No ‘Same-Day Service’ For EFT Payments To SARS
30 May 2010
Posted by: TaxFind™
No ‘Same-Day Service’ For EFT Payments To SARS
If the tax is due today and you make an EFT, it only hits SARS’ bank tomorrow—which means it’s late
When has a taxpayer fulfilled the obligation to pay SARS if such payment is made via electronic funds transfer (EFT)? We will look at the following example: In terms of Paragraph 2(1) of the Fourth Schedule to the Income Tax Act No.58 of 1962 (theAct), an employer has an obligation to pay SARS the employees' tax (PAYE) he has withheld from remuneration paid to his employees within seven days after the end of the month during which the amount was deducted or withheld.
Suppose an employer proceeds to transfer such amount to SARS on the seventh day by EFT. However, the funds are only reflected in SARS’ bank account the next day. Has the employer failed to pay SARS within the seven days permitted?
It appears that SARS is of the view that payment has only been made once the relevant amount is reflected in its bank account (for example, the SARS Reference Guide to Provisional Tax dated 10 July 2010 states at page 7 that "where payments are done electronically, provision must be made for your bank's cut-off times and for a clearance period that could take between two and five days").
If this is correct, then the employer in our example above will be liable for a penalty of 10% (Paragraph 6(1) of the Fourth Schedule) and interest (Section89 bis). However, "paid” is not defined in the Act and there are no other provisions in the Act, nor do there appear to be any tax cases, which provide guidance as to whether or not "paid” means that SARS must actually have access to the funds, or if the funds must merely have been transferred by the taxpayer.
In Nedbank Ltd v Pestana (71 SATC 97), the Supreme Court of Appeal (SCA) had to consider whether or not a bank could reverse an EFT made by a bank in contradiction of a notice issued by SARS in terms of Section 99 of the Act. The court held that a completed and unconditional payment had been effected when the bank credited the plaintiff's account, with the result that the bank could not unilaterally reverse the credit.
Whilst this case provides guidance as to the unconditional nature of an EFT, it does not provide clarity as to when payment by EFT is considered to be effected. There is no legislation in South Africa governing EFTs and little guidance as to the legal consequences arising from transactions of this nature.
Fein in Law of Electronic Banking (2000 at xxi quoted in Schultze SA Merc LJ (2008) at page 290) goes so far as to say that "any research on the legal principles underlying electronic credit transfers is no more than an exercise in search of a law where little is to be found at present”.
Meiring Juta's Business Law(1998) at page 39 states that the legal principles established in court decisions concerning the moment of payment of cheques should apply with equal force to EFTs, because they are both effected through the same system (this system is discussed below). If this is correct (the rules of this system are confidential and it is not clear if a cheque payment is processed in the same way as an EFT once in the system), then guidance in respect of the moment of payment for EFT can be found in such court decisions.
In Volkskas Bank BPK v Bankorp BPK (h/a Trust Bank) en‘n Ander  2 all 324 (A)(Volkskas), the then Appeal Division (AD) had to determine when payment by cheque had been effected. The AD held that the issue had to be answered in the context of the system which the banks use to clear cheques, namely the system operated under the auspices of Automated Clearing Bureau(Pty) Ltd (ACB).
Malan on Bills of Exchange, Cheques and Promissory Notes in South African Law (2009) (Malan) at page 244 states that the ACB was established by the South African clearing banks in 1973 to provide for the computerised collection and payment of cheques. This system uses sophisticated electronic data equipment and processes cheques by means of magnetic ink character recognition. Provisional debits and credits are generated in the books of the collecting and drawee bank which become final in the absence of notice of dishonour by the drawee bank to the collecting bank within a prescribed period.
The AD in Volkskas applied the law of obligations and held that payment is a bilateral juristic act which requires the co-operation of both parties. Therefore, the mere decision by the drawee bank to pay a cheque does not constitute payment.
The court found in effect that, in light of the way in which the ACB operates, ordinarily payment is made when the time limit allowed by the ACB for dishonouring has expired and there has been no notification of dishonour (the position could be different where the collecting bank and the drawee bank are one and the same). Until then, payment can be counter manded.
As previously mentioned, the rules governing the ACB are confidential and the court therefore had to rely on testimony by bank representatives who had knowledge of how the system operates. At first blush, Volkskas seems to support the proposition that payment made by EFT is not effected merely when the taxpayer decides to pay SARS and initiates transfer of the funds by EFT.
However, if one assumes the ACB processes EFTs in the same way in which cheque payments are processed, it could lead to an attractive argument that payment by EFT is made as soon as the payer initiates the EFT, based on the premise that an EFT cannot be countermanded (discussed below).
In Take and Save Trading CC and Others v Standard Bank of South Africa Ltd 2004 (4) SA 1(SCA) (Take and Save Trading),the SCA dealt with an appeal against the decision of the judge in the court a quo (Combrinck J) not to recuse himself for bias. Two questions before the court a quo that are applicable to this discussion whether or not the defendant had given instructions to reverse an EFT that he had made and, if so, whether such instructions could have been carried out.
A bank representative ("Ms B”)was called as a witness to explain how electronic banking works. Ms B told the court a quo that an EFT amounts to an immediate transfer of money by a client from one account to another. She also testified about an inter-bank agreement under the auspices of the ACB which provides that without the beneficiary's consent, an EFT cannot be reversed. After hearing this evidence, Combrinck Jexpressed the view that the second of the two aforementioned questions before the court could not be answered in favour of the defendant (i.e. could not be answered in the affirmative).
The defendants' legal team then withdrew without proffering any reason. The judge stated that he thought that the withdrawal occurred because counsel had lost faith in the case which, he said, was not surprising considering the evidence that had been led. The defendants argued that the views expressed by Combrinck J created a reasonable apprehension of bias because the judge had effectively judged the case even before the plaintiff's case had been closed. The defendants therefore applied by way of notice of motion for the judge to recuse himself. He refused the application and the defendants appealed this decision.
The SCA dismissed the appeal, stating that a deadly legal point forcefully made by the Court during argument cannot give rise to an apprehension of bias in the eye of the "reasonable, objective and informed” litigant in possession of "the correct facts”. If, in fact, an EFT cannot be countermanded once initiated (without the permission of the payee) then, following the ratioof Volkskas, it could potentially be
argued that the moment of payment by EFT occurs at the point in time when a taxpayer proceeds to transfer funds by EFT and not when the funds are reflected in SARS’ bank account.
A payee might object to the imposition of the ACB rules on his affairs, since these rules governinter-bank transactions. However,it is argued in Malan that, in the same way a person instructing his mandatory to buy or sell in a certain market will be bound by the rules of that market when they are notorious, certain, reasonable and legal whether or not he has knowledge of them, a customer instructing his bank to collect payment of a cheque will be bound by any clearing house rule when it is notorious, certain, reasonable and legal.
Presumably the same should apply to payment by EFT. It is important to note, however, that Paget's Law of Banking (1996), commentating on English Law, argues that "payment usually involves the transfer of money, or the performance of some other act, tendered and accepted in the discharge of a money obligation" and that payment by EFT "will be deemed to be complete when the creditor is given the unconditional (in the sense of unfettered and unrestricted) right against his own bank to the immediate use of the funds transferred".
Accordingly, the argument that payment is made as soon as the taxpayer initiates payment could potentially provide a defence against the imposition of penalties and interest by SARS for late payment when funds are transferred by EFT initiated by the due date.
However, in light of the uncertainty in respect of the moment of payment when funds are transferred by EFT, it would be prudent to ensure that payments to SARS by EFTs are made timeously so as to reflect in SARS’ account within the prescribed period.
Where the payments are substantial and the time value of money cost of paying a day or two early is material, clarity should be sought from SARS or National Treasury as to whether or not a payment effected by the taxpayer on the due date for payment by EFT will satisfy the requirement of the relevant revenue Act.
There are a number of other issues that arise with regard to EFTs. For example, who is entitled to the interest on the funds once the taxpayer has initiated payment by EFT but the funds are not yet reflected in SARS’ account? Furthermore, does it matter what time of day the payment is initiated by the taxpayer? In light of the prevalence of payments by EFT, further clarity on the legal nature of such payments would be a welcome addition to our law.
This article first appeared in Integritax, the technical tax newsletter of the South African Institute of Chartered Accountants, and is reproduced with their permission.
Source: Edward Nathan Sonnenbergs (Taxbreaks)