Amendments to the definition of relevant material for purposes of the Tax Administration Act

Introduction

The Minister of Finance tabled the Tax Administration Laws Amendment Bill No. 14 of 2014 in Parliament on 22 October 2014 at the same time that he introduced the 2014 Medium Term Budget Policy statement. The Bill as introduced by the Minister of Finance, also contained the memorandum on the objects of the Tax Administration Laws Amendment Bill of 2014. 

This article will consider certain of the amendments proposed to the Tax Administration Act No. 28 of 2011 which will take effect once the Bill is enacted.

Amendment of section 45 of the Value-Added Tax Act No. 89 of 1991

Clause 32 of the Tax Administration Laws Amendment Bill (‘TALAB’) proposes amending section 45 of the Value-Added Tax Act (‘VAT Act’), which regulates the payment of interest to a vendor, where SARS delays a refund payable to the vendor.

It is important to note that it was previously proposed by way of section 271, read with paragraph 134 of schedule 1 to the Tax Administration Act No. 28 of 2011 (‘TAA’) that with effect from a date to be determined by the President by proclamation in the Gazette that a delayed refund would not be payable if a person fails to, without just cause, submit relevant material requested by SARS for purposes of verification, inspection or audit of a refund in accordance with chapter 5 of the TAA. 

In addition, the provision applied where a taxpayer failed to furnish SARS in writing with particulars of the account required in terms of section 44(3)(d) of the VAT Act to enable SARS to transfer a refund to that account. The date on which the proposed amendment was to take effect was not determined as it related to interest which was dealt with in Government Gazette 35687 published on 14 September 2012.

Clause 32 of the TALAB now removes the reference to where a taxpayer fails to submit relevant material requested by SARS for purpose of verification, inspection or audit of a refund in accordance with chapter 5 of the TAA. Thus, the fact that a taxpayer fails to submit the necessary material to SARS will not prevent the payment of interest to the taxpayer once the refund is finalised and paid to the taxpayer. 

The requirement to furnish SARS in writing with particulars of the account required in terms of section 44(3)(d) of the VAT Act to enable SARS to transfer a refund to that account remains in place. Thus, where a taxpayer fails to comply with that requirement, no interest will accrue on the amount refundable from the date that the refund is authorised until the date that the person submits the bank account particulars. 

The proposed amendments will take effect on the date on which the TALAB is promulgated. The Explanatory Memorandum on this particular provision contained in the TALAB indicates that in practice it has proven factually difficult and impractical for SARS to apply the rules set out in the proposed amendment.

Clause 37 of the Tax Administration Laws Amendment Bill

Clause 37(b) of the TALAB proposes that the definition of “relevant material” in section 1 of the TAA will in future provide as follows:

“means any information, document or thing that in the opinion of SARS is foreseeably relevant for the administration of a tax Act as referred to in section 3”

Previously, the definition of “relevant material” did not refer to “in the opinion of SARS”. The rationale for the above amendment as set out in the Explanatory Memorandum on the Objects of the TALAB is to prevent protracted disputes about the information which SARS believes it is entitled to under the information gathering powers contained in the TAA.

The Explanatory Memorandum points out that the proposed amendment seeks to clarify that the statutory duty to determine the relevance of any information, document or thing for the purposes of, for example, a verification or audit is that of SARS and the term “foreseeable relevance” does not imply that taxpayers may unilaterally decide relevance and refuse to provide access thereto. SARS indicates that in practice taxpayers are deciding what information should be submitted to SARS and what information should not be so provided.

In addition, the Explanatory Memorandum indicates that according to the literature, which is not cited in the Explanatory Memorandum, the test of what is foreseeably relevant for domestic tax application would have a low threshold and the application of what is “foreseeably relevant” follows the following broad principles:

·         Whether at the time of the request there is a reasonable possibility that the material is relevant to the purpose sought;

·         Whether the required material, once provided, actually proves to be relevant is immaterial;

·         An information request may not be declined in cases where a definite determination of relevance of the material to an ongoing audit or investigation can only be made following receipt of the material;

·        There need not be a clear and certain connection between the material and the purpose, but a rational possibility that the material will be relevant to the purpose; and

·         The approach is to order production first and to allow a definite determination to occur later.

The Explanatory Memorandum points out that the protection of taxpayer information received by SARS is confidential and protected under chapter 6 of the TAA and may only be disclosed to another party in certain specific circumstances referred to in chapter 6 of the TAA.

The Explanatory Memorandum indicates that SARS received comments that SARS should provide reasons for each request for information, explaining why the material requested is considered relevant. SARS indicates that this is impractical when auditing taxpayers and referred to the case of Australia and New Zealand Banking Group Limited v Konza, [2012] FCA 196, which SARS relies on as a basis not to justify why material requested is in fact relevant. It is unfortunate that SARS does not draw attention to the fact that Australia does not have a Bill of Rights enshrined in a constitution as is the case in South Africa where the right to administrative justice set out in section 33 of the Constitution of the Republic of South Africa is paramount.

SARS indicates that where a taxpayer is dissatisfied in the manner in which SARS requests information, taxpayers have the following remedies:

·         Request SARS to withdraw or amend the decision to request material in terms of section 9 of the TAA;

·         Pursue the internal administrative complaints resolution process of SARS;

·         Approach the Tax Ombud;

·         Approach the Public Protector.

SARS refers to the internal administrative complaints resolution process of SARS and it is unfortunate that these have not been clarified and publicised on SARS’ website. It is questionable whether the particular issue falls within the mandate of the Tax Ombud as set out in the TAA.

Section 17 of the TAA sets out the limitations placed on the Tax Ombud’s authority and the Tax Ombud may not review SARS’ policy or practice generally prevailing other than to the extent that it relates to a service matter or procedure or administrative matter arising from the application of the provisions of a tax Act by SARS. It may therefore be possible for a taxpayer to argue that where SARS exceeds its powers enshrined in the TAA in requesting information which is clearly irrelevant, that a taxpayer may be entitled to file a complaint with the office of the Tax Ombud.

Where SARS chooses to undertake a field audit at the taxpayer’s premises in terms of section 48 of the TAA, it is important that the material requested falls within the scope of the audit as required under section 48 of the TAA. Section 48(2) requires that SARS issues a notice to a taxpayer indicating the initial basis and scope of the audit or investigation and this should, restrict the scope of information requested and should not entitle SARS to call for all documents and records pertaining to the taxpayer which bears no relationship to the scope of the audit underway.

Taxpayers must remember that under the provisions of the common law, SARS is not entitled to request information which is protected by legal professional privilege. Generally, where a taxpayer has sought advice from an attorney or an advocate, such advice is protected by the so-called advice privilege and furthermore, where a taxpayer is engaged in litigation the documents relating to that litigation will, depending on the circumstances, also be privileged. Based on the decision of the court in Heiman Maasdorp and Barker v Secretary for Inland Revenue and Another 1968 (4) SA 160 (W), 30 SATC 145 the court upheld the principle that SARS is not entitled to request information which is protected by privilege. 

It is unfortunate that the information gathering powers conferred on SARS in sections 46 to 48 do not deal with the question of documents which may be subject to legal professional privilege, as is the case where SARS conducts a search and seizure operation where specific rules are in place to regulate the treatment of documents which may be subject to legal professional privilege. Section 64 of the TAA regulates the process relating to search and seizure operations but does not unfortunately apply specifically to requests for information or field audits conducted by SARS. 

On many occasions SARS will also request copies of advice and opinions obtained by a taxpayer from a person other than an attorney or an advocate and it is questionable whether such information would constitute relevant material as envisaged in section 1 of the TAA. An opinion is generally an analysis of the law and an interpretation thereof which would in a legal dispute be regarded as inadmissible in court as the court is required to adjudicate on matters of legal interpretation. Taxpayers need to consider SARS request for opinions and make a decision whether SARS is lawfully entitled to call for such opinions.

Amendment to the definition of “return”

Clause 37(c) of the TALAB proposes amending the definition of “return” to provide as follows:

“means a form, declaration, document or other manner of submitting information to SARS that incorporates a self-assessment, is a basis on which an assessment is to be made by SARS or incorporates relevant material required under section 25, 26 or 27 or a provision under a tax Act requiring the submission of a return;”

It is therefore clear that the definition of “return” will be expanded and the Explanatory Memorandum indicates that the amendment seeks to clarify that a return is also an information gathering mechanism to obtain third party information which may not on its own constitute a basis of an assessment but is relied on by SARS to verify the correctness of returns submitted by taxpayers. In addition, the purpose of the amendment is to ensure that SARS obtains information required for purposes of SARS meeting its obligations to exchange information under international tax agreements.

The intended amendment seeks to ensure that the definition of a return is more closely linked to the provisions in the TAA and other tax Acts dealing with returns.

Amendment to section 46 of the TAA

Clause 46 of the TALAB contains a requirement that where SARS requests relevant material under section 46, the taxpayer must submit that relevant material to SARS in the format, which must be reasonably accessible to the taxpayer.

Where, for example, taxpayers possess relevant material in electronic format, they would be obliged to make that version of the material available to SARS once the amendment takes effect. SARS indicates in the Explanatory Memorandum that historically taxpayers would only supply SARS with printouts of the electronic version of the material. Thus, this amendment seeks to ensure that where a taxpayer receives a request for relevant material from SARS in terms of section 46 of the TAA, it must be supplied in the format required by SARS if reasonably accessible to the taxpayer. Where, for example, a taxpayer does not maintain electronic records, it would not be acceptable for SARS to insist that the taxpayer captures manual records electronically to suit SARS purposes. Furthermore, a taxpayer should not be obliged to manipulate date and supply it in the particular format which SARS requires if that is not readily available and accessible to the taxpayer.

Tax compliance status

Clause 64 of the TALAB amends section 256 of the TAA which regulates the process regarding the issue of tax clearance certificates to taxpayers.

SARS is compelled to issue or decline to issue the confirmation of the taxpayer’s compliance status within 21 business days from the date on which the taxpayer’s application is submitted or such longer period as may reasonably be required where a senior SARS official is satisfied that the confirmation of the taxpayer’s tax compliance status may prejudice the efficient and effective collection of revenue.

Furthermore, a  senior SARS official may provide a taxpayer with confirmation of the taxpayer’s compliance status as compliant only where they are satisfied that the taxpayer is registered for tax and does not have any outstanding tax debt, other than a tax debt contemplated in sections 167 or 204, or where a tax debt has been suspended under section 164 or does not exceed the amount referred to in section 169(4). Furthermore, the tax clearance certificate may be denied where a taxpayer has an outstanding return, unless an arrangement acceptable to the SARS official has been made for the submission of the return in question.

Section 256(4) of the TAA will provide that a confirmation of tax compliance status must be issued in the prescribed format and refer to the original date of issue of the tax compliance confirmation to the taxpayer, the name, taxpayer reference number and identity number or company registration number of the taxpayer, the date of the confirmation of the tax compliance status of the taxpayer to an organ of state or a person referred to in section 256(5) of the Act and the confirmation of the tax compliance status of taxpayer as at the date referred to above.

SARS will be entitled, in terms of section 256(5) of the TAA, to confirm a taxpayer’s compliance status as at the date of the request by an organ of state or a person to whom the taxpayer presented the tax compliance status confirmation, despite the provisions protecting confidentiality of taxpayer information in chapter 6 of the TAA.

Section 256(6) of the TAA will provide that SARS will be entitled to alter a taxpayer’s compliance status to non-compliant if the confirmation was issued in error or was obtained on the basis of fraud, misrepresentation or non-disclosure of material facts and SARS has given the taxpayer prior notice thereof and an opportunity to respond to the allegations made of at least 14 days prior to the alteration of their status.

Section 256(7) of the TAA provides that a taxpayer’s tax compliance status will be indicated as non-compliant by SARS for the period commencing on the date that the taxpayer no longer complies with the requirements under section 256(3) of the Act and ending on the date that the taxpayer remedies the non-compliance. The new provisions regulating tax clearance certificates will take effect on the date on which the TALAB is promulgated. The Explanatory Memorandum indicates that the requirements of no outstanding requests for information is removed as a requirement for a tax clearance certificate, but that that will be reviewed during the 2015 legislative cycle. SARS has introduced a new tax clearance system which will cater for sending a letter to taxpayers advising them as to the change in their status from compliant to non-compliant, thereby enabling taxpayers to remedy their non-compliant status.

Conclusion

The amendments proposed to the TAA are significant and taxpayers need to be aware thereof. SARS is clearly concerned that taxpayers may resist its request for relevant material when requesting information under section 46 and indeed when undertaking a field audit at the premises of the taxpayer under section 48 of the Act. Clearly, in the case of a field audit, the law requires that SARS specifies the scope of the audit and it would be untenable for SARS to request information which falls outside of the scope of the audit as prescribed in section 48 of the TAA. It is hoped that certain of the provisions contained in the TAA regulating the request for information and particularly what is envisaged by the term “relevant information” will ultimately be adjudicated by the courts to provide clarity for taxpayers and SARS.

Dr Beric Croome,  Tax Executive, ENSAfrica. This article first appeared in TAX TALK Professional, January/February 2015 edition from The South African Institute of Tax Professionals.