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

The Tax Administration Act takes effect

INTRODUCTION

The Tax Administration Act, No 28 of 2011 (‘TAA’), which was promulgated on 4^th July 2012, took effect on 1^st October 2012, except for certain specific provisions dealing with the imposition of interest payable to the Commissioner: South African Revenue Service by taxpayers, and, also, by the Commissioner to taxpayers.  The rules regulating the payment of interest will be changing, such that, in future, 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.

TRANSITIONAL RULES

Chapter 20 of the TAA contains a number of transitional provisions seeking to ensure the smooth transition from actions which were commenced under the administrative provisions of various fiscal statutes, but which had not yet been completed by 30^th September 2012.  

Chapter 20 of the TAA provides that any tax number allocated to a taxpayer prior to the TAA taking effect will continue to be applicable until SARS allocates a new number to the taxpayer under the TAA.

Section 259 of the TAA provides that the Minister of Finance must appoint a person as a Tax Ombud within one year of the commencement date of the TAA, namely 1^st October 2012.  

The National Treasury has indicated that it is intended to appoint a Tax Ombud before the end of this year.

All SARS officials are required to subscribe to an oath or solemn declaration of secrecy, which was previously contained in section 4 of the Income Tax Act, No 58 of 1962 (‘the Act’), or section 6 of the Value-Added Tax Act, No 89 of 1991, as amended.  The fact that those officials may have been administered the oath under another fiscal statute will be regarded as having taken the required oath under section 67(2) of the TAA.

Section 261 of the TAA confirms that those persons appointed as the public officer under a tax act, who held office immediately prior to the commencement of the TAA, will be regarded as the public officer appointed under the TAA.

Those persons who were appointed as chairpersons of the Tax Board or members of the Tax Court will continue in office until their appointment is terminated or lapses.

Section 264 of the TAA confirms that those rules of the Tax Court issued under another tax act prior to the commencement of the TAA, will continue in force as if they were issued under section 103 of the TAA.  It is envisaged that the rules governing objections and appeals will be reviewed after SARS has followed a consultative process, where after those rules will be promulgated under the TAA.

SARS officials who were authorised to conduct audits under a tax act before the commencement of the TAA, will be regarded as the official envisaged in section 41 of the TAA, which allows for a senior SARS official to grant a SARS official written authorisation to conduct a field audit or criminal investigation.

Section 269 of the TAA provides that those forms issued under the authority of any tax act prior to the commencement of the TAA, and in use before the date of commencement of that Act, will be considered to have been prescribed under the authority of the TAA to the extent consistent with that Act.  Similarly, any rulings and opinions issued under the provisions of a tax act repealed by the TAA, and enforced prior to the commencement of the TAA, which have not been revoked, will be regarded as having been issued under the authority of the TAA. 

Section 270 of the TAA provides that the TAA applies to an act, omission or proceeding taken, occurring or instituted before the commencement date of the TAA, but without prejudice to the action taken or proceedings conducted before the commencement date of the comparable provisions of the TAA.  This section, therefore, seeks to ensure that those actions commenced prior to the TAA and not yet completed by the date of its commencement, must be continued and concluded under the provisions of the TAA as if taken or instituted under the TAA itself.

PUBLIC NOTICES

The TAA envisages various notices being published in the Government Gazette dealing with certain aspects of the TAA.  Thus far, four public notices have been gazetted under the provisions of the TAA.

Section 1 of the TAA defines “this Act” as including the regulations and the public notice issued under the TAA.  Thus, the public notices issued pursuant to the TAA, are to be regarded as part and parcel of the Act itself.  The four public notices which have been issued deal with specific aspects of the TAA. 

RECORD KEEPING

Section 30 of the TAA sets out the manner in which records, books and account documents referred to in section 29 of the Act, must be kept or retained.  

The TAA requires that records are kept in the original form, in an orderly fashion, and in a safe place, or, where retained in electronic form, in the manner to be prescribed by the Commissioner in a public notice, or in a form specifically authorised by a senior SARS official in terms of section 30(2) of the Act.  

Government Notice No 787 contained the public notice issued pursuant to section 30(1)(b) of the TAA.  The public notice in question allows taxpayers to keep records in terms of section 29 in an electronic form, so long as the rules contained in the public notice are adhered to.  

Rule 3.2 of the public notice defines an “acceptable electronic form” as a form in which the integrity of the electronic record satisfies the standard contained in section 14 of the Electronic Communications and Transactions Act.  

Furthermore, it is required that the person required to keep records is able to, within a reasonable period when called on by SARS, to provide SARS with an electronic copy of the records, in a format that SARS is able to readily access, read and analyse, or to send the records to SARS in an electronic form that is readily accessible by SARS, or to provide SARS with a paper copy of those records.

Rule 4 of the public notice requires that the records retained in electronic form must be kept and maintained at a place physically located in South Africa.  Thus, the electronic documents may not be retained outside of the country without SARS’ consent.  

The notice states that a senior SARS official may authorise a person to keep records in an electronic form outside of South Africa where that official is satisfied that the electronic system used by that person will be accessible from the person’s physical address in South Africa for the duration of the period that the person is obliged to keep and retain records under the TAA.  Furthermore, the locality where the records are proposed to be kept will not affect access to the electronic records themselves.  

In addition, the rules require that there is an international tax agreement for reciprocal assistance in the administration of taxes in place between the country in which the person proposes to keep the electronic records and South Africa.  

Furthermore, the form in which the records are to be kept satisfies all the requirements of the rules contained in the public notice, apart from the issue of the physical locality of the storage of those records, and, importantly, that the person concerned will be able to provide SARS with an acceptable electronic form of the records on request, within a reasonable period.  

The public notice also deals with documentation required to be retained regarding the system utilised by the taxpayer.  Where the computer software used by the taxpayer is commonly recognised, the taxpayer is not required to retain systems documentation relating thereto.  Where, however, the software used by the taxpayer is not commonly recognised in South Africa, or has been adapted for the taxpayer’s particular environment, it is necessary to retain the systems documentation set out in rule 5 of the public notice.

Rule 6 of the public notice places a requirement on persons who keep records in an electronic format to ensure that measures are taken for the adequate storage of the electronic records for the duration of the period referred to in section 29 of the Act.  It is necessary to store all electronic signatures, login codes, keys, passwords or certificates required to access the electronic records, and the procedures to obtain full access to any electronic records that are encrypted.

Rule 7 of the public notice requires persons to retain electronic records to have the records available for inspection by SARS in terms of section 31 of the TAA at all reasonable times, and at premises physically located within the country, or accessible from such premises if authority in terms of rule 4.2 has been granted.  Under rule 8 of the notice, the electronic records must be able to be made available for purposes of an audit or investigation conducted by SARS in terms of section 48 of the TAA.

Finally, rule 9 of the public notice provides that any person who keeps records in electronic form, must be able to comply with the provisions of the rules contained in the public notice throughout the period that the person is required to keep the records, in order to comply with section 29 of the TAA.

SARS AUDITS AND TAXPAYER FEEDBACK

Government Notice No 788, also issued on 1^st October 2012, sets out the form and manner of a report to be submitted by SARS to a taxpayer on the stage of completion of an audit, in terms of section 42(1) of the TAA.  It must be remembered that, in accordance with the TAA, a taxpayer is required to be advised as to the status or progress in an audit conducted on their affairs by SARS, which is an improvement in that the Act did not contain any such provision.  

Under rule 2 of this public notice, a SARS official responsible for an audit instituted before but not completed by the commencement date of the TAA, or instituted on or after its commencement date, 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, SARS 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 the TAA commencement date, 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.

In terms of rule 3, SARS must advise the taxpayer as to the current scope of the audit, the stage of completion of the audit, and relevant materials still outstanding from the taxpayer.

Unfortunately, in the past, it happened too often that taxpayers were subjected to an audit and would hear nothing from SARS for a long period of time, and then, suddenly, be requested to supply information within a very short period.  

The new provisions contained in the TAA should alleviate this from happening in future. 

INTERVIEWS BY SARS AND TRAVELLING DISTANCE

Government Notice No 789 was issued pursuant to section 47(4) of the TAA, which deals with the distance to be taken account of in determining whether a person may lawfully decline to attend an interview with SARS.  

This public notice prescribes that a person other than a person described in section 211(3)(a),(b) and (c) of the TAA may decline to attend an interview where that person is required to travel more than 200kms between the place designated in the notice and their usual place of business or residence and back.

Where the person described falls within section 211(3)(a),(b) and (c)of the Act, the distance is increased to 2500kms, and that relates to companies listed on a recognised stock exchange, a company whose gross receipts or accruals for the preceding tax year exceed R500 million, or a company that forms part of a group of companies of either of the aforementioned entities. 

FIXED AMOUNT PENALTIES

Government Notice No 790 was issued pursuant to section 210(2) of the TAA, which deals with the imposition of a fixed-amount penalty under the TAA.  Rule 2 of that public notice provides that failure by a natural person to submit an income tax return as and when required under the Income Tax Act, for years of assessment commencing on or after 1^st march 2006, where that person has two or more outstanding income tax returns for such year of assessment, will be liable to the fixed-amount penalty as envisaged in section 211 of the TAA.

OUTSTANDING PUBLIC NOTICES

From a review of the TAA, it would appear that other public notices remain to be issued, particularly those dealing with the following sections: 

·         section 81(1), regarding fees for advanced rulings

·         section 103, dealing with rules for dispute resolution

·         section 166(2) and (3), dealing with allocation of payments

·         section 167, pertaining to rules regarding instalment payment agreements

·         section 245, regarding dates for submission of returns and payment of tax

·         section 255, dealing with rules regarding the submission of returns in electronic format

CONCLUSION

The TAA introduces significant changes in the administrative provisions regulating the fiscal statutes in South Africa, and it is going to take time for both taxpayers and SARS to become accustomed thereto.  SARS has published various documents dealing with the introduction of the Act, particularly the SARS Short Guide to the Tax Administration Act, 2011, as well as various other documents dealing with frequently asked questions, and penalties administration and dispute administration.  

Taxpayers will need to familiarise themselves with the provisions of the TAA and the documents published by SARS to obtain a better understanding of how the TAA impacts on their obligations so as to comply with the fiscal statutes of the country.

This article first appeared in Tax ENSight, October 2012