Lodging Objections Against Assessments Issued by the Commissioner: South African Revenue Service

INTRODUCTION

On 1 October 2012, the Tax Administration Act, No 28 of 2011 (‘the TAA’) came into force.  As a result of the commencement of the TAA, several sections of the fiscal statutes were repealed and replaced by corresponding provisions in the TAA.  

The primary purpose of the changes is to consolidate existing tax administration legislation into a single, more comprehensive statute, which will, hopefully, ensure that tax administration is managed more efficiently and effectively.  

It is important that taxpayers are aware of the changes introduced as a result of the TAA, particularly insofar as it relates to the objecting of assessments issued by the Commissioner: SARS.  

It must be noted that the TAA applies to all taxes administered by the Commissioner, other than customs and excise.  Therefore, what is stated below will apply to assessments issued to taxpayers for income tax, value-added tax and other taxes also.

THE DATE BY WHEN AN OBJECTION SHOULD BE LODGED AGAINST AN ASSESSMENT

One of the important changes brought about by the TAA relates to the definition of ‘date of assessment’, the importance of which relates to tax dispute resolution.

Previously, section 81(1) of the Income Tax Act, No 58 of 1962, as amended (‘the Act’), stated the following:

“Objections to any assessment made under this Act shall be made in the manner and under the terms and within the period prescribed by this Act and the rules promulgated in terms of section 107A by any taxpayer who is aggrieved by any assessment in which that taxpayer has an interest.”

Rule 4(e) of the Rules promulgated under section 107A of the Act, prescribing the procedures to be observed in lodging objections and noting appeals against assessments (‘the Rules’) states:

“a taxpayer who is aggrieved by an assessment may object to an assessment, which objection must –

                (e)           be delivered to the Commissioner at the addressed specified in the assessment for this purpose, within                   30 days after –

                                in the case where the taxpayer has requested reasons under rule 3, either the date of the notice by the                       Commissioner that adequate reasons or the date the reasons were furnished by the Commissioner, as                   the case may be, or;

                                in any other case the date of assessment.”

The Rules themselves do not define the meaning of the words ‘date of assessment’, and it is necessary, therefore, to refer to the definition section contained in section 1 of the Act, which defines the terms as follows:

“in relation to any assessment, means the date specified in the notice of such assessment as the due date, or, where a due date is not so specified, the date of such notice.”

Lastly, the meaning of ‘day’ in the definition section contained in section 1 of the Rules means:

“a day as contemplated in section 83(23) of the Act.”

Section 83(23) of the Act defines ‘day’ as:

“any reference in this Part and the Rules to ‘day’ means any day other than a Saturday, Sunday or public holiday: provided that the days between 16 December of a year and 15 January of the following year, both inclusive, shall not be taken into account in determining days or the period allowed for complying with any provision in this Part or the rules.”

In addition, paragraph 6.1 of SARS Guide on Tax Dispute Resolution (‘SARS Guide’) sets out when an aggrieved taxpayer may object to an assessment.  It refers to the definition of ‘date of assessment’ contained in section 1 of the Act and thereafter states the following:

“Please note that where an assessment has a ‘date of assessment’ on the assessment form, as well as a due date and a second date, the 30-day period must still be calculated with reference to the due date, in accordance with the definition of ‘date of assessment’ in the Act.  The ‘date of notice’ or ‘date of assessment’ only applies where there is no ‘due date’ on the notice.”

The SARS Guide provides an example, summarised in the table below, and which provides clarity on the matter:

Date of Notice:	29/09/2003
Due Date:	03/11/2003
Second Date:	28/11/2003
In the above example, the objection must be filed within 30 days after 03/11/2003 of the ‘due date’, that is, by 15 December 2003.  The tax due must be paid before 28/11/2003 (the “second date’).

THE DEFINITION OF ‘DATE OF ASSESSMENT’ AND DISPUTE RESOLUTION UNDER THE TAA

The TAA has repealed section 81 of the Act, and, hence, objections and appeals against assessments issued by SARS are now governed by section 104 of the TAA.  Section 104(3) of the TAA directs that an objection to an assessment or decision must be lodged in the manner and within the time periods prescribed in the ‘Rules’.  

The aforementioned Rules have not yet been published by Public Notice in terms of section 103 of the TAA, and, thus, until such time as they are, the old Rules promulgated under the Act remain the relevant Rules in terms of section 264(2) of the TAA.

As pointed out above, there is no definition of ‘date of assessment’ in the ‘old Rules’.  It is, therefore, necessary to consider the definitions contained in the TAA, which took effect on 1 October 2012.  Section 1 of the TAA defines ‘date of assessment’ as follows:

“(a)          in the case of an assessment by SARS, the date of the issue of the notice of assessment;”

Based on the above, the period granted for the submission of an objection has changed, and has been reduced.  

Now, by referring to the example contained in the table above, the objection must be filed 30 days after 29 September 2003, that is, by 7 November 2003, which is a reduction of the time allocated for the submission of the objection of over a month.  

Were a taxpayer unaware of this change and thus follow the old rules in conjunction with the old definition of ‘date of assessment’, they would have to seek condonation for the late filing of the objection, which is unlikely to be continuously entertained by SARS on the basis of ignorance of the law.  The example shows the importance of this amendment to the fiscal provisions, and is important for all parties, especially taxpayers and their advisors, to ensure that they are aware of the changes that the TAA has introduced, and to seek advice where uncertainty arises.

Where the taxpayer has been subjected to an audit, the Commissioner will, in most cases, issue a letter advising that the taxpayer’s taxable income is being amended.  Often, these letters are referred to as a letter of assessment, and, if the letter complies with the definition of assessment contained in section 1 of the TAA, read together with paragraph 23(a) of Schedule 1 to the TAA, the taxpayer must object within thirty days of the date of the letter of assessment.  In this regard, see the decision of the Court in C:SARS v South African Custodial Services (Pty) Ltd [2012] 74 SATC 61.

This article first appeared in
Without Prejudice (March 2013)

GROUNDS OF OBJECTION

Where the taxpayer decides that the reasons received from SARS adequately set out the basis on which the assessment has been issued, the taxpayer must lodge a proper notice of objection setting out the grounds of the objection.  Clearly, in the event that the reasons received are inadequate, a taxpayer is entitled to call for adequate reasons in terms of Rule 3(1)(a) of the Rules governing dispute resolution.

It is important that the taxpayer formulates their grounds of objection in detail and sets out the basis on which they dispute the assessment issued by the Commissioner. 

A question that is often asked by taxpayers disputing an assessment is the detail which must be contained in the letter objecting to the assessment issued by the Commissioner.  It is important that the objection sets out the basis on which the taxpayer challenges the assessment issued by the Commissioner.  The question that arises is whether a taxpayer may later expand upon the grounds of objection.

In ITC 1843 [2010] 72 SATC 229, the Court was required to determine whether the Commissioner was entitled to raise a new ground of assessment at the time when the Rule 10 statement setting out the Commissioner’s grounds of assessment was being issued to the taxpayer.  

Claasen J reviewed the Rules governing objections and appeals and decided that it was competent for the Commissioner to advance new grounds of assessment which had previously not been communicated to the taxpayer in the process leading up to the amended assessment issued to the taxpayer.  

The Court decided that, just as the Commissioner is entitled to modify his grounds of assessment in the Rule 10 statement to be issued to the taxpayer, the taxpayer would also be entitled to expand on and vary the grounds of objection contained in their letter of objection when the time arrived to finalise the grounds of appeal comprising the taxpayer’s Rule 11 statement setting out the grounds of appeal.

The Court, therefore, reached the conclusion that the Commissioner could add new grounds to its Rule 10 statement of grounds of assessment, and that there could be no prejudice to the taxpayer, on the basis that Rules 10 and 11 were interpreted in the manner contained in the judgment because of the built-in safeguards which were available to a taxpayer to vary their grounds of objection in their statement of grounds of appeal, regulated by Rule 11.

However, more recently, in the case of HR Computek (Pty) Ltd v The Commissioner for the South African Revenue Service, as yet unreported (case number 830/2011), where judgement was delivered by the Supreme Court of Appeal on 29 November 2012, the Court decided that the taxpayer is limited to the grounds stated in their notice of objection.  Unfortunately, Ponnan JA did not refer to the decision of Claasen J handed down in 2010 in ITC 1843.

The Supreme Court of Appeal reached the conclusion that, by virtue of the fact that the taxpayer had not raised an objection to the principal amount of VAT in its notice of objection, the taxpayer was precluded from raising it on appeal before the Tax Court.

The Court reached the conclusion that, when the taxpayer challenged the capital amount of the value-added tax reflected as payable for the first time in its Rule 11 statement, it effectively raised a new objection against an individual assessed amount that had not previously been objected to.  

The Supreme Court of Appeal, therefore, concluded that, in terms of section 32(5) of the Value-Added Tax Act, No 89 of 1991, as amended, because no objection had been lodged against SARS’ assessment, the taxpayer was liable to SARS for the additional VAT output tax amounting to R1,246,177.60, and that the assessment issued became final and conclusive in April 2007.  

Thus, the Supreme Court of Appeal held that the taxpayer’s appeal must fail, on the basis that it was not competent to amend the grounds of objection set out in the earlier letter of objection when the time came to prepare the Rule 11 statement of grounds of appeal.  This decision would appear contrary to that of Claasen J.

If the taxpayer is to be bound to their grounds of objection, following the decision of the Supreme Court of Appeal, the Commissioner must also be bound to the reasons supplied in the grounds of assessment notified to the taxpayer at the time that the assessment is issued.  

It would be most iniquitous if the taxpayer cannot vary the grounds of objection, whereas the Commissioner is entitled to supplement the basis on which the assessment was issued to the taxpayer.

It remains to be seen if the anomalies arising between ITC 1843 and the Supreme Court of Appeal’s decision in Computek will be reconciled when the new Rules governing objections and appeals are finalised under the provisions of the TAA.

CONCLUSION

Taxpayers wishing to dispute an assessment issued by the Commissioner must lodge the objection within the time allowed, or, alternatively, request adequate reasons for that assessment, and, should they fail to meet the time periods prescribed, they will need to call for condonation for the late submission of the objection.  It is important that the objection lodged against the assessment sets out in detail the grounds on which the taxpayer seeks to rely in challenging the assessment issued by the Commissioner.

DR BERIC CROOME Tax Executive Edward Nathan Sonnenbergs Inc.  

Inexorable Powers of the Tax Debt Collector

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Penalties Given Hinge On Taxpayer’s Conduct

THE Tax Administration Act, No 28 of 2011, took effect from October 2012 and, as a result, the new rules governing the imposition of the understatement penalty also took effect.

Previously, the Commissioner: South African Revenue Service (SARS) could levy additional tax of up to twice the tax which otherwise would have been payable in accordance with section 76 of the Income Tax Act, No 58 of 1962.

Typically, a taxpayer subjected to an audit would be invited by SARS to advance reasons why additional tax should not be imposed in the particular case prior to the issue of an additional assessment. The manner in which section 76 was drafted meant that SARS was entitled to levy up to 200% additional tax where the taxpayer made a default in rendering a return in respect of any year of assessment, or omitted from his return any amount which ought to have been included therein.

The Commissioner was conferred a discretion to remit the additional tax where he was of the opinion that there were extenuating circumstances, but was unable to remit the tax where he was satisfied that any act or omission on the part of the taxpayer was done with the intent to evade tax.

The enactment of the Tax Administration Act has changed the old approach in that the Tax Administration Act itself prescribes the quantum of the understatement penalty to be imposed, which depends on the taxpayer’s conduct.

Item	Behaviour	Standard Case	If obstructive, or if it is a ‘repeat case’	Voluntary disclosure after notification of audit	Voluntary disclosure before notification of audit
(i)	“Substantial understatement’	25%	50%	5%	0%
(ii)	Reasonable care not taken in completing return	50%	75%	25%	0%
(iii)	No reasonable grounds for ‘tax position’ taken	75%	100%	35%	0%
(iv)	Gross negligence	100%	125%	50%	5%
(v)	Intentional tax evasion	150%	200%	75%	10%

 Section 223 of the Tax Administration Act sets out a table (see above) which prescribes the quantum of understatement penalties to be imposed depending on the taxpayer’s conduct.

It is important to note the definitions contained in section 221, which apply directly to the imposition of the understatement penalty. The Tax Administration Act defines a “repeat case” as a second or further case of any of the behaviours listed in the table which prescribes the understatement penalty percentage to be imposed, within five years of the previous case.

A “substantial understatement” means a case where the prejudice to SARS exceeds the greater of 5% of the amount of tax properly chargeable or refundable under a tax act for the relevant period, or R1m. A “tax position” means an assumption underlying one or more aspects of a tax return, specifically whether or not an amount, transaction, event or item, is taxable or is deductible, or may be set off.

Where a taxpayer chooses to make a voluntary disclosure before notification of an audit, the understatement penalty is reduced to zero, in all cases except when the taxpayer was grossly negligent or intentionally evaded tax.

In those cases, where a taxpayer chooses to make a voluntary disclosure after SARS has commenced an audit, the understatement penalty may range from 5% to 75%, depending on the taxpayer’s specific behaviour.

Where SARS takes the view that the taxpayer has been obstructive, or has previously been subjected to the understatement penalty, the understatement penalty will range from 50% to 200%, depending on the taxpayer’s behaviour.

In what is referred to as a “standard case” in the table, the understatement penalty will range from 25% to 150%, depending on the taxpayer’s specific conduct.

When determining the amount of the understatement penalty to be levied, the Commissioner is required to reach a conclusion as to the taxpayer’s behaviour and, at the same time, to determine whether the taxpayer should be treated as a standard case, or whether the taxpayer is a repeat offender — which would give rise to a higher level of understatement penalty.

As a result of the enactment of the table to be used by SARS in determining the understatement penalty to be levied, the only occasion on which no understatement penalty may be levied is where the taxpayer goes forward to SARS prior to the notification of an audit. In all other cases, the taxpayer will face an understatement penalty, which is more onerous than what was the case under section 76 of the Income Tax Act.

If SARS conducts an audit on a taxpayer’s affairs, and decides that certain deductions claimed do not qualify as such under the provisions of the Income Tax Act, and the adjustment is regarded a substantial understatement, the penalty could amount to 25% or 50%, depending on the taxpayer’s specific behaviour.

In levying the understatement penalty as a result of a substantial understatement, it is not necessary that SARS takes account of the taxpayer’s intention which gave rise to that adjustment. The only occasion on which the Commissioner must remit a penalty imposed for a substantial understatement is if SARS is satisfied that the taxpayer made full disclosure of the reportable arrangement which gave rise to the prejudice to SARS as defined in section 34 of the Tax Administration Act no later than the date that the relevant return was due, and was in possession of an opinion issued by a registered tax practitioner as defined in section 239 of the Tax Administration Act  The obligation to disclose under section 34 of the Tax Administration Act relates only to those arrangements regarded as reportable arrangements as defined in the act.

Section 223(3) of the Tax Administration Act requires that the opinion was issued by no later than the date on which the relevant return was due to the Commissioner, took account of the specific facts and circumstances of the arrangement, and confirmed that the taxpayer’s position is more likely than not to be upheld if the matter proceeds to court.

It is critical that, in future, taxpayers exercise reasonable care in completing their returns, failing which the understatement penalty prescribed in the table will be levied.

Where SARS reaches the conclusion, based on the facts of the taxpayer’s case, that reasonable care was not taken in completing their tax return, the understatement penalty will be levied at the level of 50% or 75%, depending on whether it is a standard or a repeat case. Clearly, where the taxpayer goes forward under the voluntary disclosure programme, the understatement penalty will be reduced.

"It has become almost impossible for taxpayers to satisfy the Commissioner that no understatement penalty should be levied."

"When determining the amount of understatement penalty to be levied, the Commissioner is required to reach a conclusion as to the taxpayer's behaviour."

Where SARS takes the view that the taxpayer had no reasonable grounds for the tax position taken, the understatement penalty is increased. Where, for example, a taxpayer has sought an opinion on a particular aspect prior to the finalisation of their tax return, it would be difficult for SARS to levy the understatement penalty on the basis that the taxpayer had no reasonable grounds for the tax position taken by the taxpayer.

Where the Commissioner is satisfied that the taxpayer was grossly negligent, the understatement penalty will be increased. Where a taxpayer, for example, fails to make full and proper disclosure in their tax return, they would, in all likelihood, be regarded as having been negligent, and thereby face a greater understatement penalty.

The highest level of understatement penalty is applicable in those cases where a taxpayer has it intentionally evaded tax, and this would comprise those cases where a taxpayer has deliberately understated income, falsified invoices to claim deductions, etc. Besides facing the risk of enhanced understatement penalties, taxpayers in such cases would face the risk of criminal prosecution as well.

The rules regulating the levy of the understatement penalty should ensure greater consistency in the manner in which penalties are levied on taxpayers. The difficulty which the Commissioner faces will be to ascertain the taxpayer’s behaviour in a particular case, and thereby ensure that the taxpayer is subjected to the correct level of understatement penalty.

Previously, under section 76, taxpayers were able to satisfy the Commissioner that additional tax should not be levied because of the particular circumstances of the case.

As a result of the introduction of the penalty table set out in this article, it has become almost impossible for taxpayers to satisfy the Commissioner that no understatement penalty should be levied.

Based on the transitional rules in the Tax Administration Act, it is questionable whether SARS may levy the understatement penalty by using the penalty table on tax returns submitted before 1 October 2012 instead of the old additional tax rules.

Where a taxpayer is subjected to an audit by SARS, and is subjected to the understatement penalty, they are entitled to ask the Commissioner for reasons why the particular amount of penalty was levied.

■ Dr Beric Croome is a tax executive at ENS. This article first appeared in Business Day :Business Law & Tax Review (February 2013) Free Image via ClipArt.

The Tax Administration Act and Taxpayers' Rights

INTRODUCTION

The Tax Administration Act, No 28 of 2011 (‘TAA’), was promulgated on 4 July 2012 and took effect on 1 October 2012, except for certain specific provisions dealing with the imposition of interest payable to the Commissioner: South African Revenue Service (‘SARS’) by taxpayers and also by the Commissioner to taxpayers.  The TAA provides that, once the new interest rules take effect, interest will be compounded on a monthly basis, both in respect of interest payable by a taxpayer on the late payment of tax, and also in respect of refunds payable by SARS to taxpayers.

The TAA was enacted to regulate the administrative provisions of all tax Acts administered by the Commissioner: SARS.  In preparing the legislation, the Commissioner consulted extensively, seeking input on the legislation, with a view to ensuring that its provisions comply with the Bill of Rights contained in the Constitution of the Republic of South Africa, Act 108 of 1996, as amended (‘the Constitution’). 

TAX OMBUD

The TAA creates the legal framework for the creation of the Tax Ombud in South Africa.  SARS has indicated that the Tax Ombud will follow the model adopted by the United Kingdom in creating a Tax Adjudicator’s Office, and the Tax Ombud’s Office in Canada.  The legislation provides that the staff of the office of the Tax Ombud must be employed in terms of the SARS Act, and will be seconded to the office of the Tax Ombud from SARS.  The TAA requires that the Tax Ombud be appointed within one year from 1 October 2012.  The Minister of Finance has indicated that it was intended to appoint a Tax Ombud before the end of 2012.

The mandate of the Tax Ombud, is to review and address complaints by a taxpayer regarding a service or a procedural administrative matter.  The Tax Ombud must review a complaint lodged by a taxpayer and resolve it either through mediation and conciliation, and must act independently in resolving taxpayers’ complaints.  The Tax Ombud is required to follow informal, fair and cost-effective procedures in resolving taxpayers’ complaints.  The creation of the Tax Ombud is to be supported in that it creates a mechanism for complaints to be dealt with by a formalised procedure, despite the fact that the Tax Ombud may be located within the SARS structure. 

Section 17 of the TAA 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 TAA 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 be the matter be escalated to the SARS Service Monitoring Office.  Section 18 of the TAA 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.

The Tax Ombud has a duty to submit reports to Parliament on an annual basis, and to identify those issues which are causing problems for taxpayers, and it is hoped that this will ultimately enhance tax administration in South Africa and reduce the administrative burden faced by taxpayers.

CRIMINAL INVESTIGATIONS

The TAA also seeks to ensure that taxpayers’ rights are protected where a taxpayer faces a criminal investigation.  The Act requires that audits and criminal investigations are separated, ensuring that the rights of an accused under the Constitution are protected.  This was previously not properly dealt with under the provisions of the Income Tax Act or other fiscal statutes.

SEARCH WITHOUT A WARRANT

One power contained in the Act that has attracted much comment is SARS’ power to conduct a search-and-seizure operation without a warrant to protect documents from imminent destruction by taxpayers.  Previously, SARS could only search a taxpayer’s premises and seize documents when authorised to do so by a warrant issued by a court in terms of section 74D of the Income Tax Act.  

Section 63 of the TAA provides that a senior SARS official may, without a warrant, exercise the powers contained in section 61 of the TAA, which regulates the search of premises and seizure of documents.  It is intended that the search of premises without a warrant should only take place in exceptional circumstances, but there is always the concern that the power may be abused.  It is appropriate to point out that seventeen other statutes in South Africa confer on state organs a similar power to conduct search-and-seizure operations without a warrant.  It remains to be seen if this part of the TAA will face a Constitutional challenge at some point.

SARS AUDITS AND FEEDBACK FROM SARS

Previously, taxpayers experienced frustration in dealing with SARS, in that a letter of inquiry would be received from SARS and the taxpayer would submit a response thereto, and sometimes many months, and in some cases, unfortunately, even years, would pass before the taxpayer received any indication from SARS as to whether the inquiry or audit was completed, or, alternatively, what adjustments were to be made to the taxpayer’s assessments.  

Fortunately, the TAA contains a provision whereby SARS must advise a taxpayer as to the status or progress of an audit conducted on their affairs.  There was, previously, no such provision under the other fiscal statutes.  In accordance with section 42(1) of the TAA, the Commissioner was required to release a Public Notice setting out the details and processes relating to the manner in which taxpayers should be kept informed of audits conducted by SARS.  

Under Rule 2 of the Public Notice, dealing with keeping taxpayers informed, a SARS official responsible for an audit instituted before but not completed by the commencement date of the TAA, or instituted on or after 1 October 2012, must provide the taxpayer subject to audit with a report indicating the stage of completion of the audit.  

Where the audit started before the commencement date of the TAA, the Commissioner must provide feedback within 90 days of the TAA’s commencement, and within 90 day intervals thereafter.  Where SARS instituted an audit on or after 1 October 2012, the report must be submitted within 90 days of the start of the audit, and within 90 day intervals thereafter until the audit is concluded by SARS.

The Commissioner is required to advise the taxpayer as to the current scope of the audit, the stage of completion of the audit, and relevant material still outstanding from the taxpayer.

It is hoped that the Commissioner: SARS will adhere to this requirement, thereby alleviating the frustration that occurred in the past, that taxpayers subject to an audit would hear nothing from SARS for a long period of time and then suddenly be requested to supply additional information within a very short period of time.

Previously, the Commissioner would also not advise a taxpayer as to when an audit had been completed, particularly, when no adjustments were made in the calculation of the taxpayer’s taxable income.  Since the commencement of the TAA, it would appear that SARS is now advising taxpayers that an audit has been completed and that no adjustments are being made in the calculation of taxable income.

GROUNDS OF ASSESSMENT

Where, however, the audit identifies amounts which SARS wishes to subject to tax, it is necessary that SARS advises the taxpayer thereof, and also furnishes the grounds or reasons for the assessment issued to the taxpayer.  The Commissioner is required to furnish the grounds of an assessment within 21 business days of the assessment being issued to the taxpayer.  

Previously, the taxpayer had a right to request reasons for assessments issued by SARS, but no provision was contained in the Income Tax Act compelling SARS to issue reasons within a specified period after the issue of an assessment.  The TAA therefore improves the position for taxpayers in this regard.

VOLUNTARY DISCLOSURE PROGRAMME

The TAA also contains a permanent voluntary disclosure programme whereby taxpayers can approach the Commissioner to rectify pervious defaults under any fiscal legislation, other than customs and excise.  If taxpayers have failed to comply with their obligations under the fiscal laws of the country, they are, therefore, entitled to rectify those defaults under the framework contained in the TAA.  

Unfortunately, the provisions of the Voluntary Disclosure Programme contained in the TAA are not as attractive as that contained in the Voluntary Disclosure Programme and Taxations Laws Second Amendment Act, No 8 of 2010.  This is by virtue of the fact that, under the TAA, taxpayers will remain liable for interest due to SARS, and, depending on their particular circumstances, may remain liable to an understatement penalty ranging from 5 to 10%.

OBJECTIONS TO ASSESSMENT

The TAA also amends the time frame within which taxpayers need to object to an assessment.  Previously, a taxpayer was required to submit an objection within 30 days after the date of the assessment, which was defined in the Income Tax Act as the due date of the assessment.  This was typically a date some time after the date on which the assessment was issued.

Under the TAA, the objection must now be lodged within 30 days of the date of issue of the assessment, which generally means that an objection must be lodged earlier than what would have been the case under the Income Tax Act. 

TAX CLEARANCE CERTIFICATES

The Income Tax Act previously contained no procedure dealing with the issue of tax clearance certificates applied for by taxpayers.  The TAA now contains specific provisions regulating the manner in which tax clearance certificates may be applied for and issued by the Commissioner.  The TAA requires that SARS must issue or decline to issue the tax clearance certificate within 21 business days from the date that the application is properly filed.  Unfortunately, it would appear that, historically, SARS did not issue tax clearance certificates promptly, and it is hoped that the new statutory provisions in the TAA will be complied with.

CONCLUSION

The TAA contains many provisions with which taxpayers are familiar, but also refines and modifies a number of provisions which were contained the various fiscal statutes and introduces various new provisons.  It is important that taxpayers and SARS officials alike are aware of the provisions of the TAA so as to ensure that the provisions of the TAA are complied with.  In drafting the TAA, the Commissioner was sensitive to the rights of taxpayers, and sought to ensure that the TAA does not infringe on the rights of taxpayers.  

Certain of the provisions contained in the TAA referred to above do enhance the protection of taxpayers’ rights by way of new provisions which were not found in the other tax Acts.  It remains to be seen, though, whether the Commissioner is geared to providing taxpayers with regular feedback on the status of audits, and to deal properly with the other provisions contained in the TAA.

*Dr Beric Croome is a Tax Executive at Edward Nathan Sonnenbergs Inc.  This article appeared in the January 2013 issue of TaxTalk newsletter. 

A New Chance to get on the Right Side of SARS

A VOLUNTARY disclosure programme for taxpayers has been introduced as a permanent feature of the fiscal laws of SA, but more limited in scope than the previous programme. This was done via the Tax Administration Act, No 28 of 2011, promulgated on July 4 2012 and which took effect on October 1, and which contains the relevant sections, 225 to 233.

The new disclosure programme presents an opportunity for taxpayers to regularise prior violations of the fiscal laws of the country, but, unfortunately, does not grant relief on interest that would otherwise have been payable on the late payment of the tax concerned. 

Furthermore, the relief does not extend to penalties which may be imposed in terms of a tax act for the late submission of a return or the late payment of tax.

The taxpayer would need to consider seeking relief from those penalties under the particular provisions of the respective statute whereby such penalties are levied.

During the period 1 November 2010 to 31 October 2011, taxpayers could apply for relief under the Voluntary Disclosure Programme and Taxation Laws Second Amendment Act, No 8 of 2010, and, at the same time, could regularise violations of the exchange control regulations by applying for relief from the Financial Surveillance Department of the South African Reserve Bank.

For a taxpayer to successfully apply for relief under the new voluntary disclosure programme, it is necessary that the taxpayer has committed a default. 

A default is defined in section 225 of the act as meaning the submission of inaccurate or incomplete information to SARS or the failure to submit information or the adoption of a tax position which resulted in the taxpayer not being assessed for the correct amount of tax, or the correct amount of tax not being paid by the taxpayer, or an incorrect refund being made by SARS. 

The voluntary disclosure programme contained in the act applies to all taxes administered by the Commissioner: SARS other than customs and excise.

A prerequisite for applying for relief under the act is that the taxpayer is not aware of a pending audit or investigation into their affairs, or an audit or investigation that has commenced but has not yet been concluded. 

The law allows for a senior SARS official to direct that a person may still apply for voluntary disclosure relief even though an audit may be underway, having regard to the circumstances and ambit of the audit or investigation and the default which the person wishes to seek relief for would not otherwise have been detected during the audit or investigation conducted by SARS, and that the application for relief is in the interest of good management of the tax system, and the best use of SARS ’s resources.

Section 227 of the act prescribes the requirements for the voluntary disclosure to be valid: 

• The act requires that the disclosure must be voluntary, and involve a default which the taxpayer has not previously disclosed. 

• The disclosure must be full and complete in all material respects, and must involve the potential imposition of an understatement penalty in respect of the default, and not result in a refund due by SARS. 

• Finally, the act requires that the disclosure must be made in the prescribed manner.

As was the case under the previous legislation, taxpayers may apply for a non-binding private opinion as to whether that person is eligible for relief under the voluntary disclosure programme.

Where the taxpayer applies for relief under the programme, SARS will not pursue criminal prosecution for any statutory offence under a tax act, pursuant to the default committed by the taxpayer, and grant the relief in respect of any understatement penalty referred to in section 223. 

Ordinarily, where a taxpayer approaches SARS outside of the programme, SARS may impose an understatement penalty ranging from 5% to 75% where the voluntary disclosure is made after notification of an audit or where the voluntary disclosure is made before an audit, SARS can levy an understatement penalty of 5% to 10%. 

By seeking voluntary disclosure programme relief, the taxpayer will be relieved from being liable to any understatement penalty, except in the cases where the taxpayer is grossly negligent or has intentionally evaded tax.

Furthermore, the act allows for 100% relief in respect of an administrative non-compliance penalty that was or may be imposed under chapter 15 of the act, or a penalty imposed under a tax act, excluding those penalties levied for the late submission of a return or the late payment of tax.

The voluntary disclosure programme available under the new act is not as attractive as that available under the previous legislation in that the taxpayer remains liable to interest which is payable on the late payment of the tax in question.

The approval of the voluntary disclosure application and the relief available under the act must be evidenced by a written agreement concluded between SARS and the qualifying person. 

Section 230 of the act requires that the agreement must be prepared in the prescribed format, and must contain details of the facts pertaining to the default on which the voluntary disclosure relief is based, as well as the amount payable by the taxpayer, and must contain details of arrangements and dates for payment and relevant undertakings

by the taxpayer and SARS.

SARS is entitled to withdraw the voluntary disclosure relief granted where it is established that the taxpayer failed to disclose a matter that was material for purposes of making a valid voluntary disclosure as envisaged in section 227 of the act. 

The consequences of withdrawal are significant, in that any amount paid in terms of the voluntary disclosure programme constitutes part-payment of any further tax in respect of the relevant default, and SARS may pursue criminal prosecution for statutory offences under a tax act or related common law offence.

Once the voluntary disclosure agreement has been concluded between SARS and the taxpayer, an assessment or determination must be made giving effect to the agreement. 

Clearly the assessment issued pursuant to the voluntary disclosure agreement is not subject to objection and appeal.

New disclosure programme again allows taxpayers to regularise any transgressions, 

but no relief is provided for interest owing

Under the previous programme, applicants could apply for relief for tax defaults from SARS and relief from the Financial Surveillance Department of the South African Reserve Bank for violations of exchange control regulations. 

In its Guide to the Tax Administration Act, SARS indicates that the voluntary disclosure  programme will not provide relief on interest payable to SARS, or exchange control, and that the programme contained in the act will only deal with tax matters. 

Thus, at this stage, it would appear that there are no  plans for a permanent exchange control voluntary disclosure programme.

Those persons who have contravened the exchange control regulations, and did not utilise the previous voluntary disclosure programme, would be required to approach their authorised dealer to assist them with an application to regularise their exchange control affairs. 

The levy payable in regularising breaches of the exchange control regulations could range from 20% to 40% of the amount of the contravention in question. 

The quantum of the levy finally payable to the South African Reserve Bank will, amongst other things, depend on whether the applicant chooses to retain the funds abroad or return the funds to SA.

■ Dr Beric Croome is a tax executive at Edward Nathan Sonnenbergs. This article first appeared in Business Day, Business Law and Tax Review (November 2012) Free image from ClipArt