Be Aware of Bogus Tax Practitioners

The Tax Administration Act requires that any person who renders tax consulting services or completes tax returns for a fee must register as a tax practitioner with the South African Revenue Service (‘SARS’). To register with SARS,  the tax practitioner must be a member of a Registered Controlling Body approved by SARS.

Currently recognised controlling bodies are:

• Chartered Institute of Management Accountants (CIMA)
• Chartered Secretaries Southern Africa (CSSA)
• Financial Planning Institute (FPI)
• Institute of Accounting and Commerce (IAC)
• SA Institute of Chartered Accountants (SAICA)
• SA Institute of Professional Accountants (SAIPA)
• SA Institute of Tax Practitioners (SAIT)
• The Association of Chartered Certified Accountants (ACCA)
• Association of Accounting Technicians Southern Africa (AAT(SA))

In addition, the following controlling bodies were automatically recognised in terms of the Tax Administration Act:

• Law Society of South Africa
• General Council of the Bar of South Africa, Bar Councils and Societies of Advocates referred to in Section 7 of the Admission of Advocates Act, 1964
• Independent Regulatory Board for Auditors (IRBA)

Only members of the bodies referred to above may apply to be registered as a tax practitioner with SARS. Other persons cannot be registered as tax practitioners.

The purpose in requiring tax practitioners to register is to protect taxpayers from unscrupulous tax practitioners.

In July this year, tax practitioner Nosicela Ntozini was convicted on 159 counts of fraud and for failing to register as a tax practitioner. She was sentenced to six and a half years imprisonment. She was employed by SARS as a call centre agent and submitted income tax returns for 38 taxpayers, claiming fraudulent tax refunds.

She manipulated the SARS system to secure the refunds and received a percentage of the refunds from the taxpayers in question. SARS paid out a total of R399 134 to the taxpayers. Ntozini received R109 660 from the taxpayers as her share of the fraudulent refunds.

In addition to the fraud committed by the accused, she failed to register as a tax practitioner. The failure to register as a tax practitioner is a criminal offence under section 234 (c)  which can give rise to a fine or a period of imprisonment not exceeding two years.

Taxpayers can seek help from SARS officials in completing tax returns during filing season and no fee is payable for that assistance. Taxpayers should not employ SARS officials to assist in completing their tax returns as that is a violation of the SARS code of conduct.

Where a tax practitioner fails to comply with their statutory obligations, the taxpayer may lodge a complaint with SARS which in turn may then lodge a formal complaint under section 241 of the Tax Administration Act against the tax practitioner’s Registered Controlling Body.

It is important that taxpayers choosing to appoint a tax practitioner to attend to their tax affairs only appoint a duly registered tax practitioner to do so.

Tax practitioners who are not registered with SARS approved controlling body 

will not be able to answer taxpayers' queries.

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Before selecting a tax practitioner, taxpayers should check with SARS, via the SARS website, that the tax practitioner they are dealing with is duly registered as required by the law. If the person is not registered with SARS, that fact should be reported to SARS so that appropriate action can be taken by SARS against the offender.

Also, where a tax practitioner guarantees the taxpayer a tax refund, and wants a share of that refund, the taxpayer should be concerned about the integrity of the tax practitioner and immediately check whether that person is, in fact, a duly registered tax practitioner.

Dr Beric Croome is a Tax Executive  at ENSafrica. This article first appeared in Business Day, Business Law and Tax Review, September 2018.

E-filing and Submission of Tax Returns

Until 2007 taxpayers had no choice but to file paper-based tax returns with SARS. This required the completion of a paper-based return and also the submission of the taxpayers’ supporting documents and tax certificates. SARS then introduced e-filing, whereby taxpayers could register for e-filing and submit their tax returns electronically. With e-filing it is not possible to submit supporting documents when, for example, an individual files their tax return, the ITR12.

Furthermore, taxpayers have a choice to register for e-filing personally and file their returns themselves or they can appoint a registered tax practitioner to act on their behalf and file their returns. The Tax Administration Act (‘the Act’) sets out who must register as a tax practitioner, as well as the statutory obligations arising where a person is a registered tax practitioner.

A registered tax practitioner must be a member of a SARS Recognised Controlling Body or a body recognised by the Act. All registered tax practitioners must adhere to the code of professional conduct prescribed by their controlling body. If the practitioner does not comply with their code of conduct or the provisions of the Act, SARS can lodge a complaint against the practitioner.

The failure to file returns on time can give rise to action being taken by SARS
against the taxpayer or tax practitioner.
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Although a taxpayer appoints a tax practitioner to submit tax returns on their behalf, the taxpayer retains the legal obligations imposed by the Act. Thus, if the tax practitioner fails to submit a tax return at all or on time, the taxpayer can be subjected to the administrative penalties for late submission of returns, which can range from R 250 per month to R 16 000 per month that the return remains outstanding. The penalty amount depends on the taxpayer’s level of income.

The failure by a tax practitioner to file returns on time can give rise to action being taken by SARS against the tax practitioner. However, this does not detract from the taxpayer’s personal liability for the failure to lodge a return. SARS can still subject the taxpayer to the administrative penalty and prosecute the taxpayer for non-submission of a return.

Should a taxpayer be dissatisfied with the service received from a tax practitioner, they should terminate the agreement with the tax practitioner. The taxpayer may have a basis on which to lodge a formal complaint with the practitioner’s controlling body or with SARS itself where the practitioner has violated the Act.  If a practitioner delays the submission of a return they can face action by SARS itself. In addition, the taxpayer must remember that the e-filing profile belongs to the taxpayer and can be retrieved from the tax practitioner at any time. 

SARS indicated recently that it will use the National Prosecuting Authority to prosecute taxpayers in the Tax Court for the failure to submit tax returns. It must be remembered that the failure to submit a return when required to do so constitutes a criminal offence, which can give rise to a fine or a period of imprisonment. This will, on a successful prosecution, result in the taxpayer having a criminal record.

Taxpayers using e-filing must ensure that they do not allow unauthorised persons to obtain their login and password details. The Office of the Tax Ombud has in its various annual reports indicated that there have been too many cases of identity theft where taxpayers have been duped into making  their passwords available to unauthorised third parties.

Once a return is filed via e-filing, SARS will often request that the taxpayer submits the documents to support the filed return. The taxpayer should receive notice of such verification requests via e-mail or SMS. The taxpayer is entitled to receive proper notice of SARS requests and, in my opinion, it is not sufficient for SARS to merely post a letter on the taxpayer’s e-filing profile.

E-filing has allowed SARS to enhance its data matching processes to ensure that taxpayers properly declare all income derived by them. Should a taxpayer choose not to declare all income received or accrued they will be subject to the understatement penalty, which can range from 10% to 200% of the income tax underpaid.

E-filing has its advantages to both taxpayers and SARS in that returns can be processed far more quickly than paper-based returns.  However, taxpayers must still submit their tax returns on time. Where a tax practitioner is appointed, that person must act professionally and should not delay the filing of returns without a good reason. 

Whether returns are filed via e-filing or manual submission, or managed by a tax practitioner or the taxpayers personally, the taxpayer remains liable for the failure to submit a tax return on time.  

Dr Beric Croome is a Tax Executive  at ENSafrica. This article first appeared in Business Day, Business Law and Tax Review, May 2018.

Court Orders Taxpayer to Respond to Sars Request to Complete the Lifestyle Questionnaire

The Eastern Cape Division of the High Court delivered judgment on 5 May in the case of Commissioner for the South African Revenue Services v J Brown, case no 561/2016, as yet unreported, directing the taxpayer to submit a response to the Lifestyle Questionnaire submitted to him by the Commissioner for the South African Revenue Service (“SARS”).

According to the judgment, Mr Brown was not registered for tax purposes and had never submitted tax returns to SARS. SARS made an application to the court requesting that the court direct the taxpayer to respond to the Lifestyle Questionnaire and the taxpayer contended that he had shown just cause for his refusal to respond to the Lifestyle Questionnaire.

SARS submitted the Lifestyle Questionnaire to the taxpayer on 19 October 2015, and the taxpayer was required to submit the completed questionnaire to SARS within 21 business days. The letter indicated that the period of investigation covered the 2011-2015 tax years and that SARS was in the process of reviewing the taxpayer’s file and that the information was requested in terms of section 46(1) of the Tax Administration Act (‘TAA’).

The court indicated that the Lifestyle Questionnaire comprised 26 pages and that the first page thereof draws the taxpayer’s attention to the provisions of section 72(1) of the TAA which provides that a taxpayer may not refuse to complete and file a return on the basis that to do so may incriminate the taxpayer. 

The information requested by SARS related to the taxpayer and his wife’s personal particulars and circumstances, personal and private investments and assets as well as properties owned by him and his spouse together with income received during the period under review and any expenses incurred. 

The taxpayer’s attorneys responded to SARS letter on 5 November 2015 and in that letter reminded SARS of its statutory obligations towards taxpayers and requested confirmation that SARS will keep the respondent informed of the progress and findings of any audits and that he will be given a reasonable opportunity to respond to the findings thereof. 

The taxpayer’s attorneys also required the following information before the taxpayer would reply to SARS’s questionnaire:

• “In terms of which sections of which law the respondent was obliged to submit the relevant material;
• If this is for administration of any tax law, the relevant subsection of that definition in section 3(2) of the Act, must be quoted, supported by the underlying facts and circumstances that make the enquiry foreseeably relevant with the reasonable specificity as required by the Act;
• Adequate reasons for the questionnaire, investigation and audit and why it is being conducted, including the underlying risk analysis for the industry  the taxpayers is in, on which this audit is based; and
•  Copy of the SARS id’s and letters of the of the SARS assessors as well as the line manager involved in the matter.”

SARS was informed that the taxpayer would also submit a formal request for the above information under the Promotion of Access to Information Act. (‘PAIA”)

SARS subsequently replied to the taxpayer’s letter reminding his attorney’s about the taxpayer’s statutory obligation to pay the prescribed fee under PAIA and stating that the request for information under the law would not be processed until the prescribed fee had been paid. 

Further correspondence passed between SARS attorneys and the taxpayer’s attorneys with SARS reminding the taxpayer’s attorneys that the taxpayer had a duty to respond to SARS request for information.

The taxpayer‘s attorneys indicated that the request to complete the questionnaire constituted administrative action and was subject to the principle of legality and that the taxpayer had just cause not to respond to the request because the information requested by him had not been provided to him and thus he was entitled to assume that the exercise of a power in terms of section 46 of the TAA had not been properly authorised.  

The court directed the taxpayer to submit a proper response
to the Lifestyle Questionnaire within two weeks 

Image purchased from www.iStock.com ©iStock.com/"gavel and book" by khz

The taxpayer indicated that he would only reply to SARS’s request for completion of the Lifestyle Questionnaire once the information requested in terms of PAIA had been supplied by SARS.

SARS agreed to supply copies of the SARS identification cards but refused access to the remainder of the records and information required by the taxpayer. SARS declined the request of that information on the basis that disclosure thereof would jeopardise the effectiveness of SARS auditing procedures and methods used by SARS to identify taxpayers.

It was argued by SARS that the provisions of section 46 are peremptory and that a taxpayer has no choice but to submit the information where SARS calls for information under that section. SARS raised various reasons contending why the taxpayer was obliged to supply the information requested. 

The taxpayer in return contended that SARS was seeking to conduct an unlawful fishing exhibition and was not entitled to the information as the request constituted an infringement of the taxpayer‘s constitutional rights set out in the Bill of Rights.

The court reviewed the arguments raised by SARS and the taxpayer, and came to the conclusion that the issuing of the Lifestyle Questionnaire was done in the course of the administration of a tax Act andwas therefore satisfied that all of the jurisdictional facts contained in section 46 had been complied with. 

The taxpayer contended that the request for information constituted administrative action which was protected by the right to just administrative action. SARS argued that the request for information under section 46 of the TAA constituted a preliminary investigation by SARS which may or may not result in a more formal inquiry into the taxpayer’s affairs. 

The court decided that it is only once the information has been received by SARS and it has been established that a further inquiry is required that the principles of administrative justice must be observed. 

The court concluded that SARS had provided sound reasons for its decision to issue the Lifestyle Questionnaire particularity taking account of the fact that the taxpayer was not registered and had failed to submit tax returns. The Court decided that the refusal by SARS to make information available to the taxpayer under PAIA was justified.

The court directed the taxpayer to comply with section 46 of the TAA and submit a proper response to the Lifestyle Questionnaire within two weeks of granting of the order in question. The court further ruled that should the taxpayer fail to submit the completed Lifestyle questionnaire, he would be held in contempt and will be committed to imprisonment until such time as he complies with the court order. 

In addition, the taxpayer was also ordered to pay SARS costs of the suit on the party and party scale.

Thus, taxpayers who decide not to submit information requested to do so by SARS under section 46, need to be aware that such behaviour will not be condoned by court.

Dr Beric Croome is a Tax Executive  at ENSafrica. This article first appeared in Business Day, Business Law and Tax Review, June 2016

Request by SARS for Information from South African Taxpayers Regarding Related Parties Abroad

In terms of chapter 5 of the Tax Administration Act No. 22 of 2011 (the “TAA”), the South African Revenue Service (“SARS”) is empowered to seek information from taxpayers to ensure that the returns that they have submitted to SARS are complete.

Originally, the TAA did not provide a means for SARS to compel taxpayers to supply information relating to foreign related entities. In practice, SARS would request information from taxpayers pertaining to overseas subsidiaries or on other occasions indicate that they wished to conduct an audit in the country in which the foreign subsidiary was located. 

It is clear from a review of South African and international law that SARS’ powers do not extend beyond the borders of South Africa and that it would have been unlawful for SARS officials to arrive in a foreign country to conduct an audit on a company or entity located abroad. That is the reason why States conclude double taxation agreements to eliminate double taxation but also to allow for co-operation between States and to receive information from a taxpayer located in one jurisdiction for transmission to a revenue authority in another country. 

Thus, SARS could only procure information from another country under either a bi-lateral tax treaty or in accordance with the Convention On Mutual Administrative Assistance In Tax Matters which allows for a revenue authority in one country to seek assistance from another revenue authority to audit and investigate the affairs of the taxpayer located in the other country.

Countries such as Canada and Australia have historically had provisions in their fiscal legislation allowing the revenue authority to request information from domestic taxpayers regarding entities related to the domestic taxpayer which are located abroad. 

It was therefore no surprise that section 46 of the TAA was amended by way of section 42 of the Tax Administration Laws Amendment Act No. 23 of 2015 which now confers on SARS the power to call for information from a South African taxpayer in respect of a connected person located abroad.

Thus, section 46 (2) now provides that a senior SARS official may require relevant material from a taxpayer held or maintained by a connected person as defined in paragraph (d)(i) of the definition of connected person contained in section 1 of the Income Tax Act 58 of 1962, as amended in relation to the taxpayer where that person is located outside South Africa.

The definition of connected person is comprehensive and this article does not seek to analyse the scope of that definition but taxpayers must remember that the connected person definition particularly in relation to a company is very wide and clearly would apply where, for example, a South African company owns more than 50 % of the equity shares or voting rights in a company located abroad, or meets certain other requirements specified in paragraph (d)(i) of the definition of connected person.

Section 46 also regulates the time period within which information located abroad must be provided to SARS. Where the information is held by a connected person in relation to a South African taxpayer, the taxpayer must supply the information within 90 days from the dates of SARS’ request for the information and it is important that SARS when calling for the information relating to the connected person located abroad sets out the consequences should the taxpayer fail to provide the information requested. 

It must be noted that the time period referred to is 90 days and not business days as defined in section 1 of the TAA and thus in determining the period available within which to respond taxpayers would need to take account of calendar days and not business days.

Where a taxpayer fails to provide the information requested by SARS in accordance with section 46 of the TAA it must be noted that the material in question may not be produced by the taxpayer in any subsequent proceedings with SARS unless a competent court directs otherwise on the basis of circumstances beyond the control of the taxpayer and any connected person referred to in paragraph (d)(i) of the definition of connected person as defined in the Income Tax Act in relation to the taxpayer.

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It is interesting to note that other countries have a similar provision that where a taxpayer declines to provide information relating to a foreign related entity that information cannot be used in subsequent proceedings against the revenue authority of that country. 

Thus, Section 46 (9) of the TAA which provides that information may not be used by the taxpayer should they not make it available to SARS is not uncommon.

It is important to remember also that that where a taxpayer is assessed by SARS , the onus is on the taxpayer in accordance with section 102 of the TAA to prove that an amount, transaction, event or item is exempt or otherwise not taxable, or that an amount or item is deductible or maybe set off. 

Thus, should a taxpayer not provide the information to SARS it may become very difficult for the taxpayer to discharge the burden of proof as prescribed in section 102 of the TAA.

In addition, the failure to provide information to SARS is specifically regarded as a criminal offence under section 234 of the TAA. 

Thus, taxpayers should not lightly refuse or neglect to furnish information to SARS when called upon to do so, including information relating to a connected person located abroad.

In addition, the failure to provide information, particularly information held by a connected person abroad, could be construed as obstructive and result in an increase in the understatement penalty which SARS may seek to impose if SARS adjusts the taxable income of the taxpayer.

Thus, taxpayers who are requested to provide information held or kept by a connected person as envisaged in section 46 read together with the definition of connected person in section 1 of the Income Tax Act need to be aware of the consequences should they fail to provide the information to SARS timeously.

Dr Beric Croome is a Tax Executive  at ENSafrica. This article first appeared in Business Day, Business Law and Tax Review, March 2016. 

Effect of Taking Professional Advice on Imposition of Understatement Penalties and Interest

On 18 November 2014 Wepener J delivered judgment in the case of Mr Z v The Commissioner for South African Revenue Service, case number 13472 in the Tax Court Johannesburg (as yet unreported), which dealt with how amounts paid by the taxpayer to an erstwhile shareholder of a company in which the taxpayer had invested should be dealt with for capital gains tax purposes, as well as the imposition of the understatement penalty and interest imposed on the underpayment of provisional tax.

The judgment indicated that during November 2003, A Investments Ltd (“A”) disposed of its shareholding in B (Pty) Ltd. During August 2007 Mr Z, together with another shareholder, Mr X, disposed of 600 000 ordinary shares in B (Pty) Ltd to F. The shares represented 30% of the total issued share capital of B (Pty) Ltd with the taxpayer holding 27,005% and Mr X holding the balance.

Mr Z disposed of his shares for R841,655,833. A Investments Ltd informed the taxpayer that it had discovered that Mr Z had withheld material information from it when he represented A during its transaction with F. As a result, A instituted action against Mr Z on the basis of the 2003 transaction and in particular Appellant’s failure, as A’s agent to inform A that F would be prepared to extend minority protections to A. 

The dissatisfied shareholder claimed an amount of R925,000,000 from Mr Z on the basis that that was the value of the shares and claims it would have held and which it lost by virtue of having disposed of its shares and claims in B (Pty) Ltd. Mr Z concluded a settlement agreement with A to pay it an amount of R694,888,271 in full and final settlement of its claim. Mr Z reflected the net amount derived by him as proceeds for capital gains tax purposes and SARS subsequently increased the proceeds of R216,218,233 originally disclosed by the taxpayer by an amount of R625,437,601 to an amount of R841,655,833. 

The Tax Court reached the conclusion that SARS was correct in disregarding the amount paid by the taxpayer to A of R625,437,601 and thus effectively taxed the taxpayer on an amount he never retained. The court reached the view that the Eighth Schedule to the Income Tax Act No. 58 of 1962, as amended (“the Act”) afforded no relief to the taxpayer in the particular circumstances. This aspect is not discussed further in this article.

SARS imposed an understatement penalty of R46,907,820 on the amount paid by Mr Z to A. In addition, SARS imposed interest on the alleged underpayment of provisional tax in terms of section 89quat of the Act.

The Commissioner adjusted the taxpayer’s taxable income for the 2008 year of assessment and applied the provisions regulating the understatement penalty in terms of section 221 of the Tax Administration Act No. 28 of 2011 (“TAA”).

The Commissioner reached the conclusion that the taxpayer had not taken reasonable care in submitting the tax return to SARS or alternatively that there were no reasonable grounds for the tax position taken. The Commissioner applied the understatement penalty table with the result that the penalty was imposed at a level of 75%, which was the rate of penalty applicable at that time.

Mr Y gave evidence on behalf of SARS and indicated that the 75% penalty was determined by taking account of the fact that there were no reasonable grounds for the tax position taken by the taxpayer.

Most of the provisions of the TAA took effect on 1 October 2012 and at the time of its commencement, the level of penalty imposed on the basis of no reasonable grounds for tax position taken amounted to 75%. That was subsequently reduced to an amount of 50% by way of the Tax Administration Laws Amendment Act No. 39 of 2013 with effect from 16 January 2014. However, the court indicated that should the court decide that Mr Z had no reasonable grounds for the tax position taken the penalty provided for is 50%.

The court indicated that Mr Z’s unchallenged evidence was that the tax position he took was based on his belief that his calculation of capital gains tax was correct and that there was no intention to evade or delay the payment of tax. The taxpayer sought professional advice regarding the completion of his tax returns and denied being negligent in the returns submitted to SARS. Wepener J accepted that the taxpayer obtained professional advice regarding the submission of his tax returns to SARS and the deduction which was the subject of dispute in the case.

The court concluded that the provisions of section 270(6D) of the TAA applied and that the taxpayer had reasonable grounds for the tax position taken by him. The court reached the conclusion that there was a substantial understatement with the result that that triggered the payment of a 10% understatement penalty. The court decided that there were no extenuating circumstances as envisaged in section 270(6D) of the TAA. 

In the result the court decided that the understatement penalty should be reduced to an amount of 10%, taking account of the fact that the taxpayer had relied on advice received from his accountant and others.

The court then considered the imposition of interest under section 89quat of the Act and by virtue of the fact that the dispute related to the 2008 year of assessment, the basis on which the court had to decide whether to remit the interest, was whether the taxpayer had acted on reasonable grounds.

The Court made the point that when the court is required to establish the correctness of the exercise of a discretionary decision, which is subject to objection and appeal, the matter must be reheard by the Tax Court. The court referred to Juta’s Income Tax where the following is stated:

“The test as to whether the grounds are reasonable, is objective, in relation to actions of the taxpayer. A mere subjective belief by the taxpayer that a deduction should be allowed, without taking advice on the matter, is unlikely to be reasonable. On the other hand, the reliance by the taxpayer on expert advice, even if this is wrong, will in most cases constitute reasonable grounds for the action taken.”

The court came to the conclusion that the taxpayer’s reliance on the advice received was reasonable and therefore directed that the Commissioner should waive the section 89quat interest in full.

Unfortunately, the discretion conferred on SARS to waive interest on the underpayment of provisional tax has been significantly narrowed, such that SARS may only take account of circumstances beyond the control of the taxpayer in respect of years of assessment ending on or after 1 November 2010. For individual taxpayers, the restricted discretion applies with effect from years of assessment ending on or after 28 February 2011.

SARS relied on an internal template setting out the basis on which it determined the understatement penalty applicable to the taxpayer in this case. SARS led evidence relating to the template and the reasons contained thereon, which sets out the process SARS adopted in reaching the conclusion that the taxpayer in this particular case had no reasonable grounds for the tax position taken by him. Taxpayers who are subjected to understatement penalties should therefore request reasons from SARS regarding the imposition of the understatement penalty and must remember that where the understatement penalty is challenged, the onus to satisfy the court as to the penalty imposed lies upon SARS in terms of section 102(2) of the TAA.

It is essential that taxpayers exercise caution in submitting their tax returns to SARS and seek professional advice from a registered tax practitioner which may assist in reducing the exposure to the imposition of the understatement penalty where SARS takes a different view regarding the tax treatment of an amount received or a deduction claimed. 

Remember, too, that where a taxpayer has obtained an opinion from a registered tax practitioner in the manner prescribed under section 223 of the TAA, SARS is compelled to waive the penalty which would otherwise have been imposed. This was not the issue before the court, as the taxpayer did not hold a written opinion for the 2008 year of assessment, as that return was filed long before the TAA took effect. 

The fact that the taxpayer took advice at the time of completing his returns was sufficient for the court to show that the taxpayer had acted reasonably and therefore the level of penalty to be imposed was 10%, which under the penalty table is the lowest possible level of penalty which can be imposed.

Dr Beric Croome, Tax Executive: ENSafrica Inc. This article frist appeared in Business Day, Business Law and Tax Review, February 2015. Image purchased from  iStock.