Inexorable Powers of the Tax Debt Collector

It is important that taxpayers who are indebted to the South African Revenue Services (SARS) engage with the Commissioner to resolve the manner in which the tax debts will be paid.  It must be remembered that the tax debt will not go away, and that the Commissioner has substantial powers in the Tax Administration Act to ensure that taxpayers settle tax debts due to it.

Where a taxpayer is required to file a tax return, that will be assessed by the Commissioner: South African Revenue Service, and an assessment will be issued reflecting the amount of tax payable by the taxpayer to SARS, or, alternatively, payable by the Commissioner to the taxpayer by way of a refund.  It is important that the taxpayer settles the tax reflected as payable on the assessment within the time period allowed on the assessment. 

Should the taxpayer fail to pay the tax within the time allowed, interest will be levied on the late payment of tax, and, furthermore, the Commissioner: SARS may initiate the various recovery procedures contained in the Tax Administration Act, No 28 of 2011, to ensure that the tax is indeed paid by the taxpayer.

Where the taxpayer fails to pay the tax when it is due, the Commissioner may apply for civil judgment for the recovery of the tax reflected as payable.  Previously, the so-called ‘judgment rules’ were contained in section 91 of the Income Tax Act, No 58 of 1962, and are now regulated by section 172 of the Tax Administration Act.  

Where a taxpayer fails to pay tax which is payable, the Commissioner may, after the giving the taxpayer at least 10 business days’ notice, file with the clerk or registrar of a competent court a statement setting out the amount of tax payable and certified by SARS as correct.  Previously, under section 91 of the Income Tax Act, the Commissioner was not obliged to issue a notice to the taxpayer indicating that SARS was about to take a judgment against the taxpayer.

SARS will get its due,
so it's best to pay up ahead
of any punitive measures

Note that the Commissioner is entitled to file a statement at court regardless of whether or not the amount of tax reflected as payable is subject to an objection or appeal, unless the obligation to pay the amount in dispute has been suspended under section 164 of the Tax Administration Act.

Therefore, should a taxpayer wish to dispute an assessment and lodge an objection thereto, they need to adhere to the rules regulating objections and appeals, and, at the same time, decide whether to pay the tax in dispute or to request the suspension of payment under section 164 of the Tax Administration Act.

It must be noted that the Commissioner: South African Revenue Service is not required to give the taxpayer prior notice of the intention to take a judgment against the taxpayer where the Commissioner is satisfied that giving such notice would prejudice the collection of the tax in question.

A difficulty arises in cases where the Commissioner has made an error on the assessment issued to the taxpayer and subsequently files a statement at court, which can have disastrous implications for the taxpayer’s credit standing.  

Furthermore, it does appear that there are occasions where the Commissioner takes a judgment without advising the taxpayer that it is intending to take judgment against the taxpayer.  

The difficulty that taxpayers have is that the information reflected on the e-Filing system regarding the amounts which may be payable by the taxpayer do not, for some reason, always correspond with what is reflected on SARS’ own internal system.  It is not unknown for taxpayers to have been in receipt of tax clearance certificates confirming that their tax affairs are in order and yet suddenly be advised by creditors or another party that judgment has been taken against them for the failure to pay taxes due to SARS. 

Where SARS fails to advise the taxpayer of the intention to take judgment, the taxpayer has no recourse against SARS, but would have to approach SARS with a view to having the judgment withdrawn, or, alternatively, approach the High Court for a rescission of the SARS judgment.

As pointed out above, should a taxpayer decide to lodge an objection against an assessment, a decision must be made whether to pay the tax in dispute or to submit a properly-motivated request to the Commissioner to postpone the payment of tax pending the outcome of the objection and appeal.  

Again, the difficulty that arises is that taxpayers may file an objection and a request for postponement of payment and not receive any communication from SARS for a substantial period of time.  The first time that they may become aware of a problem, is when SARS has either taken judgment against them or demands payment of tax within a very short period of time, despite the fact that SARS has failed to consider the taxpayer’s request for postponement of tax in accordance with section 164 of the Tax Administration Act.  

The taxpayer’s only recourse would be to launch proceedings in the High Court, or, once the Tax Ombud is appointed, to seek assistance from that office.

Where the taxpayer is unable to meet its tax obligations as a result of poor financial conditions, it is imperative to engage with the Commissioner to resolve the matter and consider seeking a deferral of payment in terms of section 167 of the Tax Administration Act.   

It does not appear that the Commissioner has published the Public Notice referred to in section 167(1)(a) of the Tax Administration Act, which sets out the criteria or risks that may be prescribed by the Commissioner in adjudicating whether an instalment payment agreement should be concluded with the taxpayer.  

Where, however, the taxpayer is facing financial difficulties, consideration should be given to applying for an instalment payment agreement on a properly motivated basis, and in compliance with the provisions of section 167 of the Tax Administration Act.  

Clearly, the Commissioner will not agree to an instalment payment arrangement for an indefinite period, but will typically agree to the payment of the outstanding tax in a number of instalments, and will review the arrangement regularly.

Previously, under section 99 of the Income Tax Act, the Commissioner could appoint any other party as the agent of the taxpayer and direct that any monies held by that person on behalf of the taxpayer be paid over to the Commissioner in settlement of the tax debts due by the taxpayer.  The rules regulating the so-called ‘appointment of agent’ are now contained in section 179 of the Tax Administration Act. 

That section requires a senior SARS official to issue a notice to any person who holds or owes or will hold or own any money, including a pension, salary, wage or other remuneration for or to the taxpayer, and require the person to pay those funds over to the Commissioner in satisfaction of the taxpayer’s tax debt.  The first time, generally, that a taxpayer becomes aware of such steps having been taken against it, are when payment instructions issued by the taxpayer to its bank cannot be followed because no funds are held in the taxpayer’s bank account as a result of SARS’ instructions. 

The Commissioner may also direct an employer to withhold from any salary payable to a member of its staff and to pay such money over to SARS in satisfaction of tax debts due by the employee.  SARS has published guidelines as to how employers are to deal with so-called ‘garnishee instructions’, and, also, to ensure that employees receive sufficient remuneration to pay the basic living expenses of themselves and their dependants. 

The Tax Administration Act also contains rules regulating the liability of financial management for tax debts due to the Commissioner.  

A person is personally liable for the payment of any tax debt due by the taxpayer to the extent that the person’s negligence or fraud resulted in the failure to pay the tax debt to SARS, where that person controls or is regularly involved in the management of the overall financial affairs of the taxpayer, and, where a senior SARS official is satisfied that the person is or was negligent or fraudulent in respect of the payment of the tax debts of the taxpayer. 

The decision to rely on section 180 of the Tax Administration Act can, therefore, only be made by a senior SARS official.  Unfortunately, taxpayers at this stage are not aware as to which SARS officials have been designated as senior SARS officials under the Tax Administration Act.

Clearly, where a person is involved in the financial management of a taxpayer, and deliberately fails to pay SARS taxes due and diverts those funds for other purposes, and it can be shown that the person was negligent or acted fraudulently, they may be personally liable for the tax debts of the taxpayer.

In addition, section 181 of the Tax Administration Act prescribes the circumstances where shareholders may be liable for the tax debts of a company.  Previously, the Commissioner was only entitled to recover Value-Added Tax and PAYE from persons involved in the financial management of a taxpayer under specific provisions contained in the Value Added Tax Act and the Income Tax Act.  Section 181 of the Tax Administration Act now applies to any tax debt due by a company, and is thus wider than those rules that were contained in the administrative provisions of the various tax Acts which have been repealed with effect from 1 October 2012.

The liability of a shareholder for the tax debts of the company arises where a company is wound up other than as a result of an involuntary liquidation without having settled its tax debts due to SARS, including its liability as a responsible third party, withholding agent or representative taxpayer, employer or vendor.

Those persons, who are shareholders of the company within one year prior to the company being wound up, are jointly liable to pay the unpaid tax to the extent that they receive assets of the company in their capacity as shareholders within one year prior to its winding up, and the tax debt existed at the time of the receipt of the assets would have existed had the company complied with its obligations under a tax Act.  

It must be noted that the provisions contained in section 181 do not apply in respect of a listed company as defined in the Income Tax Act or in respect of a shareholder of such a listed company.

The Tax Administration Act contains other specific provisions empowering the Commissioner to ensure the collection of tax debts from taxpayers who do not settle the payment of their tax debts timeously.  In certain cases, the Commissioner may seek the assistance of a foreign revenue authority where South Africa has concluded a double-taxation agreement allowing for the reciprocal assistance in the collection of tax debts.

Dr Beric Croome is a Tax Executive at Edward Nathan Sonnenbergs Inc. This article first appeared in Business Day, Business Law and Tax Review(March 2013.) Free image from ClipArt.