Voluntary Disclosure Under The Tax Administration Act
02 May 2013
Posted by: Author: Johan van der Walt
Source: Johan van der Walt
When should an applicant be 'aware' of being under 'audit or investigation' by SARS?
The Tax Administration Act, No 28 of 2011 (TAA) provides for a permanent Voluntary Disclosure Programme (VDP) in ss225 - 233 (part B of chapter 16). Following the success of the previous VDP that ran from November 2010 to October 2011, there should be a steady stream of applicants knocking on the doors of the VDP unit.
The provisions regarding the VDP under the TAA largely curtail SARS's discretion, making the VDP process fairly predictable for a prospective applicant. Follow the prescribed procedure in s227(f)
and meet the requirements in s227 for a valid voluntary disclosure, and the applicant should be home and dry. The statutorily defined VDP relief cannot be denied because, "despite the provisions of a
tax Act, SARS must" grant the applicable relief (s229).
Applicant aware of 'audit or investigation' into his affairs.
One area where SARS does have discretion with regard to an applicant's access to the VDP is under s226(2). Section 226(1) provides that "a person may apply ... unless that person is aware of a pending audit or investigation into the affairs of the person seeking relief or an audit or investigation that has commenced, but has not yet been concluded." In such an instance s226(2) provides that a senior SARS official (SSO) "...may direct that a person may apply for voluntary disclosure relief." In exercising the discretion to allow the applicant into the VDP, the SSO must be of the view that the default would not have been detected during the audit or investigation; and the application would be in the interest of good management of the tax system and the best use of SARS' resources.
The above has two implications. Firstly, SARS effectively controls VDP access for an applicant under 'audit' or 'investigation'. Secondly, should the applicant get into the VDP, the relief would be limited to
that in column 5 of the understatement penalty matrix in s223(1), being between 5 – 75% (as opposed to that in column 6, being between 0 – 10%).
The differentiating factor is whether, at application stage, there is an awareness on the applicant's part of a pending "audit or investigation into the affairs of the person seeking relief", alternatively of an audit
or investigation that has not yet been concluded. Importantly the VDP01 form to be e-filed when making a VDP application has a specific question regarding this aspect and the 'Yes' or 'No' box has to be ticked.
Meaning of '... unless that person is aware'
Section 226(3) deems there to be awareness of an audit or investigation under certain circumstances.
Ignoring the above, it would appear that '... unless that person is aware' requires that the prospective applicant should subjectively have knowledge of being the target of a SARS 'audit or investigation'
before SARS's discretion under s226(2) would apply.
Meaning of 'audit' and 'investigation'
The problem is that the terms 'audit', 'investigation' and 'into the affairs' as found in s226 are not defined. They therefore take their ordinary meaning.
But what about a situation where SARS has merely requested information (eg under chapter 5 of the TAA), which the taxpayer subsequently provides, and then all goes quiet? Should such a person later decide to apply for the VDP, which box should be ticked? Does the earlier SARS interaction mean the taxpayer is (or should be) "...aware of a pending audit or investigation?" If 2 | Tax Alert 26 April 2013
that is the case, the SSO will decide on VDP access and, if granted, there will only be column 5 understatement penalty relief (ie 'after notification of audit' relief). Unfortunately, SARS' Short Guide to
the TAA does not give clarity regarding the above-mentioned terms and how SARS would exercise its discretion regarding VDP access (refer paragraph 16.7.4).
The ordinary meaning of 'audit' includes "an official examination and verification of financial accounts." To conduct an audit means to 'review methodically and in detail' (The New Shorter Oxford English Dictionary). It is also defined as "a formal examination of an individual's or organization's accounting records, financial situation, or compliance with some set of standards" (Black's Law Dictionary). 'Investigation' is defined as "the action or process of investigating; systematic examination; careful research" (The New Shorter Oxford English Dictionary). 'Investigate' is defined as "to inquire into (a matter) systematically" (Black's Law Dictionary).
From the above it would appear that a prospective VDP applicant should have awareness that SARS is conducting a formal and systematic examination into their (tax) affairs before the discretion in s226(2) could come into play. Where the level of SARS's engagement with the taxpayer has not yet reached that level, the prospective applicant would be within his rights to tick the 'No' box on the VDP01 form, and should receive the column 6 relief.
Guidance from abroad
Entry into the VDP under s226(1), as opposed to s226(2), impacts accessibility (straight in or via SARS's discretion) as well as the available relief (s223(1) penalty matrix: column 6 vs column 5). The
outcome is significant for a prospective VDP applicant; hence the consideration below of how the matter is dealt with in Australia.
As indicated above the South African VDP distinguishes on the basis of the applicant being 'aware ... of an audit or investigation', or not.
The Australian Tax Office (ATO) sets out its approach in Miscellaneous Taxation Ruling MT 2012/3. The ATO uses the concept of 'examination' (also not defined) rather than 'audit' or 'investigation'. The ATO approach could be summarised as follows:
- The ATO will notify a taxpayer that an 'examination ... into its affairs' is to be conducted (accordingly this is different from the 'awareness' test which applies locally);
- The concept 'examination' is very broad and covers not only traditional audits to ascertain an entity's tax-related liability, but covers any investigation of an entity's affairs;
- The examination must relate to a particular entity's affairs and thus excludes activities that are merely educational in nature (eg an ATO bulk mail-out giving guidance regarding limitations on certain tax deductions);
- The examination must involve more than the routine processing of forms or applications by the ATO;
- The examination must be on-going at the time the voluntary disclosure is made; and
- Because the concept of 'examination' is so broad, it could result in circumstances where it would be harsh to disallow the higher reduction in penalty. In such a case, the lower penalty percentage penalty would nevertheless be imposed.
The agenda pursued by SARS when initially engaging with a taxpayer could be unclear, ie the taxpayer might not have an exact idea what SARS is after, for what reason and on what basis. Sometimes the interaction is left 'hanging' ie SARS does not expressly indicate that it is satisfied with the information provided, nor does it unequivocally state that it is no longer pursuing a particular issue or line of questioning. Months (sometimes even years) could go by without communication between the parties due to, for example, SARS staff changes or the taxpayer hoping 'the problem will go away'.
A taxpayer contemplating a VDP application in respect of a hitherto undetected tax 'default' is consequently in a predicament: Will the application, once e-filed, be processed under s226(1)? Or
would they receive a letter from SARS stating that the taxpayer is (or has been for some time) the subject of a SARS audit or investigation. That could mean the application will only be considered in terms of SARS's discretion under s226(2), and with the resultant lower level of relief.
A prospective VDP applicant should therefore be circumspect where there is an unresolved or 'open' SARS interaction, irrespective of how far it goes back. One should attempt to get official confirmation
from SARS that a matter has been finalised and that there is no longer any live audit or investigation underway. This action could, in itself, have unintended consequences like restarting a process that
had gone stale. Where the unresolved matter is immaterial in the bigger scheme of things, it might even be better to pay and simply clear the way for a s226(1) VDP application - thereby optimising the
It is important that a prospective VDP applicant understands whether a SARS interaction constitutes an 'audit' or 'investigation' taking into account the level of engagement between the parties. Entry into the VDP under s226(2) of the TAA (as opposed to the more advantageous s226(1)) entails both a more cumbersome process and less benevolent end-result.