Monday 13 December 2010

Tax Ombudsman's office to be created

On Friday, 0ctober 29 2010 the Commissioner of the South African Revenue Service released the draft Tax Administration Bill (TAB) for a second round of public comment. The TAB has been approved by cabinet and it was originally envisaged that it would be introduced to parliament during November 2010. An important amendment contained in the latest draft of the TAB, is the intention to create a Tax 0mbud's 0ffice in South Africa. (See HERE)

The press release issued by SARS at the time the TAB was released, states:

"A new framework for a Tax Ombud's Office to provide simple remedies to taxpayers affected by failures by SARS to fully respect taxpayers’ rights. The framework draws on those of the Canadian Taxpayer Ombudsman and the UK Revenue Adjudicator. The creation of this office was foreshadowed when SARS introduced the new court rules and the SARS Service Monitoring Office in 2003, when the then Minister of Finance stated that— 'Once SARS's processes and procedures have improved sufficiently, the next important step that will be taken in emulating international standards will entail an important role for an Ombud."'

Thus, the most recent draft of the TAB now contains clauses 14 to 21, which create the legal framework to create a Tax Ombud’s Office in South Africa.

The decision to create a Tax Ombud in South Africa must be welcomed and answers a call for its establishment made over many years by the Commission of Inquiry into the Tax Structure of South Africa, professional bodies and tax practitioners.
Left: The long-awaited Tax Ombudsman's Office will be created to help taxpayers and SARS resolve disputes.

Clause 14 of the TAB confers on the Minister of Finance the power to appoint a Tax Ombud for a period of three years, which term may be renewed. The Minister has also been conferred the power to determine the conditions regarding remuneration and allowances to be paid to the Ombud. The TAB, similarly, enables the Minister to remove the Ombud for any reason considered good and sufficient.

The TAB empowers the Minister to designate a person working in the Office of Tax Ombud as Acting Tax Ombud while there is a vacancy, and that person can act for no longer than a period of 90 days at a time.

The draft legislation requires that the person appointed as Tax Ombud is accountable to the Minister and must have a good background in customer service, as well as tax law. In addition, the person may not, at any time, have been convicted of theft, fraud, forgery or any offence involving dishonesty in the preceding five years.

Thus, the Tax Ombud will report to the Minister and not to the Commissioner: SARS, which should create the desired degree of independence.

In accordance with clause 15 of the TAB, the staff at the Office of the Tax Ombud is required to be employed under the provisions of the SARS Act and will be seconded from SARS. The Tax Ombud’s Office will be funded out of the funds allocated to SARS.

The TAB provides that the Tax Ombud and the staff attached to that office are subject to confidentiality provisions which will be contained in Chapter 6 of the TAB, currently enshrined in s4 of the Income Tax Act, Act 58 of 1962, as amended (that is, the so-called “secrecy provisions”).

The TAB prescribes the mandate of the Tax Ombud and provides that the Tax Ombud is charged with reviewing and addressing complaints by the taxpayers regarding a service matter or procedural or administrative matter arising from the application of the provisions of a Tax Act administered by SARS.

The Tax Ombud, in discharging his or her mandate, is required to undertake the following:

• Review a complaint and, if necessary, resolve it through mediation or conciliation;

• Act independently in resolving a complaint;

• Follow informal, fair and cost effective procedures in resolving a complaint;

• Provide information to a taxpayer about the mandate of the Tax Ombud and the procedures to pursue a complaint;

• Facilitate access by taxpayers to complaint resolution mechanisms within SARS to address complaints; and

• Identify and review systemic and emerging issues related to service matters or the application of the provisions of the TAB that impact negatively on taxpayers.

Clause 17 of the TAB makes it clear that the Tax Ombud may not review legislation or tax policy, or SARS policy or practice generally prevailing, or deal with any matter subject to objection and appeal under a fiscal statute, or any decision which is before the Tax Court. In those overseas countries where Tax Ombud Offices have been created, the resolution of legal disputes falls outside of the jurisdiction of the Tax Ombud and, in this respect, South Africa is adhering to the international norm.

The TAB provides that, once the Tax Ombud receives an issue falling within the Ombud's mandate, the Ombud may determine how the review of the taxpayer's complaint is to be conducted, and whether a review should be terminated before completion of the matter.

Currently, where taxpayers encounter administrative difficulties with SARS, it is necessary to raise the matter first with the official dealing with the taxpayer's affairs and failing resolution at that level, to refer the matter to the branch manager of the Receiver of Revenue office in question.

Only once that procedure has failed to resolve the matter, may the matter be escalated to the SARS Service Monitoring Office. Clause 18 of the TAB requires the taxpayer to exhaust available complaints resolution mechanisms in SARS before resorting to the Tax Ombud, unless there are compelling circumstances not to do so and this follows international practice.

It is provided that the Tax Ombud may entertain a request for assistance without exhausting SARS internal complaints procedures where the matter raises systemic issues or exhausting the complaints resolution mechanism will cause undue hardship to the taxpayer, or exhausting the SARS procedures is unlikely to produce a result within a period of time which the Tax Ombud considers reasonable.

In terms of clause 19 of the TAB, the Tax Ombud must report directly to the Minister and must submit an annual report to the Minister within five months of the end of SARS's financial year. In addition, the Tax Ombud is required to submit a report to the Commissioner: SARS, quarterly, or other intervals as may be agreed.

The annual report to be submitted by the Tax Ombud must contain a summary of at least ten of the most serious issues encounters by taxpayers, including a description of the nature of the issues.

Furthermore, the report must contain an inventory of the issues described for which action has been taken and the result of such action, and action that remains to be completed in the period during which each of them has remained unresolved.

Where no action has been taken, it is necessary to indicate the reasons for inaction on the taxpayer's complaint. Furthermore, the Tax Ombud’s report must contain recommendations for administrative action as may be necessary to resolve problems encountered by taxpayers in dealing with SARS.

It is specifically required that the Tax Ombud must seek to resolve all issues within the Tax Ombud's mandate in an efficient and effective manner and communicate with any SARS officials that may be identified by SARS. It must be noted that the Tax Ombud's recommendations are not binding on taxpayers or SARS. This would appear to follow the international norm, but based on experience, it does appear that revenue authorities, generally, will follow the recommendations made by the Tax Ombud and it is hoped that this outcome will prevail in South Africa.

The confidentiality of information dealt with by the Tax Ombud is preserved at clause 21 of the TAB. However, information may be disclosed where the information disclosed does not directly or indirectly reveal the identity of the taxpayer to whom it relates. Where information is required by the TAB or any other Act of Parliament, it must be disclosed, but only for the purposes of such statutes.

It remains to be seen when the TAB will be introduced to parliament and will take effect. Clearly, the creation of the Tax Ombud should create an effective means whereby taxpayers can resolve administrative difficulties encountered in dealing with SARS, or where SARS has abused taxpayers' rights. It must be noted that the Tax Ombud has no jurisdiction to deal with objections and appeals and legal disputes, as is the case with Ombud's offices around the world.

It is unfortunate, though, that the Tax Ombud is not empowered to award costs or damages to taxpayers who have suffered financial loss as a result of the conduct of SARS and its officials.

Dr Beric Croome is a tax executive with Edward Nathan Sonnenbergs. This article first appeared in the December 2010 issue of Without Prejudice

Thursday 2 December 2010

Monday 15 November 2010

Chance to benefit from tax-free home transfers

The Taxation Laws Amendment Bill, 2010, was introduced in Parliament by the Minister of Finance on August 24 and contains the final rules whereby taxpayers may transfer the home that they live in from a company or trust into their own name without incurring capital gains tax (CGT), secondary tax on companies (STC) or transfer duty.

The final rules for the tax-free transfers will be contained in paragraph 5lA of the Eighth Schedule to the Income Tax Act, 1962. The rules have undergone a number of refinements since first released for public comment during May and it is appropriate therefore to summarise the framework regulating the tax-free transfers of certain residences from companies, close corporations and trusts.

In accordance with paragraph 51A(1) of the Eighth Schedule to the act, the interest in the residence must be disposed of by a company, including a close corporation or trust, on or before December 31 2012.

New law offers wider options than expected to acquire company-owned homes, but there is a time limit.

The residence to be transferred must be used mainly for domestic purposes during the period beginning on February 11 2009 and ending on the date that the property is disposed of, which can be no later than December 31 2012.

The property must be transferred to natural persons who are connected persons in relation to the company or trust and that typically means that they are beneficiaries of the trust or shareholders of the company or members of the close corporation.

It is critical that once the property has been transferred from this company or close corporation that the company from which the property was transferred has within six months taken steps to liquidate, wind up or deregister, or where it is a trust, dispose of the residence; the founder, the trustees and the beneficiaries of that trust have agreed in writing to the revocation of the trust; or alternatively, that an application has been made to court for the revocation of the trust.

The purpose of paragraph 51A is to allow persons who own their homes in companies or close corporations of trusts to take ownership without incurring tax costs, but at the same time to remove either companies or trusts from the tax register. The South African Revenue Service sees this as a means of increasing efficiencies in tax administration.

In accordance with paragraph 51A(2), the company or trust disposing of the residence is deemed to have disposed of that residence for an amount equal to the base cost of the interest in that residence as at the date of disposal. On this basis, no CGT can arise when the property is transferred from a company or close corporation or trust to a natural person. It is therefore not possible to step up the cost of the property for CGT purposes.

Paragraph 51A distinguishes between transfers of residences to persons who bought shares in a company after the company acquired the residence and cases where shareholders created the structure that owns the residence in question.

If the company in question owns other assets, and the residence does not amount to 90% or more of the market value of the assets held by the company, the relief is not available where the company was acquired by a taxpayer at the time that it owned the property.

In those cases where a natural person takes transfer of the property from a company and paragraph 51A(3) does not apply, the base cost for the natural person taking transfer of the property is the same as the base cost of the property to the company concerned.

Paragraph 51A(5) of the Eighth Schedule to the act deals with those residences owned by a trust that are ultimately transferred to a natural person, and provides that the date of acquisition of the residence by the trust will be deemed to be the date on which the natural person acquired the asset in the event that the residence is disposed of later. Any expenditure incurred by the trust in acquiring the property will be deemed to have been incurred by the natural person taking transfer of the property as well.

Previously, the government made it clear that it would only entertain transfers of fixed residences from companies or close corporations directly to a natural person, or from a trust directly to a natural person, and that it would not allow for tax-free transfers from multiple-tiered structures, whereby residences would be transferred from a company owned by a trust of which a natural person was a beneficiary.

The bill, as introduced in Parliament, now allows for tax-free transfers when residences are owned in multiple-tiered structures, and the effect of this is that the residence can be transferred free of taxes from a company to a trust and ultimately to a beneficiary of a trust as long as the conditions contained in paragraph 51A of the Eighth Schedule are complied with.

The quid pro quo for transferring residences free of taxes from a company or trust structure is that the company or trust that previously owned the residence must be terminated.

Paragraph 51A requires that the disposal of the residence takes place from a trust or company to a natural person on or before December 31 2012.

The advantages of applying for the relief available under paragraph 51A is that the residence may be transferred free of CGT from a company or trust to a natural person, and that when the residence is finally disposed of the exemption applicable to the primary residence will then apply to the capital gain realised on disposal of the primary residence.

Furthermore, the legislation provides that no transfer duty will be payable on such transfers and in addition no STC will arise by virtue of section 64B(5)(kA). It must be remembered that when the residence is owned by a trust and it is transferred to a natural person, that will increase the value of the natural person's estate for estate duty purposes once that person dies.

The relief available in paragraph 51A is now wider than what was mooted in the draft bill released for comment during May.

Therefore, persons residing in residences owned by companies or trust structures should evaluate their circumstances to determine whether it is appropriate to transfer those residences out of the structures and into their own names, thereby taking advantage of the concessions available in the legislation whereby no CGT, STC or transfer duty will be payable.

Clearly, to give effect to the tax-free transfer it will be necessary to complete documents for submission to SARS and the Deeds Office and it remains to be seen when these documents will be released.

In practice it would make sense that when the residence is owned by a trust, for the trust merely to award the property to the natural person who is a beneficiary of the trust, and in the case of a company, to award the property as a dividend to the shareholder being a trust or natural person.

When the company is owed by a trust it would be necessary to transfer the property from the company to the trust and ultimately to a natural person beneficiary in order to utilise the concession available in paragraph 51A of the act and related exemptions contained in the bill.

 Dr Beric Croome is a tax executive at ENS. This article first appeared in the November 2010 edition of “Business Law & Tax Review” in Business Day

Free image from ClipArt

Wednesday 10 November 2010

Tax Administration Bill and Taxpayers' Rights (Part 3)

Part 1 (The importance of taxpayers' rights) appeared here

Part 2 (Important changes contained in TAB)  appeared here

Remedy for taxpayers

The TAB introduces a number of provisions that enhances taxpayers’ rights in South Africa, but unfortunately does not introduce a cost effective remedy where SARS has abused its powers or as has acted badly. Currently, taxpayers would be obliged to seek relief in the form of damages or costs of the High Court, which is a costly and time consuming exercise.

Taxpayers who are aggrieved about the manner in which they have been dealt with by SARS can lodge a complaint with the Service Monitoring Office, which is currently structured such that it is an office within SARS. It would be preferable if an independent ombudsman is created where taxpayers could lodge formal complaints against SARS and seek redress from SARS where the authorities have abused their position. Unfortunately, many taxpayers are reluctant to complain about SARS for fear of victimisation, whether such victimisation may or may not occur, and an ombudsman-type office would go some way in alleviating this concern.

In a number of democracies taxpayers are entitled to recover wasted costs from the revenue authority where the authorities have failed to comply with their statutory obligations or have caused taxpayers to incur costs as a result of poor administration of the fiscal statutes. Unfortunately, there is no provision currently whereby taxpayers can recover wasted costs from SARS.

Left: The TAB goes some way towards providing a remedy for taxpayers' complaints.

Recently, a number of taxpayers have encountered difficulties with SARS regarding the first provisional tax return submitted. In one case, SARS issued a letter to a taxpayer who had timeously submitted the first provisional tax return stating as follows:

"The IRP6 return submitted by you cannot be accepted and processed due to the following reasons:

1. You have not calculated the tax on estimated taxable income correctly for the amount declared and the year of assessment specified on the return. Please calculate the tax using the correct tax tables and estimated taxable income amount to enable the processing of the return

The completed return must be submitted as soon as possible as your filing obligations have not been met until such time as you have fully completed and filing [sic] the return.”

We are aware of other instances where letters have been issued by SARS for the first provisional tax return which incorrectly referred to the income threshold contained in paragraph 19 of the Fourth Schedule to the Act, which in fact deals with the second provisional tax payment and not the first provisional tax payment. In some cases, SARS has been required to withdraw letters issued by it to taxpayers.

In those cases where taxpayers have received letters advising that their provisional tax returns were incomplete, they have travelled to their closest SARS office, spending some hours at the SARS office waiting for an opportunity to discuss the matter with a consultant. Once the SARS official reviewed the letter and checked the taxpayers’ status on the system, it was established that the letters were erroneously issued. In such cases, taxpayers should, as a matter of right, be entitled to recover the costs incurred in travelling to SARS and be recompensed for the time wasted by them in attending to SARS erroneous letters. Currently, there are no provisions in our law which cater for this and it is unfortunate that the TAB does not address this lacuna.

Currently, where a taxpayer makes a mistake with a tax return, SARS will issue an additional assessment and impose additional tax for that mistake whereas when SARS makes a mistake, there is no apology, nor is there any recompense to the taxpayer.


The TAB was approved by cabinet on September 2 2010 and it is anticipated that the bill will be introduced to parliament during November 2010. It has not yet been indicated by when the TAB will take effect but it is more than likely to take effect over a period of time, commencing during 2011.

It is clear that the TAB does provide for feedback to be supplied to taxpayers subject to an audit, which was previously not the case and in other instances the TAB does seek to improve and uphold taxpayers’ rights.

Unfortunately, the TAB lacks a cost effective remedy for taxpayers and it would be far more preferable if measures were introduced whereby taxpayers could recover wasted costs and damages for mistakes made by SARS or where SARS abuses its powers. Ideally, a separate and distinct ombudsman’s office should be introduced to address taxpayers' complaints and grievances in dealing with SARS, as is the case in a number of democracies around the world.

Croome is a tax executive with Edward Nathan Sonnenbergs. This article first appeared in Without Prejudice November 2010 issue.
Free Image from Clipart

Tuesday 9 November 2010

Tax Administration Bill and Taxpayers' Rights (Part 2)

Part 1 (The importance of taxpayers' rights) appeared here.

Important changes contained in TAB

The TAB will create a single framework for all tax types which must be welcomed as taxpayers are currently required to submit different forms to register for different taxes, and the administrative burden of procuring registration numbers for the different taxes is onerous. Hopefully, this administrative burden will be eased somewhat once the TAB is fully operational.

The TAB will also broaden the scope of third party reporting to SARS to facilitate the greater pre-population of information on tax returns issued by SARS to taxpayers. Currently, taxpayers who are required to submit tax returns will receive a return reflecting details of remuneration received from employers and it is anticipated that the return will be enhanced whereby interest, medical aid related information and other third party information will be set out in tax returns, thereby reducing the administrative burden in submitting returns to SARS.

Currently, it is unclear what level of SARS official is authorised to exercise the powers contained in the various fiscal statutes. The TAB contains an innovation in this regard whereby certain powers can only be exercised by the Commissioner personally and a second tier of powers may be exercised by so-called "senior SARS officials" only. The remaining powers can be exercised by the third tier, namely, SARS officials generally. SARS will, therefore, need to indicate which officials fall into which category so that taxpayers can satisfy themselves that the more important powers have indeed been exercised by a senior SARS official as defined in the TAB.

The TAB also seeks to extend SARS information-gathering powers to enhance compliance by taxpayers with the fiscal statutes.

Currently, when a taxpayer is subject to an audit by SARS, there is no process whereby SARS is required to inform the taxpayer as to the status of that audit and this will change as a result of the enactment of the TAB. The TAB specifically provides that SARS must provide regular feedback to taxpayers informing them as to the status of the audit, which will bring South Africa into line with a number of other democracies. Importantly, SARS must, in terms of the TAB, inform a taxpayer that an audit has been concluded. Currently, a taxpayer may receive a request for information or be subjected to an audit and is never formally advised that the audit has been completed. It may take many months and sometimes years for SARS either to request further information or issue an amended assessment. With the TAB, this will change and SARS will be legally required to inform taxpayers that the audit has been completed.

Currently, the fiscal statutes do not clearly demarcate between routine audits and criminal investigations that may be undertaken by SARS. Under the Constitution, persons facing criminal prosecution enjoy certain rights and in light thereof, the TAB requires the separation of audit and criminal investigations by SARS to comply with the constitutional rights conferred on an accused.

It will be necessary for SARS to indicate to the taxpayer that an audit is no longer a routine audit but that the taxpayer is facing a criminal prosecution. This should enhance the protection of taxpayers' rights in this area.

The TAB contains a provision whereby SARS seeks to obtain a power to conduct searches of premises without a search warrant to protect documents from destruction. Currently, under s74D of the Income Tax Act (58 of 1962, as amended), the Commissioner is required to apply to the high court for a warrant authorising the search of premises and seizure of documents.

The TAB also contains a provision that, where SARS is concerned that documents may be destroyed prior to obtaining of a search warrant, a senior SARS official may authorise a search and seizure operation without a warrant issued by a court. There are concerns that this power may be abused as there is no independent check on the manner in which the power is exercised. It must be noted though that other statutes in South Africa, such as the Competition Act (89 of 1998), contain provisions whereby the state can conduct search and seizure operations without procuring a warrant from a court where there is a serious concern that documents will be destroyed prior to the obtaining of the search and seizure warrant.

Clause 88 of the TAB contains a provision whereby SARS may issue what is referred to as a "jeopardy assessment.” This entails SARS issuing an assessment in advance of the date on which a tax return would normally be due, so long as a senior SARS official, as defined, is satisfied that it is required to secure the collection of tax that would otherwise be in jeopardy. Currently, and based on the decision of the courts, SARS can only collect tax once an assessment has been issued to a taxpayer.

Clause 88 of the TAB seeks to neutralise the decision of Singh v Commissioner for SARS 65 SATC 203, which decided that SARS may only seek to recover tax once an assessment has been issued. Clause 88 seeks to confer on SARS the power to issue an assessment here SARS is of the opinion that the tax reflected as payable on that assessment will not be paid. This is a draconian provision and, as a result, clause 88(2) provides that in addition to the normal rights of objection and appeal to an assessment, a taxpayer can submit a review application against an assessment to the high court on the basis that the jeopardy assessment is excessive or, alternatively, that the circumstances do not justify the issue of such an assessment.

The TAB also proposes that all judgements delivered by the tax courts in the country are published, thereby placing taxpayers on an equal footing with SARS. Currently, SARS is in possession of all judgements delivered by the tax court, whereas taxpayers are only aware of those decisions which are published in some form or another. This is discriminatory and unfair and the move to publish all judgements of the tax court must be supported. There is no reason why all judgements of the tax court should not be published. Clearly judgements of the tax court cannot contain details of the taxpayer as this would violate the secrecy provisions contained in the various fiscal statutes.

The TAB contains rules refining the imposition of additional tax, which will bring South Africa into line with other democracies. Currently, SARS may, under s76 of the Act, impose additional tax of up to 200% where a taxpayer has failed to disclose all income or has sought a deduction to which they were not entitled. Typically, SARS is required to start off on the basis that the 200% additional tax should be levied and to reduce that by taking account of extenuating circumstances.

The TAB proposes a system whereby the conduct of the taxpayer will determine the scale of the additional tax levied whereby voluntary disclosure made by the taxpayer before SARS commences an audit will be treated far more leniently than those taxpayers who are obstructive or intentionally seek to evade tax. The TAB, therefore, proposes introducing objective criteria to be used in determining the quantum of additional tax to be levied where a taxpayer is in default under a fiscal statute.

To follow:

Croome is a tax executive with Edward Nathan Sonnenbergs. This article first appeared in Without Prejudice November 2010 issue.

Monday 8 November 2010

Tax Administration Bill and Taxpayers' Rights (Part 1)


The concept of a separate and distinct Tax Administration Bill (TAB) was first mooted in the Budget review published by National Treasury at the time of the 2005 Budget. It was indicated that National Treasury was contemplating introducing a single piece of legislation to deal with all the administrative provisions contained in the fiscal statutes administered by the South African Revenue Services (SARS), except for customs and excise duties.

The draft TAB was released for public comment on October 30 20O9 and its purpose is to harmonise the administrative provisions contained in all the various fiscal statutes except, as already pointed out, customs and excise which is subject to a separate process of review and legislative amendment.

In drafting the TAB, SARS consulted with domestic tax and constitutional law experts to ensure that the Bill does not violate the Bill of Rights contained in the Constitution as amended.

The TAB comprises some 20 chapters made up of approximately 254 draft sections. Many of the provisions contained in it will be familiar to taxpayers as they are currently found in the various fiscal statutes administered by SARS. The TAB deals with the various processes taxpayers will face when dealing with SARS, ranging from the registration as a taxpayer, to submitting tax returns, receiving assessments, challenging assessments and the information-gathering powers of the Commissioner. Clearly, as South Africa is a constitutional democracy, it is important that the TAB complies with taxpayers' rights as enshrined in the Constitution.

The importance of taxpayers' rights

All legislation introduced in South Africa must uphold the Bill of Rights. While the Constitution does not specifically refer to taxpayers' rights, it is clear that taxpayers can rely on the Bill. As a result of the constitutional dispensation, all fiscal statutes must adhere to the provisions contained in the Constitution, failing which the courts could strike down legislation as being repugnant under the constitutional provisions.

The Bill of Rights, therefore, affects the powers conferred on SARS in the fiscal statutes and, more importantly, how SARS conducts itself in dealing with taxpayers.

It must be remembered also that the rights contained in the Bill of Rights are capable of being limited under a law of general application in terms of s36 of the Constitution.

That section provides that rights may be limited in certain circumstances where it is reasonable and necessary in an open and democratic society. In the tax context, the taxpayers’ right to privacy enshrined in s14 of the Constitution is important in that it protects information held by a taxpayer and prevents the state from conducting searches of premises or from seizing documents and records, unless authorised by specific statutory provisions.

s32 of the constitution confers the right of access to information, whereby taxpayers can request information about themselves from SARS and in accordance with the provisions contained in the Promotion to Access to Information Act (2 of 2000). In addition, the right to just administrative action contained in s33 of the constitution confers on taxpayers a right to request reasons from SARS for decisions made by it in its dealings with taxpayers and as more fully set out in the Promotion of Administrative Justice Act (3 of 2000).

It is important, therefore, that the provisions contained in the TAB adhere to the provisions contained in the Constitution and particularly the rights available to taxpayers.

To follow:

Part 2 (Important changes contained in TAB)

Part 3 (Remedy for taxpayers)

Croome is a tax executive with Edward Nathan Sonnenbergs. The full article first appeared in Without Prejudice November 2010 issue.

Monday 1 November 2010

United Kingdom Court of Appeal Rules on Legal Professional Privilege and Accountants

In South Africa, taxpayers may lawfully refuse to supply information to the Commissioner: South African Revenue Service ("SARS"), which is subject to legal professional privilege. The concept of legal professional privilege originated in the English law of evidence and has been in existence for hundreds of years, having first having been adjudicated in the case of Stradling v Morgan (1560)1 Plowd 199, 75 ER 305. Legal professional privilege has played an important part in the law of evidence but has become more than merely a rule of evidence and has more recently been regarded as a basic right to ensure the proper administration of justice.

Left: The judge has ruled on professional privilege.

In principle, legal professional privilege applies where a person seeks legal advice from an attorney or advocate on a professional basis, the so-called "advice privilege" or where advice is sought in anticipation of litigation from an attorney or advocate acting in a professional capacity, the so-called "litigation privilege".

In Heiman, Maasdorp and Barker v Secretary for Inland Revenue and Another [1968] 30 SATC 145, the taxpayer contended that privilege prevented the disclosure of the information required by the Commissioner. That case, which was decided in 1968, held that the Commissioner's powers to seek information did not trump the taxpayer's right to claim privilege. More recently in Jeeva v Receiver of Revenue, Port Elizabeth 1995 (2) SA 433 (SE), SARS sought an order from the High Court forcing the taxpayer to disclose information which would otherwise have been protected by legal professional privilege. In Jeeva the court refused to accede to the SARS request and thus upheld the taxpayer's right to claim privilege on the information requested by SARS.

In S v Safatsa 1988 (1) SA 868 (A), the Supreme Court of Appeal ruled that legal professional privilege is a fundamental right which is necessary for the proper functioning of the legal system in South Africa. Based on the cases and the common law in South Africa, legal professional privilege can be claimed by a taxpayer only where the taxpayer has sought legal advice from an attorney or advocate on a professional basis. Legal professional privilege does not extend to advice supplied by an accountant, even though the accountant may be rendering advice on the tax laws of South Africa. This distinction is questionable when reference is made to the provisions of the Constitution of the Republic of South Africa, Act 108 of 1996, as amended ("the Constitution") and the comments made in S v Safatsa.

The question of whether legal professional privilege should be extended to accountants was considered by Charles J in Prudential Plc and Others v Special Commissioner of Income Tax and Others [2009] EWHC 2494 (ADMIN) where it was decided that it was not possible to extend legal professional privilege to accountants advising clients on tax matters in the United Kingdom.

Prudential being dissatisfied with the decision of Charles J, noted an appeal against his decision and, as a result, the case proceeded to the Court of Appeal. Judgment was delivered in that case on 13 October 2010.

In the lower court, Charles J decided that he was unable to go against the precedent set by the higher courts whereby legal professional privilege applied only to legal advice supplied by barristers and solicitors in a professional capacity. Thus, the case proceeded on appeal and the court allowed for The Institute of Chartered Accountants in England and Wales, the General Council of the Bar and the Law Society to intervene in the matter because of the importance of the issues raised in the dispute between Prudential and Her Majesty's Revenue and Customs ("HMRC").

Lord Justice Lloyd, at paragraph 2, summarised the issues facing the court in Prudential Plc and Another v Special Commissioner of Income Tax and Another [Institute of Chartered Accountants in England and Wales and others intervening] [2010] EWCA Civ 1094 as follows:

"In the present case, the Claimants and Appellants (whom I will call Prudential) seek to establish that the principle extends further than has yet been recognised. They assert (and it is not really in dispute) that, nowadays, on many if not most occasions on which a person seeks advice about fiscal liabilities, which often involves a consideration of, and advice about, the relevant law, that person does so by approaching accountants rather than lawyers. They contend that the rationale which lies behind the LPP rule requires that a client's communications with his advisers should be just as much protected from disclosure if the advice, being legal advice is sought from and given by an accountant as if the advice given is sought from and given by a solicitor or barrister."

In the case of R (Morgan Grenfell and Co.) v Special Commissioner of Income Tax [2002] UKHL 21, Lord Hoffmann stated as follows:

"LPP (legal professional privilege) is a fundamental human right long established in the common law. It is a necessary corollary of the right of any person to obtain skilled advice about the law. Such advice cannot be effectively obtained unless the client is able to put all the facts before the adviser without fear that they may afterwards be disclosed and used to his prejudice."

In view of the importance of whether legal professional privilege applies where legal advice is sought from and given by accountants to clients, the court granted permission to the Institute of Chartered Accountants in England and Wales, the Bar Council and the Law Society to intervene in the appeal. The court therefore canvassed the question of legal professional privilege thoroughly and, particularly, whether it should be extended to legal advice, particularly in the tax arena, supplied by accountants to clients.

The dispute between Prudential and HMRC arose from the fact that HMRC requested that Prudential produce certain documents. The United Kingdom fiscal legislation precludes the production of documents protected by legal professional privilege. Certain of the documents in question had been prepared by accountants for Prudential and Prudential sought to extend the application of the legal professional privilege to the documents prepared by its accountants.

HMRC asserted that the notices issued under the United Kingdom fiscal legislation sought the production of documents pertaining to legal advice on tax matters received from counsel, from foreign lawyers and also from a leading firm of accountants. Prudential argued that it was not obliged to disclose any documents relating to any advice obtained on the fiscal legislation, whether that advice was supplied by United Kingdom lawyers, foreign lawyers or accountants.

The court pointed out that legal professional privilege is a Judge-made rule and Prudential's lawyers argued that it was open to the court to declare the law by ruling that legal professional privilege is available in respect of communications obtained for purposes of giving legal advice, whether or not the adviser is a lawyer. The court reviewed the legal position in the United Kingdom and the manner in which legal professional privilege was extended to patent agents and foreign lawyers. Furthermore, the court referred to the Committee on Enforcement Powers of the Revenue Departments, the so-called "Keith Committee", which recommended "that legal professional privilege should be extended to duly appointed tax agents, who have been admitted members of an incorporated society of accountants or of the Institute of Taxation, and should apply only to advice given by a tax agent. This recommendation by the Keith Committee was not implemented." (at paragraph 50 ii of the judgment).

Justice Lloyd referred to the decisions of the European Court of Human Rights, which held that the interference with the privacy of a person's communications with their lawyer violates Article 8 of the European Convention on Human Rights (see Campbell v UK (1992) 15 EHRR 137 and Foxley v UK (2001) 31 EHRR 25).

Lord Pannick, arguing for Prudential, submitted that Article 14 of the European Convention on Human Rights stated that if privilege only exists where advice is sought from and given by a member of the legal profession that constitutes discrimination and should, for that reason, be extended to apply to advice given by an accountant. The court rejected the argument that limiting legal professional privilege to advice procured from a lawyer was discriminatory. At paragraph 69, the court referred to the restriction of legal professional privilege to advice supplied by lawyers in the following terms:

"It seems to me plain that a rule which limits LPP to communications with a member of a relevant legal profession (a) is in accordance with law and (b) can properly be regarded as necessary in a democratic society in one or more relevant interests, in particular for the protection of the rights and freedoms of others."

Prudential argued that legal professional privilege should be extended to accountants and the court analysed what is meant by the term "an accountant" and how that should be interpreted. The court pointed out that there is no restriction on persons wishing to set themselves up in business as an accountant, even though they may not be registered with a professional body.

After reviewing the principles applicable to legal professional privilege, and the definitional problems pertaining to accountants, the court pointed out that it is for Parliament in the United Kingdom and not for the courts to extend the scope of legal professional privilege.

The court referred to the position of legal professional privilege in other countries and, in this regard, stated as follows:

"We were shown some material about the position in Canada, Australia, New Zealand and the United States of America, and in some other jurisdictions. In New Zealand and the USA there is legislation on the point. In Australia legislation is being proposed. In Canada the application of LPP in relation to accountants appears to have been rejected. We were not shown any examples of LPP applying in relation to accountants except as a result of legislation.

... However, it is noteworthy that no example of the application of LPP in relation to any professional adviser other than lawyers has been found except as a result of statutory interventions. That seems to me to be consistent with the conclusion to which I have come, namely that, even if there is a strong case for applying LPP in such a way, it is not a matter which can properly be achieved by the courts; it requires legislation." (at paragraph 80).

As a result, the court ruled that legal professional privilege does not apply in relation to any professional, other than a qualified lawyer, a solicitor or barrister, or an appropriately qualified foreign lawyer. The court concluded that the human rights argument did not assist in satisfying the court that legal professional privilege should be extended to accountants in the United Kingdom when such accountants render to advice to clients on tax law.

Thus, the court declined the request to expand legal professional privilege to accountants and, furthermore, refused permission for Prudential to appeal to the Supreme Court, that is, the court that succeeded the erstwhile House of Lords.

It does not appear that any case has come before a South African court where a taxpayer has refused to supply information to SARS on the basis that the advice obtained was secured from an accountant. Under the provisions of the Constitution, our courts can take account of decisions handed down in foreign courts insofar as they are relevant to the application of the law in South Africa. It is possible, therefore, that a South African court, if called on to deal with the issues faced by the court in Prudential, would reach a similar conclusion.

However, it remains to be seen what weight the court will place on the Bill of Rights contained in the Constitution, which is different to the Human Rights Act of the United Kingdom. It is clear that under existing statutory provisions, tax advice supplied by an accountant to a client is not subject to legal professional privilege under current law.

It remains to be seen if the legislature will intervene in this regard as has happened in other countries. Clients seeking legal advice on tax matters should, therefore, be aware that where advice is being procured from an accountant, such advice is not protected by legal professional privilege and if called on by SARS, such information would, on the face of it, be required to be supplied to SARS, thus placing attorneys and advocates in a preferential position in advising clients on tax matters.

This article first appeared in tax ENSight, October 2010
Free image obtained from Please contact blog owner for any copyright issues.

Tuesday 26 October 2010

Tax Compliance in the 21st Century

During October 2010, the South African Institute of Tax Practitioners held their 3rd Annual Tax Conference at the Sandton Convention Centre. 

#Left: Dr Beric Croome, passionate about tax.

Speakers included Prof Michael Katz and Dr Beric Croome (both of Edward Nathan Sonnenbergs Incorporated, and both listed as Best Lawyers 2010) as well as other well-known tax personalities such as Judge Dennis Davis (University of Cape Town), Professor Keith Engel (National Treasury), Professor Daniel Erasmus (Thomas Jefferson School of Law, San Diego, California), Professor Walter Geach (University of KwaZulu-Natal),  Jackie Coolidge (World Bank), Nina Olsen (US Taxpayer Ombudsman and Advocate), Telita Snykers (Inland Revenue Service, Singapore), and Gelishan Naidoo(Deloitte).

Focusing on tax compliance in the 21st century, attendees explored:

* the importance of tax compliance for the economic and social development of South Africa;
* current and future National Treasury policy on improving tax compliance;
* how an independent tax ombudsman can assist taxpayers;
* how SARS envisages tax compliance;
* the role of SARS enforcement in improving tax compliance;
* how eFiling and third party data collection will improve tax compliance;
* the impact of tax avoidance and compliance;
* the purpose and impact of trusts in tax compliance;
* how to effectively manage tax risk to enhance tax compliance;
* how to improve their relationship with SARS;
* whether tax policy really improves tax compliance;
* how tax compliance costs impact taxpayer behaviour in complying with tax laws.

Dr Beric Croome spoke on the Tax Administration Bill and Taxpayers' Rights in South Africa. You can see the slides of the presentation by clicking HERE.

Beric says, "It's never easy to find the time to attend conferences, but I found this conference of great value and enjoyed the interaction with the other presenters and meeting attendees from all over South Africa."  

#Photograph and information obtained from SAIT

Thursday 14 October 2010

Lawyer of the Year 2010 - South Africa (Tax )

A jury of one's peers by Sanchia Temkin


IN THE October 2010 edition of Business Day Tax & Law Review we feature a special report on Best Lawyers SA 2010. Inclusion in Best Lawyers is based entirely on peer review. For over 25 years in the US and three years in SA, the top lawyers in the US and SA respectively have helped make the publication the leading legal referral guide by candidly evaluating the work of other top lawyers in the same areas of expertise. After more than a quarter of a century in publication, Best Lawyers this year has designated "Lawyers of the Year" in high profile legal practice areas, such as tax and competition law. Unfortunately, Tax & Law Review has not the space to profile all the lawyers who received accolades.

A list of all the lawyers honoured by inclusion can be found on page 12. Best Lawyers – Lawyer of the Year 2010 includes Edward Nathan Sonnenberg’s Dr Beric Croome (left) in the Tax category.

This year was an extremely eventful one and we decided to ask some of SA's Best Lawyers to tell us what stood out for them in their areas of practice and the challenges they foresee in the near future. More than 88 000 top general counsel see Best Lawyers lists in incisive publications such as Corporate Counsel and The American Lawyer, while more than 16-million readers see the lists in dozens of city and regional publications in the US including The Washington Post, The Los Angeles Times, and New York Magazine as well as in major business and general publications around the world, from Business Day in SA to Expansion in Spain.

The editors of Best Lawyers and Business Day Tax & Law Review would like to congratulate all the professionals who have been selected as Best Lawyers SA for 2010.

Passionate about the rights of the taxpayer

“TAXPAYERS and some advisors are usually ignorant when it comes to taxpayers' rights," says Beric Croome, an executive in tax at ENS. Croome has received the honour of "Lawyer of the Year" for 2010 in the tax category, due to the particularly high ratings he received from his peers. For three years in a row, since Best Lawyers was first published in SA, he has been designated as a "Best Lawyer" for tax.

Croome says that there is no doubt that the constitution has changed the face of taxation in SA. "Taxpayers need to be aware of the rights that they have in their dealings with the South African Revenue Service (SARS) so that they may be treated fairly and properly.''

He says that taxpayers are also unfortunately unaware of the fact that rights contained in the constitution may be limited by laws of general application where it is reasonable necessary to do so in a democracy. “I am often consulted by clients who believe that their rights have been violated by SARS but upon further investigation it is established that the limitation of rights contained in section 36 of the constitution allows for that limitation to take place.”

Taxpayers in SA currently also do not have a cost-effective remedy in seeking redress when SARS abuses its powers unduly and this is a matter that should be addressed.

Croome is a non-executive director of the Taxpayers Movement of SA which, among other things, intends to increase taxpayers' awareness of the rights that they have with SARS and is also calling for the creation of the tax ombudsman as a separate independent office to deal with taxpayers' complaints where SARS has abused its powers.

Croome's chosen career path was not initially that of a lawyer. He wanted to become a chartered accountant and, after finishing school, he commenced his undergraduate studies at the University of Pretoria for a BCom degree, which he completed at the University of Cape Town in 1980. He received his Certificate in the Theory of Accountancy in 1981. After successfully completing the final qualifying examination in I992, he began articles as a trainee accountant. In lieu of national service, he worked at the Johannesburg Receiver of Revenue (as it was then known) for a period of four years. “I so enjoyed working in the tax arena that I completed my Higher Diploma in Tax law at the University of Witwatersrand during that period, passing cum laude and garnering the Edward Nathan Friedland prize for the top student.”

It was during these studies that Croome decided that tax was a legal subject and decided to expand on his knowledge of law, and tax law in particular. As he was already working fulltime, he became a part-time student at the University of South Africa and completed the BProc and LLb degrees. “Studying constitutional law, in particular the bill of rights, whetted my appetite for taxpayers’ rights in SA and how the bill of rights affects South Africans taxpayers in their dealings with the Commissioner of SARS."

During 1994 he started to write articles about the constitution, which came into effect on April 27 1994 and the effect it had on the manner in which the revenue authority deals with taxpayers. Subsequently, he started researching the protection of taxpayers' rights in various countries, particularly Australia, Canada, the UK and the US, collecting articles and materials relating thereto. This came in handy during 2001 when Professor Richard Jooste of the University of Cape Town requested that he author an article dealing with taxpayers' rights in SA for publication in the UCT law journal 'Acta Juridica'' which was published n 2002. "My passion for the subject led to an article twice as long as was required by the university. I didn't want to lose the additional material, so when Professor Jooste suggested that I consider applying for admission to the PhD (Doctor of Philosophy) degree at the University of Cape Town, with taxpayers' rights in SA as my topic, I was drawn to the challenge,” says Croome.

He commenced studies under the supervision of professors Richard Jooste and Hugh Corder, then dean at the faculty of law at the University of Cape Town, in 2003. His topic focused on taxpayers’ rights in SA, concentrating on the rights to property, privacy, access to information, administrative justice and access to courts. He received his PhD degree in June 2008.

The University of Cape Town put his thesis forward for the 2009 Deneys Reitz National Tax Thesis Competition. Croome was subsequently advised that his thesis had been given the award in the doctoral category.

The thesis was published by Jutas as the book “Taxpayers' Rights in South Africa” in May this year.

Croome is currently working with two leading overseas tax specialists in the field of taxpayers' rights, co-authoring a book dealing with international taxpayer protection. Publication of this book is aimed at 2011 or 2012.

For many, years he has taken a great interest in the powers of SARS and how it treats taxpayers in light of the rights conferred on taxpayers under the provisions of the bill of rights.

Hopefully, when the process of converting the technical text of “Taxpayers' Rights in South Africa” into a more accessible guide for taxpaying citizens has been completed, this version of the book will give the man-in-the-street the knowledge he requires to understand his rights as a taxpayer.

"I hope that, in the not too distant future, there will be significant developments in the area of taxpayers’ rights in SA, enhancing the protection of taxpayers’ rights in the country," he says.

This article was written by Sanchia Temkin and first appeared in the October 2010 issue of Business Day's "Business Law & tax Review"

Interest paid to non-residents is to be taxed

In the Draft Taxation Laws Amendment Bill released for comment during May it was indicated that provisions would be introduced that interest paid by residents to non-residents would, in certain circumstances, become liable to tax in SA.

Initially, those proposals would have resulted in interest paid to non-residents becoming liable to tax at the rate applicable to branches carrying on business in SA, namely, 33%. The rules were deficient in that they did not deal properly with the manner in which the tax would be collected or administered. In the response document published by the Treasury and the South African Revenue Service (SARS) on submissions received in response to the bill, it was indicated that the initial proposals would be replaced by the introduction of a comprehensive non-residents’ tax on interest.

During August the minister introduced the Taxation Laws Amendment Bill 2010 that contains enabling provisions to implement a withholding tax on interest in SA. Previously, SA levied a withholding tax on interest, which was repealed during 1988.The government has now taken the view that it is appropriate to reintroduce a withholding tax on interest paid by South African residents to non-residents. The rules governing the imposition of the withholding tax on interest are contained at clause 58 of the 2010 Taxation Laws Amendment Bill, which proposes introducing sections 37I to M into the Income Tax Act 1962.

Section 37I contains various definitions that will apply to the withholding tax rules.

"Interest" is defined in section 37I as consisting of interest as defined in section 24J(1) of the act, as well as deemed interest as contemplated in section 8E(2).

It has been proposed that a “listed debt instrument” means any debt instrument that is listed on a recognised exchange as defined in paragraph 1 of the eighth schedule to the act, which includes an exchange licensed under the Securities Services Act, 2004 or an exchange in a country other than SA.

Section 37J provides that the withholding tax on interest must be calculated at the rate of 10% of the amount of any interest received by or accrued to any foreign person that is not a controlled foreign company (CFC). "Foreign person” has, in turn, been defined as any person other than a resident as envisaged in section 1 of the act. It has been provided that any foreign person that is not a CFC that receives any interest, or to which any interest accrues, will be liable to the withholding tax on interest.

The proposals contain a number of exemptions that will apply, thereby reducing the scope of application of the withholding tax on interest.

It has been proposed at section 37K that the following amounts of interest will be exempt from the withholding tax on interest:

• Received by or accrued to any foreign person during any year of assessment:

o In respect of any government debt instrument;

o In respect of any listed debt letter of credit on similar instrument ;

o In respect of any debt owed by any bank or the Reserve Bank;

o In respect of any bill of exchange, letter of credit on similar instrument to the extent that the interest is payable in respect of the purchase price of goods imported into SA, and if an authorised dealer as envisaged under the exchange control regulations has certified on the instrument that a bill of lading or other document covering the importation of the goods has been exhibited to it;

o In respect of any other debt owed by a foreign person unless the foreign person consists of a natural person who is physically present in the country for a period exceeding 183 days in aggregate during that year, or at any time during that year, carried on business through a permanent establishment in the country; or

o If that interest is paid or payable by a headquarter company and in respect of financial assistance that is not subject to section 31, as a result of the application of section 31(4) of the act.

A foreign person will not be subject to the withholding tax on interest when the recipient is a natural person who was physically present in SA for a period exceeding 183 days or at any time carried on business through a permanent establishment in the country.

Section 37L creates the legal obligation whereby any person making payments of interest to the benefit of a foreign person must withhold an amount equal to 10% of the amount of interest due to that foreign person. Once the withholding tax on interest comes into force the amount withheld must be paid over to SARS within 14 days after the end of the month during which the amount is withheld.

When the foreign person resides in a country with which SA has concluded a double taxation agreement, and that treaty provides for the reduction in the ate of the withholding tax in interest, a declaration in the form prescribed by the Commissioner must be submitted to the person paying the interest reflecting the rate of tax applicable.

Left: Waiting. Countries that have a double-taxation agreement with SA could slow down the whole process

The Taxation Laws Amendment Bill provides that the withholding tax on interest will come into operation on January 1 2013 and will apply in respect of any interest that accrues on or after January 1. Therefore, where interest is payable by a South African company to its holding company, withholding tax on interest will be payable at the rate of 10%, unless the rate of tax is reduced by virtue of the provisions of a double-tax agreement concluded with the state in which the parent company resides.

At present, interest received by domestic trusts may be awarded to non-resident beneficiaries without such interest attracting tax in SA. Once the withholding tax on interest takes effect the trust paying interest to non-resident beneficiaries will be required to pay over the withholding tax on interest on such awards, subject to the applicability of a double-taxation agreement.

The Treasury has indicated that SA will renegotiate certain double-tax treaties to ensure that the country can levy the withholding tax on interest.

This will take time, as has been borne out by the process in moving from the secondary tax on companies to the dividends tax, which has been delayed, partly, because of the process required to give effect to changes to double taxation agreements to allow for the introduction of the dividends tax system.

It is, therefore, debatable whether SA will be ready to implement the withholding tax on interest on January1 2013, taking account of the lengthy processes required to amend the treaties concluded by SA and its various trading parties.

 Dr Beric Croome is a tax executive at ENS. This article first appeared in the October 2010 issue of the Business Day "Business Law & Tax  Review".

Free image from ClipArt

Saturday 25 September 2010

Voluntary Disclosure Relief

The South African Minister of Finance announced in the 2010 Budget that legislation would be introduced to encourage taxpayers to regularise prior transgressions of the tax statutes in South Africa and the Exchange Control Regulations. The 2010 Budget Review indicated that voluntary disclosure relief would encourage individuals, with unreported foreign bank accounts, to disclose fully those accounts to the South African Revenue Service. South Africa has concluded a large number of agreements for the avoidance of double taxation with various countries and those agreements allow for the exchange of information between SARS and foreign revenue authorities.

In addition, SARS is in the process of concluding various tax information exchange agreements with a number of other countries traditionally regarded as tax havens. The voluntary disclosure programme is, therefore, being introduced to encourage taxpayers to regularise prior violations of the various tax statutes.

Details of the voluntary disclosure relief were first contained in the Draft Taxation Laws Second Amendment Bill, released by National Treasury for public comment on May 10 2010. The final version of the legislation, now known as the Voluntary Disclosure Programme and Taxation Laws Second Amendment Bill (29 of 2010), (VDPTLSAB) was introduced in the National Assembly on Tuesday August 25. It must be pointed out that the voluntary disclosure relief does not constitute an amnesty in that any tax that should have been paid and was not paid over to SARS, will always remain payable.

Qualifying persons

The voluntary disclosure relief is available to any taxpayer liable to pay any tax to SARS. The VDPTLSAB defines "tax" as including any tax, duty, levy, penalty and additional tax imposed in terms of any legislation administered by the Commissioner. Therefore, any taxpayer, be it a natural person, company, trust or close corporation, or other taxpayer is entitled to apply for the relief so long as they comply with the requirements contained in the legislation.

In order to qualify for the relief, the taxpayer must be in default insofar as the tax affairs are concerned and this means that inaccurate or incomplete information must have been submitted to SARS, with the result that the assessment was not for the correct amount of tax due or, alternatively, that an incorrect tax refund was made by SARS to the taxpayer.

It must be noted that persons facing a tax audit or investigation do not, generally, qualify, for relief under the programme. SARS may, in certain circumstances, allow for a person who is under audit or investigation to apply for the relief. Under the legislation, the Commissioner is empowered to direct that a person, who is under audit or investigation, may apply for voluntary disclosure relief where the Commissioner is of the opinion that the default in respect of which the person wishes to apply for the relief, would not otherwise have been detected during the audit or investigation and, furthermore, that the application would be in the interest of good management of the tax system and the best use of the Commissioner's resources.

The VDPTLSAB indicates that a person is deemed to be aware of a pending tax audit or investigation or that the tax audit or investigation has commenced where a representative of the taxpayer, an officer or shareholder or member of the person, where that person is a company, a partner in partnership with that person, a trustee or beneficiary of the taxpayer, if the person is a trust, or a person acting for or on behalf of or as an agent or fiduciary of the taxpayer, has become aware of the pending audit or investigation, or that tax audit or investigation has commenced.

Requirements for a valid voluntary disclosure

For a taxpayer to qualify successfully for the relief available under the programme, it is necessary that the disclosure is voluntary and must involve a default of the taxpayer's obligations to SARS. It is essential that the taxpayer makes full and proper disclosure of the default and that the default involves the potential application of a penalty or additional tax. The taxpayer is required to apply for the relief in the prescribed form. At this stage, SARS has not yet released the documentation required and will probably do so only once the legislation has been enacted.

A taxpayer may not apply for the relief where the disclosure will result in a refund due by SARS.

The Memorandum on the objects of the VDPTLSAB indicates that the application for the relief must be submitted during the period November 1 2010 to October 31 2011.

It is important to note that, in terms of the VDPTLSAB, the default or violation of the taxing statutes must have occurred prior to February 17 2010.The cut-off date is intended to prevent taxpayers from committing violations on an ongoing basis and just prior to the period for the submission of applications commencing.

Advantages of applying for the relief

Where a taxpayer successfully applies for the relief, they are assured of no criminal prosecution for the violation of the taxing statutes of the country.

In addition, the taxpayer will receive 100% relief for penalties and additional tax, other than the administrative penalties leviable under s75B of the Income Tax Act, Act 58 of 1962, as amended.

Further, qualifying taxpayers will receive 100% relief in respect of interest that would otherwise have been payable to SARS. Where, however, the taxpayer is subject to an audit or investigation and it has been decided by SARS that the person may still apply for the relief only 50% of the interest, that would otherwise have been leviable, will be imposed.

In all cases, the underlying tax remains payable to SARS, regardless of the nature of the tax. It is for this reason that it cannot be said that the voluntary disclosure relief constitutes an amnesty.

Confirmation of eligibility

The legislation contains an innovative provision whereby the Commissioner is authorised to issue a non-binding private opinion as to whether a person qualifies for the relief, so long as the person provides sufficient information for SARS to reach a decision. This information need not include the identity of any party to the default. Thus, it would appear that tax practitioners may seek guidance from SARS as to whether a particular taxpayer qualifies for the relief or not.

Left: Taxpayers who chose to participate in Voluntary Disclosure Relief must disclose material facts and figures. SARS officials will then consider their proposal and an agreement will be concluded.

Agreement to be concluded by a taxpayer and SARS

The legislation requires that the Commissioner and the qualifying taxpayer must conclude an agreement regarding the voluntary disclosure. The agreement must disclose details of the material facts of the default on which the voluntary disclosure relief application is based. In addition, the agreement must reflect the amount payable by the taxpayer, which must separately reflect the tax and interest amount due by the taxpayer as well as the arrangement and dates of payment. The voluntary disclosure agreement is also required to deal with the treatment of the tax issue in future years or periods and must contain details of the undertakings by the parties to the agreement.

Withdrawal of relief

Where the taxpayer fails to disclose material information, the relief granted under the legislation may be withdrawn and any amount paid under the voluntary disclosure agreement, will be treated as part-payment in respect of any outstanding tax in respect of the relevant default. In addition, SARS may, in such cases, institute criminal proceedings against the taxpayer for any statutory offence under a taxing statute or related common law offence.

SARS to issue a tax assessment

The legislation requires that SARS must issue an assessment to the taxpayer reflecting the agreement concluded under the voluntary disclosure relief programme. Clearly, any such assessment issued is not subject to an objection or appeal in that the assessment will be based on disclosures made by the taxpayer to SARS under the voluntary disclosure programme.

Reporting of information

The Commissioner is required to submit certain information to the Auditor-General and to the Minister of Finance regarding all applications receiver for voluntary disclosure relief. It is important to note that such information must be disclosed in such a manner that the privacy of the taxpayer is assured and does not disclose the identity of any qualifying taxpayer. The Commissioner must disclose the number of voluntary disclosure agreements concluded by taxpayers and SARS, the amount of tax and interest assessed and the relief granted under the legislation.

Exchange control

The voluntary disclosure relief programme will not work unless defaulting taxpayers may also regularise their position with the Exchange Control Department of the South African Reserve Bank. As a result, SARB will allow for the regularisation of prior transgressions of the Exchange Control Regulations.

The draft guidelines published by the Reserve Bank indicate that persons applying for the voluntary disclosure relief will be required to pay a levy of 1O% on the value of unauthorised foreign assets held by them as at February 28 2010. The applicant will be required to introduce the levy from funds located abroad, or, where they choose to settle the levy due to SARB by utilising domestic funds or the foreign assets are illiquid, the levy will amount to 12%.

Thus, where a person holds foreign funds in contravention of the Exchange Control Regulations, they may regularise those funds with the Exchange Control Department by following the processes to be announced by the Reserve Bank and to pay the levies as indicated above. In addition, companies which have violated the exchange control regulations may regularise those violations under the voluntary disclosure programme and pay the levy set.


Those taxpayers who have failed to comply with the tax laws and/or Exchange Control Regulations should avail themselves of the voluntary disclosure relief to take effect on November 1 2010. It is clear that the relief is available to all taxpayers.

Thus, for example where a company has failed to comply with its employees' tax obligations or its VAT obligations, it is entitled to seek the relief under the provisions contained in the legislation. In addition, those taxpayers who have removed funds from South Africa in contravention of Exchange Control Regulations and did not apply for amnesty under the Exchange Control Amnesty and Amendment of Taxation Laws Act (12 of 20O3), may now seek the relief available under the provisions contained in the legislation. It must be noted that the relief will only be available in respect of applications lodged with the authorities from November 1 2010 to October 31 2011.

Taxpayers who qualify for relief will benefit under the programme in that no additional tax, penalties or interest will be imposed and, furthermore, SARS will not institute criminal prosecution.

Dr Beric Croome is a tax executive with Edward Nathan Sonnenbergs. This article first appeared in the September 2010 issue of the law magazine “Without Prejudice”

Image free from Clipart