenario is complex and could end up in court. In some cases, SARS refuses to listen when you tell it that there are no third parties that can pay your debt. So try all means possible to prove to SARS that it will get a lower net result if it goes ahead with court action. You must have factual evidence to support this claim.
There are three more tests SARS performs before it accepts your application. To find out what they are, check out the Practical Tax Loose Leaf Service so you can make sure your tax debt compromise application is a success.

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