The following book review of my book Taxpayers' Rights in South Africa first appeared in the South African Mercantile Law Journal. You can find out more about this respected law journal by clicking HERE.
Taxpayers' Rights in South Africa
Book Review by S P van Zyl (University of South Africa)
In a society in which consumers are regularly reminded of their rights and in which consumer rights are protected at every cost, a constant question seems to be whether taxpayers, when dealing with revenue authorities, can be classified as consumers. Consumers may freely choose which suppliers they wish to support on the basis of client service, quality of goods and the type of consumer rights available to them.
However, taxpayers have severely unequal relationships with revenue authorities and cannot choose freely whether they want to enter into a relationship with the fisc. A good tax system is based on the principles of equity, certainty, convenience, efficiency and neutrality, but it is often difficult to ensure an economically successful tax system based on these principles and giving effect to consumer rights in an open and democratic society.
Beric Croome has excelled himself in his evaluation of the powers conferred on the commissioner of the South African Revenue Services (SARS) against the rights of taxpayers as enshrined by the Constitution of the Republic of South Africa, 1996 and embodied in the revenue laws, the Promotion of Administrative Justice Act 3 of 2000 and the Promotion of Access to Information Act 2 of 2000.
Croome has brilliantly managed to create an excellent guide to the taxpayer’s rights against the powers of the Commissioner for lawyers, accountants, academics, bankers, students, company directors but also the taxpayer as layperson. Taxpayers’ Rights in South Africa is by far the best text available on the rights of the taxpayer against the South African Revenue Service.
In the eight chapters spread over 322 pages of text, Croome successfully explains the taxpayer's rights to property, equality, privacy, access to information, administrative justice and access to the courts. In this difficult and complex field of taxation, Croome manages to explain the intricate details of the taxpayer's rights with such precision that even a layperson would be able to understand them.
Each right is carefully examined, explained and tested against the limitation clause in s36 of the Constitution before a conclusion is reached on the enforceability of the right against the Commissioner. The powers conferred on the Commissioner by revenue laws, including the right to searches and seizures (under 74D of the Income Tax Act 58 of I962), the right to appoint a financial institution as debt-collecting agent (under s99 of the Income Tax Act), the right to impose penalties and additional taxes (under ss75 and 76 of the Income Tax Act) and the highly debated 'pay now, argue later' principle are carefully examined and tested against the Bill of Rights.
It is a common misconception that taxpayers who have experienced difficulty or bureaucratic behaviour from SARS officials have to approach the expensive court system to have their rights acknowledged and enforced. Croome carefully examines other avenues of enforcing the taxpayer's rights, including the Public Protector, the Human Rights Commission, the SARS Service Monitoring Office and the taxpayer’s right to refer a dispute to alternative dispute-resolution (ADR).
In his treatment of the rights mentioned above, Croome not only discusses the South African position, but also refers to other jurisdictions in which the enforcement of the right has been decided in a court of law. This comparative research not only ensures an interesting read, but also enables a taxpayer (in most cases, the taxpayer’s legal counsel) to gain knowledge of foreign jurisdictions to enable him or her to prepare the case against the Commissioner more thoroughly. Chapter Seven deals exclusively with foreign jurisdictions.
This book is not merely a theoretical regurgitation of the current law, but it also contains practical examples and step-by-step instructions relating to the legal process to enforce rights against the commissioner. The schematic explanation of the process of objection and appeal and the subsequent explanation of the taxpayer's rights if the Commissioner fairs to adhere to its own rules can be used as a quick reference guide by attorneys, accountants, students and other tax consultants. Croome not only states the legal or constitutional problem at hand but also guides the reader to solutions within the ambit of current law.
In addition to the practical and theoretical basis of the discussions, Croome also makes recommendations to challenge certain sections of South African revenue laws in terms of the Constitution. Although Prof Bentley (Curtin University of Technology, Perth, Australia) is of the opinion that Croome's recommendations are at times controversial, I strongly believe that the enlightened and pro-taxpayer approach that Croome follows has been long awaited in the South African dictatorial fiscal regime. I consider that Croome's recommendations can and will be upheld in a court of law. The book is perfectly concluded with a quotation from Luke 3 vv L2-14:
“Among those who came to be baptised were tax gatherers, and they said to him, 'Master, what are we to do?’ He told them, 'Exact no more than the assessment."'
This book is a must for any tax practitioner, businessperson and even layperson who regularly deals with SARS. Croome has successfully compiled a book that can be used as a guide, a basis point for further research by academics and, above all, serve as a very interesting read. What impressed me most was Croome's meticulous discussion of the individual rights from a consumer's point of view, considered with the careful eye of a tax practitioner. The book is unlikely to lie about gathering dust, but should instead become grimy and tattered from daily use.
SP VAN ZYL
University of South Africa
In January, the Government Gazette contained a notice determining the date on which section 13(1) and 38(1) of the Taxation Law Second Amendment Act, 2009 will come into operation. Government Notice number 50, contained in the Government Gazette 33977, provided that February 2011 shall be the date on which Sections 13(1) and 38(1) of the Taxation Law Second Amendment Act, 2009 shall come into effect.
In order to ascertain the import of the abovementioned Government Gazette it is necessary to refer to the provisions of section 13(1) of the Taxation Law Second Amendment Act, 2009. Section 13(1) of the said statute substitutes the existing provisions contained in section 88 of the Income Tax Act of 1962.
The Government Gazette provides that the rules contained in the new version of section 88, which will be dealt with below, will come into operation on February 1. The South African Revenue Service (SARS) placed the Government Gazette's notice on its website when it was issued and, subsequently, issued a press release setting out the consequences of the notice and how SARS will deal with the new rules.
The old version of section 88 of the act regulated the payment of tax pending an appeal. It did not deal with when a taxpayer had lodged an objection and SARS had not made a decision on that objection. Section 88 of the act now regulates the payment of tax pending an objection or appeal lodged by a taxpayer.
It must be remembered that the Constitutional Court in Metcash Trading Limited vs the Commissioner: SARS 2001(1) SA 1109 (C) held that provisions of section 36 of the Value-Added Tax Act of 1991 (the VAT Act) which requires a taxpayer to “pay now, argue later" was constitutionally valid. Section 88 of the act is identical to section 36 of the VAT Act.
The Commissioner has the power to postpone the payment of tax pending the finalisation of an appeal. The old section 88 did not specify the criteria that SARS should take into account to determine whether a taxpayer should be granted a postponement of payment of tax pending finalisation of an appeal. The Constitutional Court held in Metcash that any decision made by the Commissioner on a taxpayer's request is subject to the rules of administrative justice, as a decision made under section 88 constitutes administrative action as envisaged in the constitution.
The new provisions of section 88 now deal with the powers of SARS to recover tax even though the taxpayer's objection or appeal has not been finalised.
Section 88 makes it clear that a taxpayer is entitled to request that SARS suspends the payment of any tax or a portion thereof due under an assessment when the liability to pay that tax is disputed by lodging an objection or appeal.
Section 88(3) of the act now provides that the Commissioner may suspend the payment of the tax in dispute by having regard to the following criteria:
• The compliance history of the taxpayer;
• The amount of tax involved;
• The risk of dissipation of assets by the taxpayer concerned during the period of suspension;
• Whether the taxpayer is able to provide adequate security for the payment of the amount involved;
• Whether payment of the amount involved would result in irreparable financial hardship to the taxpayer;
• Whether sequestration or Iiquidation proceedings are imminent;
• Whether fraud is involved in the origin of the dispute; and
• Whether the taxpayer has failed to furnish any information requested by the Commissioner under the act for a decision under section 88.
When a taxpayer receives an additional assessment or an assessment that does not agree with the tax return submitted by them to SARS, they have the right to lodge an objection to that assessment.
Left: Taxpayer's need to be aware of the requirements contained in section 88(3). IN determining whether to grant a taxpayer a suspension of payment, SARS must adhere to the rules of adminsitrative justice.
At the time that the objection is formulated the taxpayer should decide whether to pay the tax and know that if they succeed with their objection or appeal they will receive the tax paid by them together with interest. However, when a taxpayer chooses not to pay the tax, they will need to apply for the postponement of payment under section 88, and in the event that their objection does not succeed they will be liable for interest from the second date of the assessment issued to them.
Taxpayers need to be aware of the requirements contained in section 88(3) and should submit a formal application by way of a letter requesting postponement of payment pending finalisation of an objection or appeal, and show that each of the criteria mentioned above have been complied with.
Section 88(4) provides that SARS may refuse a request for postponement or may revoke a decision to suspend payment when SARS is satisfied that:
• The objection or appeal is frivolous or vexatious;
• The taxpayer employs dilatory tactics in the objection or appeal;
• On further consideration of the factors contemplated in section 88(3), the suspension should not have been given; or
• There is a material change in any of the factors described in section 88(3) upon which a decision to suspend the amount was based.
When a taxpayer succeeds with an objection and has paid the tax that was reflected on the additional assessment, he will receive the tax back from SARS together with interest thereon. Previously section 88 only required interest to be paid when the assessment was reduced pursuant to an appeal being allowed or conceded. The new section is more equitable than the old rules.
Section 36 of the VAT Act has been amended along the lines referred to above and should a taxpayer request a postponement of payment for a dispute under the act, the same criteria referred to above will need to be adhered to under the provisions of section 36 of the VAT Act.
When a taxpayer receives an additional assessment a decision must be made whether to lodge an objection against that assessment and, if so, a decision must be made whether to pay the tax due or alternatively to seek postponement of payment under section 88 or, in the case of a VAT matter, under section 36 of the VAT Act.
When SARS refuses a taxpayer's request to postpone payment subject to objection or appeal, the taxpayer may not object or appeal against that decision under the provisions of the act. The taxpayer would be required to pursue the matter in the high court on the basis that SARS has not complied with its obligations under the Promotion of the Administrative Justice Act of 2000. SARS, in determining whether a taxpayer should be granted a suspension of payment, must adhere to the rules of administrative justice and where it fails to do so a taxpayer should succeed in having the decision reviewed by the high court.
Dr Beric Croome is a tax executive at ENS. This article first appeared in Business Law and Tax Review, March 2011, Business Day. Free image from ClipArt.
The South African Institute of Race Relations (SAIRR) issued a press release on January 24 2011, pointing out that the number of registered individual taxpayers in South Africa grew from 3.4 million in 2002/03 to 5.9 million in 2009/10, an increase of 73%. The statistics relied on by SAIRR draws on the documentation released by National Treasury and the South African Revenue Service (SARS), Tax Statistics 2008 and Tax Statistics 2009. The increase represents a healthy improvement in the number of taxpayers in South Africa and goes some way to broadening the tax base.
According to Tax Statistics 2008, there were 814 894 companies on the register in 2002/03, a number that increased to1 878 856 in 2009/10. That is an increase of more than one million companies and close corporations on the tax register, which represents an increase 131 %.
Insofar as trusts are concerned, there were 254 593 trusts on the register in 2002/03 and that increased to 331 954 in 2009/10, an increase of 36%.
It is interesting to note, though, that the number of trusts on the register in 2008/09 was 392 260, and this reduced to 331 954 in 2009/10, a reduction of 15.37%, which would indicate that the number of trusts being created is reducing and, furthermore, that a number of trusts were terminated.
In 2002/03, the number of employers on register for Pay-As-You-Earn (PAYE) purposes was 252 589 and that had increased to 395 575 in 2009/10, an increase of 57%. The number of persons registered as vendors for value-added tax (VAT) purposes increased from 506 098 in 2002/03 to 685 523 in 2009/10, a 35% increase.
Left: How many people escape the tax net? The question that often arises in South Africa is how many people are currently registered, and how many taxpayers should, in fact, be registered for tax purposes?
More recently, SARS has reported on the number of persons registered for customs purposes and for 2OO8/0 9, 422 636 persons were registered. Importers comprised 228 350 of that total, and exporters 194 286. In 2009/10, the number of persons registered for customs purposes increased to 439 065, which represents an increase of 3.89%. lmporters increasing to 229 442 persons and exporters to 209 623.
It is extremely difficult to determine how many individuals should be registered taxpayers in South Africa and the shortfall between those persons who should be registered, and those that are on the register constitutes part of the tax gap. The tax gap also comprises tax not collected as a result of taxpayers failing to declare the correct amount of income tax. This constitutes criminal offence, which could give rise to a criminal prosecution as well as the imposition of additional tax and interest under the various fiscal statutes.
It would appear that in the 2009/10 financial year, approximately 14 million persons benefitted from social grants funded by registered taxpayers. The continued viability of social grants being paid to some 14 million people, which is funded by a small pool of taxpayers is a matter of considerable debate.
In attempting to establish how many persons should be registered for tax purposes in South Africa, it is appropriate to refer to the Quarterly Labour Force Survey, published by Statistics South Africa, for the third quarter of 2010, which was published on October 26 20I0.That survey indicates a population of between 50 and 64 years of age of some 32 072 000 people and that the labour force, that is, persons in employment, comprises some 17 371 000 persons. The Labour Force Survey reports that:
• 9 043 000 persons are employed in the formal sector, other than the agricultural sector
• 2 172 000 persons were employed in the informal sector, other than agriculture
• 640 000 persons were employed in the agricultural sector and
• 1 119 000 persons were employed by private households.
The survey reports that there were approximately 4 396 000 unemployed persons in the third quarter of last year and that there are 12 669 000 persons who are not economically active. In addition, there were 2 033 000 persons who are regarded as discouraged work seekers. The survey defines “discouraged work seekers” as “persons who were not employed during the period under review, wanted to work or was available to work but did not take active steps to find work during the last four weeks as a result of there being no jobs available in the area, unable to find work requiring their skills or lost hope of finding any kind of work.”
As a starting point, therefore, it would appear that there are approximately 17 371 000 persons in employment in South Africa, whereas 5 920 612 persons were on the register for income tax purposes. It must be noted that those persons who derive remuneration of less than R60 000 a year are not required to register for tax and are subject to Standard lncome Tax on Employees (SITE).
SARS has reported that there are approximately five million formal SITE workers who derive annual taxable income below R60 000 and are, therefore, not required to register and submit annual returns. Thus, the number of individuals paying tax, according to SARS, would amount to approximately 10 920 612 persons. Unfortunately, it is difficult to ascertain how many persons are earning below threshold and, therefore, are not liable to tax at all.
Using the figures in Labour Force Survey of persons employed as 17 371 000 and the total number of persons on register with SARS and paying SITE as 10 920 612, there is an unexplained shortfall of 6 450 388 persons. Part of the difference probably represents those persons who derive amounts below the tax threshold (that is, R57 000 for persons under 65 years of age or R88 258 for persons over the age of 65 years for 2010/2011) and are, therefore, not required to pay tax. However, it does appear that there are a significant number of economically active persons in the country who are not registered for tax purposes.
The Labour Force Survey seeks to identify those persons in some form of employment and would not, for example, include those who are retired and may derive income in the form of pensions, interest or other passive income. It is unclear how many retired persons there are in the country, but a fair number of those would also be registered as taxpayers, by virtue of the nature of the income received by them exceeding the tax threshold.
On May 14 2010, the Financial Mail published a report on community banking and reported statistics on the number of banked adults in South Africa. According to those statistics, it would appear that, in 2009, there were 19 609 384 banked adults in South Africa. It is accepted that even though persons may operate a bank account, they may not be required to register for tax purposes. However, it is an interesting statistic when reference is made to the number of taxpayers currently on the register.
SARS has undertaken various initiatives to encourage persons outside of the tax net to regularise their affairs. In 2003, taxpayers who had not complied with their obligations could regularise their affairs by utilising the 2003 foreign exchange and related tax amnesty. More recently, in 2006, SARS administered the Small Business Tax Amnesty in an attempt to encourage qualifying small businesses to regularise their affairs from a fiscal point of view. Commencing November 1 2010, the legislature introduced the Voluntary Disclosure Relief Programme (VDP), which will allow taxpayers to regularise violations of fiscal legislation and the Exchange Control Regulations. These rules also allow for those not previously in the tax net to regularise their affairs.
Clearly, in the case of companies and close corporations, it is easier to ensure that those entities are registered for tax purposes upon incorporation. Historically, companies and close corporations would automatically be registered for fiscal purposes as a result of information passed from the Companies and Intellectual Property Registration Office (CIPRO), to SARS to ensure registration of those entities for tax purposes. It is unfortunate that CIPRO is currently facing its own administrative difficulties, which may give rise to deficiencies in this regard.
Trusts are administered by the Master of the High Court which, unfortunately, does not operate a computerised system of trusts on register and it is, therefore, difficult to ascertain whether all trusts that have been registered with the Master are, in fact, registered for tax purposes as required.
When reference is made to the number of persons employed in South Africa and the number of banked adults, it is clear that there is a significant number who appear not be registered for tax purposes.
SARS previously conducted “walk-abouts” whereby SARS officials would visit various business centres to ensure that persons who were conducting business were registered for tax purposes. The Tax Administration Bill (TAB) released on October 29 2001, contains clause 40, which will confer on SARS the power to arrive at the premises and inspect the premises to determine the identity of the person occupying those premises and to establish whether that person is conducting a trade or an enterprise from those premises and, more importantly, whether the person occupying those premises is registered for tax purposes. The clause does not require SARS to make a prior arrangement with the occupier and confers on SARS officials the power to arrive, without prior notice, to ascertain whether the persons conducting business from those premises are, in fact, registered for tax purposes.
It is important that SARS, taking account of the statistics referred to, undertakes a programme of education to ensure that people become aware of their fiscal obligations. This programme of education should commence at schools. It is important that the tax base is broadened, thereby ensuring that the tax burden is spread among a far greater number of persons than is currently the case and thus allowing the state to meet its social objectives.
It is critical that the tax revenue which is collected is efficiently spent and that wastage is reduced to a minimum.
* Croome is a Tax Executive with Edward Nathan Sonnenbergs. This articles first appeared in the March 2011 edition of "Without Prejudice"
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