The Commissioner: South African Revenue Service recently indicated that it would utilise its powers contained in section 99 of the Income Tax Act 1962, to secure payment of penalty assessments issued by SARS to defaulting taxpayers for non- or late rendition of income tax returns.
A number of commentators have questioned whether SARS's power to appoint an agent is valid in light of the bill of rights contained in the Constitution of the Republic of South Africa, Act 1996, as amended.
It is important that taxpayers remember the process SARS must follow, prior to it initiating the collection of tax by relying on section 99 of the Income Tax Act. SARS must, firstly, issue an assessment to the taxpayer, reflecting an amount payable to SARS. This is in accordance with the Supreme Court of Appeal decision of Singh vs Commissioner: SARS.
The taxpayer would, typically, also receive a statement of account reflecting the amount payable to SARS and it would issue letters of demand or notices to the taxpayer requesting the taxpayer to pay the tax reflected as payable within a specified period. More often than not, SARS would also telephone the taxpayer to advise that the amount remains payable and that collection steps will be taken should the taxpayer not pay within a further period of time. SARS, therefore, only uses the power in section 99 of the act once the taxpayer has failed to engage with SARS to either dispute the assessment or to make arrangements to pay the tax reflected as payable.
Right: The Constitutional Court has upheld the 'pay now, argue later' principle.
Section 99 confers on the Commissioner the following power: "The Commissioner may, if he thinks necessary, declare any person to be the agent of any other person, and the person so declared an agent shall be the agent for the purposes of this act and may be required to make a payment of any tax, interest or penalty due from any monies, including pensions, salary, wages or other remuneration, which may be held by him or due by him to the person whose agent he has been declared to be."
It must be noted also that under the provisions of section 75(l)(j) a person who fails to comply with the provisions of section 99 of the act commits an offence and may be liable, on conviction, to a fine or to imprisonment for a period not exceeding 24 months.
It is accepted that the provisions of section 99 may appear draconian, but it must be pointed out that such provisions are not unique to SA. During 1996, the Commissioner approached the Constitutional Court for an opinion as to whether certain provisions of the fiscal statutes complied with the constitution. Unfortunately, the Constitutional Court decided not to adjudicate the various matters raised by SARS as it did not relate to an actual legal dispute, but was more in the nature of an opinion being sought from the Constitutional Court by SARS.
In the case of Hindry v Nedcor Bank Ltd and Another, Judge Wunsh had to determine whether section 99of the act was consistent with the Constitution. In Hindry, the taxpayer received a refund from the Commissioner in error. The Commissioner sought to reclaim the refund incorrectly authorised and eventually issued a notice to the taxpayer's bankers, appointing them as the taxpayer's agent under section 99 of the act, in order to recover the tax due by Hindry. Hindry applied for an interdict from the court preventing the bank from paying the Commissioner under the notice issued, pursuant to section 99, on the basis that the provisions were inconsistent with the Constitution.
Judge Wunsh decided that section 99 did not violate the constitution and. furthermore, that in none of the taxing statutes of other countries is the revenue authority required to give the taxpayer advance notice of an attachment, thereby enabling the taxpayer to make representations to avoid the effect of the agency appointment.
The judge pointed out that the garnishee procedure is recognised in other countries which constitute open and democratic societies.
Further, it must be pointed out that the Constitutional Court has upheld the "pay now, argue later" principle in Metcash Trading Ltd v Commissioner: SARS, which has the effect that SARS can insist on payment even though the taxpayer disputes an assessment issued by SARS.
The Value-Added Tax Act, 1991,contains a similar provision to section 99,at section 47. In Contact Support Services (Pty) Ltd and Others v Commissioner: SARS and Others, the taxpayer applied for the setting aside of the notices issues under section 47 of the VAT Act on the basis that the audi alteram partem principle had not been observed. The court refused to allow the challenge to the notices issued pursuant to section 47 of the VAT Act because the notices were not ultra vires the constitution.
However, in Mpande Foodliner CC v Commissioner: SARS and Others, the court set aside notices issued under section 47 on the basis that the denial of the audi principle before issuing the notices under section 47 of the VAT Act, infringed section 33 of the constitution. However, subsequently, in Smartphone SP (Pty) Ltd v ABSA Bank Ltd and Another the court referred approvingly to the comments made by Judge Brett in the Contract Support Services case. The court pointed out that in determining whether the taxpayer's right to administrative justice had been violated, it is necessary to take account of the circumstances of each case and it was unable to support the decision in Mpande.
Thus the courts have held that the issue of notices under section 99 of the Income Tax Act or section 47 of the VAT Act, do not unlawfully violate the taxpayer's right to administrative justice as envisaged in the Promotion of Administrative Justice Act of 2000.
More recently, in the Supreme Court of Appeal case of Shaikh v Standard Bank of SA Ltd and Another, the court was required to decide whether the payment of funds made by the bank to SARS was valid, despite the fact that the notice issued appointing the bank as the taxpayer’s agent, was deficient under the VAT Act. The court held that even though SARS may have referred to the incorrect statutory provision, it does not invalidate the administrative act where the decision is permitted under the provision in question.
Therefore based on a review of precedents in SA, it does not appear that section 99 violates the rights of taxpayers enshrined in the constitution. Clearly, where SARS has not issued an assessment to a taxpayer, or has otherwise abused its powers, the taxpayer would be entitled to approach a court for relief and should be entitled to recover damages from SARS.
However, where the taxpayer has ignored an assessment issued by SARS and subsequent notices of demand, SARS is fully entitled to rely on section 99 of the act to ensure the collection of tax due to it. It is important though, that section 99 of the act is used as a last resort by SARS, only after the taxpayer has failed to comply with their statutory obligations.
▪ Dr Beric Croome is a tax executive at ENS. This article first appeared in the August 2010 “Tax Bites” column of the Business Law & Tax Review in the Business Day.
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