Bite the Bullet with Voluntary Offshore Disclosure

The Voluntary Disclosure Programme and Taxation Laws Second Amendment Act contains the provisions whereby a taxpayer who is in default of his tax obligations may apply for relief.

The exchange control (excon) aspects of the voluntary disclosure programme (VDP) began on November 1 2010 and applications need to be submitted no later than October 31 2011.

The tax aspects of the VDP began once the required notice appeared in Government Gazette No 33731 as Government Notice 1026 on November 5 2010, and will also end on October 31 2011.

Persons who have contravened the exchange-control regulations ("the regulations") may regularise their affairs by submitting an application with either an authorised dealer or the exchange-control department, subsequently renamed the Financial Surveillance Department, of the Reserve Bank.

Where an applicant has removed funds from SA in contravention of the regulations a levy of 10% is required to be paid, utilising foreign funds, on the value of the assets as at February 28 2010. When the levy can no longer be paid from funds held offshore the amount of the levy is increased to 12%.

Where the applicant failed to submit an application to retain certain amounts offshore — that is, so-called "technical breaches" of the regulations that did not in any way impair SA’s reserves by the unlawful export of capital — the violation may be regularised by the submission of a declaration only and no levy is required to be paid to the authorities.

Therefore, insofar as excon aspects of the VDP are concerned the levy payable to the authorities is not unreasonable and is fairly similar to what was required to be paid under the 2003 exchange control and tax amnesty. Under the 2003 rules persons who held funds in contravention of the regulations were required to pay a levy of 10% when that person chose to retain the assets offshore, or when the person chose to repatriate the funds to SA a levy of 5% was required to be paid.

It will be recalled that insofar as violations of the fiscal laws is concerned, amnesty applicants were required to pay the 2% domestic tax levy for violations of all breaches of fiscal laws. Under the VDP, applicants are required to make full and proper disclosure of defaults and remain liable for tax due on the amount not previously reflected for tax purposes.

The advantage of applying for VDP is that the Commissioner for the South African Revenue Service (SARS) will not seek to prosecute defaulters and, furthermore, no additional tax may be levied on the amounts not previously known to SARS. When the applicant is not subjected to an audit or investigation by SARS all interest that would otherwise have been levied must be waived under the VDP process. Where the applicant is subject to an audit or investigation and satisfies SARS that they should still be allowed to apply for VDP relief, the interest relief is reduced to 50% of what it would otherwise have been.

It is clear, therefore, that the VDP does not constitute an amnesty but rather an opportunity for taxpayers to regularise violations of their fiscal obligations. However, the underlying principal tax debt remains payable.

Some taxpayers have felt aggrieved with the manner in which the VDP has been introduced, particularly because the underlying tax remains payable.

It is appropriate to refer to the rules relating to the 2011 offshore voluntary disclosure initiative introduced in the US. Under the US initiative taxpayers remain liable to payment of a penalty.

Therefore, US taxpayers are required to pay a penalty equal to 25% of the amount held in an offshore foreign account or entity, or the value of the foreign assets in the year with the highest aggregate asset value covering the periods from 2003 to 2010. The penalty may be reduced to 12,5% when the taxpayer’s foreign assets did not exceed $75000 in any calendar year covered by the programme. Furthermore, the penalty may be reduced to 5% for taxpayers who did not open the foreign account and for foreign residents who were unaware that they were US citizens.

Persons who have contravened the exchange-control regulations may regularise their affairs by submitting an application to the required authorities

The US initiative requires filing of original and amended tax returns and the payment of taxes, interest and an accuracy related penalty by no later than August 31 2011.From a review of the US commentary on the initiative it would appear that participants in that country who consult an attorney will benefit from the protection of attorney-client privilege, which is not available to accountants and other professionals in the US.

It must be noted that clients of accountants do not enjoy legal professional privilege in SA, whereas VDP applicants who seek advice from attorneys and advocates would be protected by legal professional privilege.

Those taxpayers who failed to apply for amnesty in 2003, or even those persons who did apply for relief under the amnesty rules, should now take advantage of the VDP process to regularise any defaults of fiscal obligations and violations of the regulations.

As pointed out above, taxpayers seeking relief under the VDP will always remain liable to pay the underlying tax due to SARS but will be secure in the knowledge that SARS cannot institute a criminal prosecution where VDP relief is granted and, furthermore, no additional tax may be levied and, in most cases, 100% of interest that would otherwise have been payable is waived. It is unfortunate that the VDP did not deal specifically with the late payment penalties applicable to value-added tax (VAT) or employees’ tax (PAYE).

Taxpayers, who are in default with their VAT or employees’ tax affairs should still apply for relief to ensure that no additional tax or interest is levied. It must be remembered that SARS has an inherent discretion to waive the late payment penalty that would otherwise be levied for late payment of VAT or PAYE.

Those persons considering applying for relief under the VDP need to be aware of the communication issued by the Financial Intelligence Centre (FIC), which makes it clear that advisers may assist and advise clients on the VDP process without the obligation to file reports with the FIC under the Financial Intelligence Centre Act.

The FIC recognises the benefits of the VDP and, therefore, encourages persons to seek the relief available and therefore places no specific obligation on professional advisers to report clients to the FIC who choose to seek advice or apply for VDP relief.

Advisers must still adhere to the ‘know your client’ rules.

Those persons, who have identified defaults under the fiscal legislation should consider seriously taking advantage of the VDP in order to regularise their affairs with the fiscal authorities and, where the regulations have been violated, to regularise those breaches as well.

•Dr Beric Croome is a tax executive at ENS. This article first appeared in Business Day Business Law and Tax Review 11 April 2011.   Free Image from ClipArt

Review of "Taxpayers' Rights in South Africa"

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.



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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

Payment of tax during an objection regulated

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 Few Who Support Everyone Else

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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SARS told to use a draconian tax law with care

Taxpayers are no doubt familiar with the "pay now,argue later" rule that was held to be constitutionally valid in the case of Metcash Trading Limited v Commissioner for S out h African Revenue Service and Another. That case decided that the commissioner's powers to insist on the payment of tax, even though an objection had been lodged against assessments issued, was valid and that it is necessary for the taxpayer to first pay the tax in dispute and then to pursue the objection on appeal.

The Constitutional Court did make the point, though, that the commissioner is empowered to agree to the postponement of tax pending the finalisation of an appeal and that such decision must be made in compliance with the rules of administrative justice flowing from the constitution and the provisions contained in the Promotion of Administrative Justice Act.

Section 91 of the Income Tax Act gives the commissioner the power to obtain judgment against a taxpayer by filing a written statement with the registrar without issuing a summons to the taxpayer and without prior notice being issued to the taxpayer.



Receiver can establish an estimated
assessment without notifying the taxpayer.
Judge Spilg warns SARS to use
this draconian law with caution.

Sometimes the first time the taxpayer becomes aware of a judgment against him or her is when they apply for a loan from a bank or for a new credit card or are informed that their credit rating is poor because a judgment has been taken against them by SARS.

The provisions of section 91(1)(b) of the act were considered by Judge Spilg in the case of MA Sepataka v Commissioner for the South African Revenue Service in the South Gauteng High Court, Johannesburg, in August, last year.

It was indicated in the judgment that on March 17 2010 the commissioner filed a notice in terms of section 91(1)(b) of the act with the registrar of the South Gauteng High Court that was approved by a SARS official on March 16. In terms of the notice the commissioner withdrew the statement filed under section 91(1)(b) of the act, whereby judgment had previously been granted against Sepataka on December 1 2005.

Sepataka applied for the rescission of the judgment granted to SARS on the grounds that he had not previously been made aware of the judgment. He only became aware of the judgment after he applied for a mortgage bond and a credit check disclosed the outstanding monetary judgment against him.

When a taxpayer fails to submit a return or does not complete a proper tax return the commissioner may estimate the taxpayer's income under section 78 of the act. The commissioner was of the opinion that Sepataka had not disclosed all income derived by him as required under the act and, as a result, on April 22 2004 raised an additional assessment of R702 215 for the 2001 year of assessment and R597 175 for the 2002 year of assessment.

SARS often identifies unexplained income by identifying unexplained increases in a taxpayer's net assets from one year to the next.

Typically, SARS will begin the capital reconciliation exercise by determining the taxpayer's assets at the beginning of the tax year and deducting that from the taxpayer's net assets at the end of that year.

When the increase in assets is disproportionate in relation to the taxpayer's income and living expenses, SARS will treat the shortfall as unexplained income and seek to tax that amount as taxable income.

The act gives the commissioner the power to estimate assessments and to obtain judgments against taxpayers based on an estimated assessment. These powers are aimed at ensuring that taxpayers properly disclose the income derived by them for tax purposes.

Judge Spilg, however, made the following point:"The provision however is draconian and should therefore be exercised with care by properly experienced and suitably qualified personnel, since it may otherwise be reduced to an arbitrary guesstimate with grave consequences to the taxpayer. This is so because the commissioner is entitled, even if there is an objection or an appeal, to seize and realise assets, including money standing to the credit of the taxpayer's bank account, notwithstanding that these actions may jeopardise the taxpayer's cash flow and business."

Sepataka was dissatisfied with the estimated assessments issued by SARS and formally objected to those assessments on June 27 2005.

Although the taxpayer had objected to the assessments the commissioner relied on the powers contained in section 91 of the act to apply, without notice, for judgment by filing a notice on November 7 2005 with the Registrar of the South Gauteng High Court and judgment was granted against the taxpayer on December 1 2005.

It is stated in the judgment that on August 29 2007 that SARS allowed the taxpayer's objection in respect of both years of assessment. Judge Spilg points out the estimate made by SARS was incorrect.

The judge was satisfied in Sepataka's case that the documents submitted by the taxpayer's chartered accountant disclosed a bona fide defence to the notice relied upon by the commissioner to obtain judgment under section 91(1)(b) of the act, and that it was incompetent for SARS to apply for judgment on the basis that the assessments were under objection. It is interesting to note that Judge Spilg pointed out that the issue of collecting interest and penalties pending an objection or appeal, may be on a different footing to the principal amount of tax due by a taxpayer. Judge Spilg decided that it is incompetent, when regard is had to the rights of objection and appeal, for SARS to obtain judgment against a taxpayer prior to the finalisation of the objection.

Judge Spilg reached the conclusion that the judgment against Sepataka could not lawfully be obtained by virtue of the objection being lodged against the assessment and was therefore a nullity, and for this reason the judgment was set aside.

The court held that the current statement filed by the commissioner for judgment under section 91(1)(b)falls short of providing adequate safeguards against errors occurring in the future.

This view of the court must be supported, as concerns arise when, for example, a taxpayer submits an income tax return reflecting a loss derived from trading for the year, whereas SARS treats that loss as income and levies income tax thereon, and subsequently seeks to recover that incorrectly assessed amount of tax and proceeds to file a statement at the court and secure a judgment against the taxpayer.

It is important, therefore, that safeguards are in place to ensure that the assessments issued by SARS are correct and, furthermore, that no objection or appeal is pending against the assessments issued by SARS before judgment is taken against a taxpayer.

As a result, the judge granted an order against SARS setting aside the judgment granted against Sepataka on November 7 2005. It is hoped that SARS will take heed of the comments made by Judge Spilg and introduce the safeguards in the statements filed in courts in future when seeking judgment under section 91(1)(b) of the act.


Dr Beric Croome is a tax executive at ENS. This article first appeared in Business Day’s ‘Business Law & Tax Review’ February 2011.
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Tax Ombudsman's office to be created

On Friday, 0ctober 29 2010 the Commissioner of the South African Revenue Service released the draft Tax Administration Bill (TAB) for a second round of public comment. The TAB has been approved by cabinet and it was originally envisaged that it would be introduced to parliament during November 2010. An important amendment contained in the latest draft of the TAB, is the intention to create a Tax 0mbud's 0ffice in South Africa. (See HERE)

The press release issued by SARS at the time the TAB was released, states:

"A new framework for a Tax Ombud's Office to provide simple remedies to taxpayers affected by failures by SARS to fully respect taxpayers’ rights. The framework draws on those of the Canadian Taxpayer Ombudsman and the UK Revenue Adjudicator. The creation of this office was foreshadowed when SARS introduced the new court rules and the SARS Service Monitoring Office in 2003, when the then Minister of Finance stated that— 'Once SARS's processes and procedures have improved sufficiently, the next important step that will be taken in emulating international standards will entail an important role for an Ombud."'

Thus, the most recent draft of the TAB now contains clauses 14 to 21, which create the legal framework to create a Tax Ombud’s Office in South Africa.

The decision to create a Tax Ombud in South Africa must be welcomed and answers a call for its establishment made over many years by the Commission of Inquiry into the Tax Structure of South Africa, professional bodies and tax practitioners.

Left: The long-awaited Tax Ombudsman's Office will be created to help taxpayers and SARS resolve disputes.

Clause 14 of the TAB confers on the Minister of Finance the power to appoint a Tax Ombud for a period of three years, which term may be renewed. The Minister has also been conferred the power to determine the conditions regarding remuneration and allowances to be paid to the Ombud. The TAB, similarly, enables the Minister to remove the Ombud for any reason considered good and sufficient.

The TAB empowers the Minister to designate a person working in the Office of Tax Ombud as Acting Tax Ombud while there is a vacancy, and that person can act for no longer than a period of 90 days at a time.

The draft legislation requires that the person appointed as Tax Ombud is accountable to the Minister and must have a good background in customer service, as well as tax law. In addition, the person may not, at any time, have been convicted of theft, fraud, forgery or any offence involving dishonesty in the preceding five years.

Thus, the Tax Ombud will report to the Minister and not to the Commissioner: SARS, which should create the desired degree of independence.

In accordance with clause 15 of the TAB, the staff at the Office of the Tax Ombud is required to be employed under the provisions of the SARS Act and will be seconded from SARS. The Tax Ombud’s Office will be funded out of the funds allocated to SARS.

The TAB provides that the Tax Ombud and the staff attached to that office are subject to confidentiality provisions which will be contained in Chapter 6 of the TAB, currently enshrined in s4 of the Income Tax Act, Act 58 of 1962, as amended (that is, the so-called “secrecy provisions”).

The TAB prescribes the mandate of the Tax Ombud and provides that the Tax Ombud is charged with reviewing and addressing complaints by the taxpayers regarding a service matter or procedural or administrative matter arising from the application of the provisions of a Tax Act administered by SARS.

The Tax Ombud, in discharging his or her mandate, is required to undertake the following:

• Review a complaint and, if necessary, resolve it through mediation or conciliation;

• Act independently in resolving a complaint;

• Follow informal, fair and cost effective procedures in resolving a complaint;

• Provide information to a taxpayer about the mandate of the Tax Ombud and the procedures to pursue a complaint;

• Facilitate access by taxpayers to complaint resolution mechanisms within SARS to address complaints; and

• Identify and review systemic and emerging issues related to service matters or the application of the provisions of the TAB that impact negatively on taxpayers.


Clause 17 of the TAB makes it clear that the Tax Ombud may not review legislation or tax policy, or SARS policy or practice generally prevailing, or deal with any matter subject to objection and appeal under a fiscal statute, or any decision which is before the Tax Court. In those overseas countries where Tax Ombud Offices have been created, the resolution of legal disputes falls outside of the jurisdiction of the Tax Ombud and, in this respect, South Africa is adhering to the international norm.

The TAB provides that, once the Tax Ombud receives an issue falling within the Ombud's mandate, the Ombud may determine how the review of the taxpayer's complaint is to be conducted, and whether a review should be terminated before completion of the matter.

Currently, where taxpayers encounter administrative difficulties with SARS, it is necessary to raise the matter first with the official dealing with the taxpayer's affairs and failing resolution at that level, to refer the matter to the branch manager of the Receiver of Revenue office in question.

Only once that procedure has failed to resolve the matter, may the matter be escalated to the SARS Service Monitoring Office. Clause 18 of the TAB requires the taxpayer to exhaust available complaints resolution mechanisms in SARS before resorting to the Tax Ombud, unless there are compelling circumstances not to do so and this follows international practice.

It is provided that the Tax Ombud may entertain a request for assistance without exhausting SARS internal complaints procedures where the matter raises systemic issues or exhausting the complaints resolution mechanism will cause undue hardship to the taxpayer, or exhausting the SARS procedures is unlikely to produce a result within a period of time which the Tax Ombud considers reasonable.

In terms of clause 19 of the TAB, the Tax Ombud must report directly to the Minister and must submit an annual report to the Minister within five months of the end of SARS's financial year. In addition, the Tax Ombud is required to submit a report to the Commissioner: SARS, quarterly, or other intervals as may be agreed.

The annual report to be submitted by the Tax Ombud must contain a summary of at least ten of the most serious issues encounters by taxpayers, including a description of the nature of the issues.

Furthermore, the report must contain an inventory of the issues described for which action has been taken and the result of such action, and action that remains to be completed in the period during which each of them has remained unresolved.

Where no action has been taken, it is necessary to indicate the reasons for inaction on the taxpayer's complaint. Furthermore, the Tax Ombud’s report must contain recommendations for administrative action as may be necessary to resolve problems encountered by taxpayers in dealing with SARS.

It is specifically required that the Tax Ombud must seek to resolve all issues within the Tax Ombud's mandate in an efficient and effective manner and communicate with any SARS officials that may be identified by SARS. It must be noted that the Tax Ombud's recommendations are not binding on taxpayers or SARS. This would appear to follow the international norm, but based on experience, it does appear that revenue authorities, generally, will follow the recommendations made by the Tax Ombud and it is hoped that this outcome will prevail in South Africa.

The confidentiality of information dealt with by the Tax Ombud is preserved at clause 21 of the TAB. However, information may be disclosed where the information disclosed does not directly or indirectly reveal the identity of the taxpayer to whom it relates. Where information is required by the TAB or any other Act of Parliament, it must be disclosed, but only for the purposes of such statutes.

It remains to be seen when the TAB will be introduced to parliament and will take effect. Clearly, the creation of the Tax Ombud should create an effective means whereby taxpayers can resolve administrative difficulties encountered in dealing with SARS, or where SARS has abused taxpayers' rights. It must be noted that the Tax Ombud has no jurisdiction to deal with objections and appeals and legal disputes, as is the case with Ombud's offices around the world.

It is unfortunate, though, that the Tax Ombud is not empowered to award costs or damages to taxpayers who have suffered financial loss as a result of the conduct of SARS and its officials.

 Dr Beric Croome is a tax executive with Edward Nathan Sonnenbergs. This article first appeared in the December 2010 issue of Without Prejudice

SAIT Video Presentation of Voluntary Disclosure Programme (VDP)

The video of my presentation at the recent SAIT conference held at the Sandton Convention Centre in November 2010 is now available:

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