Shifting the tax liability
07 February 2013
Posted by: Erich Bell
To incur an obligation with the Receiver of Revenue is something everyone wants to avoid. Unfortunately, the South African Revenue Service (SARS) intends to implement an action that may result in additional, unexpected obligations for taxpayers.
Previously, legislation authorised the Commissioner to appoint any person he considers as an appropriate agent to recover outstanding tax debts on behalf of SARS. The agent was required to withhold an amount determined by the Commissioner from any payment made to the indebted taxpayer. For example: an employer may have been appointed as an agent to recover outstanding taxes owed by his employee. Consequently, the appointment imposed the employer with the responsibility to deduct the amounts from the taxpayer’s salary and to pay it over to SARS. If the agent failed to comply with the Commissioner’s instruction, he became personally liable for the employee’s tax debts.
In the meanwhile, tax legislation was amended and the term "agent” was replaced with "responsible third party”. This was done in an attempt to eliminate any uncertainties relating to the entity that may become responsible to recover tax debt.
Furthermore, the previous regulations empowered only the Commissioner with the authority to appoint an agent. However, current legislation expands this power to any senior SARS official that is specifically appointed by the Commissioner or to whom written authorisation to perform this duty was given by the Commissioner.
The responsible third party can expect to receive an electronic notice entitled "Assessed tax – Third Party Appointment”. The notice will be accompanied with a document stating the details of the indebted taxpayer, the start- and expiry date of the debt collection process, the total tax obligation of the indebted taxpayer, as well as the total amount to recover.
The wording of the current electronic notice does not provide a clear identification of the person who instructed the third party appointment. Therefore it is not possible to determine if such notice was issued by a senior SARS official as legally prescribed.
As soon as a responsible third party is appointed to collect outstanding taxes, the obligation will apply to all amounts currently payable to the indebted taxpayer, as well as any future monetary commitments he may incur. If the appointee’s actions contradict the requirements of the notice, he will become personally liable for the outstanding taxes. When we apply the above requirements to the example where the employer was appointed to collect the outstanding tax debts of his employee, it implies that he will become personally liable for amounts not recovered from the employee’s salary. The employer will be expected to collect taxes from any amount that is currently payable to the employee. He will also be obligated to withhold tax from any amount that is not currently in his possession but which he intends to pay to the employee in the future. This will be the case when an employer is awaiting payment from a client before paying it over to the employee as a bonus.
It is clear from the above provisions that the appointed third party will not be allowed to make any adjustments to the instalments that SARS instructed him to recover. He is also not allowed to approach SARS with a request to reduce the instalment. A reduction of the instalment may only be applied for by the particular taxpayer himself.Furthermore, SARS will only allow such application if the amount of the instalment is not considered to be affordable when compared to the taxpayer’s living costs. There is no legal limitation to the instalments SARS may impose. This is in contrast with the legislation of countries like Australia and Canada that implements similar debt collection methods, where limitations are imposed.
If the appointee wants to dispute the nomination, he has to supply the specific senior SARS official who issued the appointment with an adequate motivation to withdraw or adjust the appointment. Currently, it will be almost impossible to perform this action, since the appointee is not supplied with any information regarding the senior SARS official’s identity.
SARS has indicated that the current debt collection method is considered to be similar to a garnishee order. However, various non-corresponding characteristics can be found when the different concepts is analysed. The process followed by SARS also appears to be stricter.
First of all, a garnishee order can only be imposed by the creditor if he obtained a court order that permits him to collect the outstanding balance of a debtor from a designated third party. This is in contrast with the debt collection method applied by SARS since no independent authorisation is required to initiate the process.
Furthermore, a third party is allowed to make an application to the court to acquit him from any responsibilities relating to the debt imposed on him as a result of the garnishee order. In contrast, a person ordered by SARS obtains a legal responsibility to collect the money on behalf of SARS and failing to do so will lead to personal liability for the other party’s tax debt.
Before the court issues a garnishee order, it gives the third party an opportunity to oppose it. With regards to the appointment made by SARS, the obliged third party does not receive an initial opportunity to dispute the appointment and it is usually unaware of SARS’s proposed actions. It is only after the appointment is made, that the responsible third party will be allowed to dispute the action. As already mentioned it is not currently possible to dispute this action since the person that should be approached is not mentioned in the documents issued by SARS.
Finally, a garnishee order is legally prohibited to be enforced on any amount relating to a debtor’s pension fund benefits. SARS is not subjected to this restriction as current tax administrative provisions specifically orders the responsible third party to withhold an amount of tax debt from any amount payable to the indebted taxpayer, including pension.
The appointment of a responsible third party will probably help SARS to be more successful in the collection of outstanding tax debts. However, it seems that SARS should reconsider the practical implementation of the Act. The fairness of the process should also be evaluated together with the potential long term cash flow implications that may result from the additional tax burden enforced on the responsible third party. Usually, these entities are already accountable for taxes in their own names, for example: employees tax, income tax, value added tax, etc.
Source: Danielle le Roux & Johan van der Walt