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Tax administration FAQ: 9 April 2014

09 April 2014   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

1. Liability of third parties and representative taxpayers in the event of a company failing to pay its tax debts

Q: A BEE company was set up as a front for various business transactions but what the holding company never assisted with is the tax affairs of the company. The company was the subject of an audit and is now left with millions of VAT and PAYE debt. SARS is in the process of liquidating the company. Can the directors be held liable for the tax debts?

A: Chapter 10 and 11 of the Tax Administration Act (No. 28 of 2011) (hereinafter referred to as ‘the TAA’) provides all the rights, duties and procedures relevant to tax liability and payment and recovery of tax respectively. It should be noted that SARS has a whole arsenal of weapons when it comes to the collection of tax and a public officer, director or senior manager may be held liable in its capacity as such, as a shareholder or as a person owing money to the company etc. For clarity purposes the liabilities will be discussed under the following headings (1) liability in the event of a ‘representative taxpayer’ and (2) liability in the event of a ‘responsible third party’. 

1.      Liability in the event of a ‘representative taxpayer’  

Sec 155 of the TAA determines when a ‘representative taxpayer’ will be personally held liable and states the following:

‘... A representative taxpayer is personally liable for tax payable in the representative taxpayer’s representative capacity, if, while it remains unpaid

(a) the representative taxpayer alienates, charges or disposes of amounts in respect of which the tax is chargeable; or

(b) the representative taxpayer disposes of or parts with funds or moneys, which are in the representative taxpayer’s possession or come to the representative taxpayer after the tax is payable, if the tax could legally have been paid from or out of the funds or moneys.’ (own emphasis added).

Sec 155 therefore gives personal liability for a tax debt to a representative taxpayer if it performs the actions listed in par (a) or (b) while the tax remains unpaid. A ‘representative taxpayer’ is defined as follows in sec 153 of the TAA:

‘a representative taxpayer means a person who is responsible for paying the tax liability of another person as an agent, other than as a withholding agent, and includes a person who—

(a) is a representative taxpayer in terms of the Income Tax Act;

(b) is a representative employer in terms of the Fourth Schedule to the Income Tax Act; or

(c) is a representative vendor in terms of section 46 of the Value-Added Tax Act. 

A ‘representative taxpayer’ is defined in sec 1 of the Income Tax Act (No. 58 of 1962) (hereinafter referred to as ‘the Act’) as follow:

‘... means a natural person who resides in the Republic and—

(a)   in respect of the income of a company, the public officer thereof...’

 

A ‘representative vendor’ as defined in sec 46(a) of the Value-Added Tax Act (No. 89 of 1991) (hereinafter referred to as ‘the VAT Act’) and par (a) of the definition of ‘representative employer’ as defined in par 1 of the Fourth Schedule to the Act states that the public officer would be the representative vendor/employer in the case of a company.

 

However, sec 169(2)(a) of the TAA states that a tax debt must be recovered as follow:

‘... A tax debt is recoverable by SARS under this Chapter, and is recoverable from—

(a)   in the case of a representative taxpayer who is not personally liable under section 155, any assets belonging to the person represented which are in the representative taxpayer’s possession or under his or her management or control ...’ (own emphasis added).

Therefore, in the case of the public officer, if the circumstances prescribed in either par (a) of (b) of sec 155 are not met, then the public officer, in his capacity as ‘representative taxpayer’, may not personally be held liable for the company’s tax debt and SARS may only recover the tax debt from the company’s assets in the possession, management or control of the public officer. The determining factor here which would make the public officer liable for the company’s tax debt would therefore be that one of the requirements of sec 155 must be met. If not, then the public officer cannot be held personally liable.

It should be noted that, in terms of sec 153(3) of the TAA, the company ‘... is not relieved from any liability, responsibility or duty imposed under a tax Act by reason of the fact that the taxpayer’s representative ... failed to perform such responsibilities or duties; or ... is liable for the tax payable by the taxpayer’.

2.      Liability in the event of a ‘responsible third party’

Sec 159 of the TAA states the following:

‘... A responsible third party is personally liable to the extent described in Part D of Chapter 11.’

A ‘responsible third party’ is defined in sec 158 of the TAA as ‘...means a person who becomes otherwise liable for the tax liability of another person, other than as a representative taxpayer or as a withholding agent, whether in a personal or representative capacity.’ (own emphasis added).

A responsible third party would therefore include a third party appointment to satisfy a tax debt under sec 179 of the TAA, financial management under sec 180 of the TAA, shareholders under sec 181 of the TAA, a transferee under sec 182 of the TAA, a person assisting in dissipation of assets under sec 183 of the TAA.

Please consult the various sections to determine if SARS would be able to invoke them. Sec 179, 182 and 183 may be invoked on directors subject to the respective requirements of the said sections. Specific focus will be given to sec 180 and 181

Sec 180 of the TAA may hold financial management personally liable for the company’s tax debt and states the following:

‘... A person is personally liable for any outstanding tax debt of the taxpayer to the extent that the person’s negligence or fraud resulted in the failure to pay the tax debt if—

(a) the person controls or is regularly involved in the management of the overall financial affairs of a taxpayer; and

(b) 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.’ (own emphasis added).

The word ‘negligence’ is not defined but in a legal sense, in short, it refers to a deviation of actions from what would have been expected from a ‘reasonable man’. It can be argued that it is expected from financial management to ensure that a company is tax compliant. From the outset it would seem as if SARS may hold a person responsible in his or her personal capacity as being negligent or committing fraud if such a person deliberately fails to pay the company’s tax debt to SARS and then subsequently diverts the funds for some other purpose.  A director or senior management may therefore in terms of this provision be held liable for the company’s tax debt.

Sec 181(1) of the TAA determines when shareholders may be held liable and states the following:

‘... (1)  This section applies where a company is wound up other than by means of an involuntary liquidation without having satisfied its outstanding tax debt, including its liability as a responsible third party, withholding agent, or a representative taxpayer, employer or vendor.’

Given the fact that SARS has applied for the liquidation of the company in terms of sec 177(1) of the TAA, the liquidation was not done on a voluntary basis and SARS would not be able to invoke the provisions of sec 181 of the TAA and the shareholders would consequently not be held liable.

In any event, should SARS aim to invoke the provisions of sec 180 – 183 of the TAA, sec 184(2) provides for the following:

‘... SARS must provide a responsible third party with an opportunity to make representations—

(a) before the responsible third party is held liable for the tax debt of the taxpayer in terms of section 180181182 or 183, if this will not place the collection of tax in jeopardy; or

(b) as soon as practical after the responsible third party is held liable for the tax debt of the taxpayer in terms of section 180181182 or 183.’ (own emphasis added).

It should also be noted that in terms of sec 184(1) of the TAA, SARS has the same powers of recovery against the third party as SARS has against the company and the third party has the same rights and remedies as the company has against SARS’ powers of recovery.

 

In any event, should the third party or representative taxpayer be held liable, the person is, in terms of section 160(1) of the TAA, entitled to recover the amount paid from the company or to retain out of money or assets in the person’s possession or that will come into the person’s possession from the company, an amount equal to the amount of taxes paid. Please refer to sec 160(2) of the TAA for the company’s powers in the event where an incorrect amount was paid by a ‘responsible third party’ appointed in terms of sec 179 of the TAA (i.e. a customer owing money to the company).

Conclusion

The public officer of the company may be held personally liable for the company’s tax debt if one of the requirements of sec 155 of the TAA is met. If it is not met then he/she may not be held liable and SARS may only recover the tax debt from the company’s assets in the possession, management or control of the public officer.

SARS may, under sec 180 of the TAA hold the financial management personally liable for the company’s tax debt to the extent that their negligence gave rise to the company failing to settle its tax debt. From the facts provided it would seem as if negligence may have been involved.

The shareholders would not be held liable for the company’s tax debt in terms of sec 181, due to the fact that the sequestration was involuntary.

 

2. ‘Referral for audit’ and its timespans

 

Q: What is a referral for audit and how long does it take to finalise?  SARS says 3-12months.

A: Chapter 5 of the Tax Administration Act (No. 28 of 2011) (hereinafter referred to as ‘the TAA’) provides the general rules for inspection, verification, audit and criminal investigation.

An audit would normally follow a request for information where SARS believes that the information provided in a return does not accurately reflect a taxpayer’s actual tax liability. In terms of sec 41, the following authorisation needs to be provided before SARS may carry out an ‘audit’:

‘(1)  A senior SARS official may grant a SARS official written authorisation to conduct a field audit or criminal investigation, as referred to in Part B.

(2)  When a SARS official exercises a power or duty under a tax Act in person, the official must produce the authorisation.

(3)  If the official does not produce the authorisation, a member of the public is entitled to assume that the official is not a SARS official so authorised.’ (own emphasis added).

 

A senior SARS official must therefore authorise a SARS official in writing to conduct an audit. It is therefore advised that you seek the authorisation of the person(s) conducting the audit before assisting them as required by sec 49 of the TAA.

A referral for audit would typically be issued in terms of sec 48 of the TAA and merely serves as notice that your client is going to be the subject of an audit. Sec 48(1) of the TAA states the following in this regard:

‘A SARS official named in an authorisation referred to in section 41 may require a person, with prior notice of at least 10 business days, to make available at the person’s premises specified in the notice relevant material that the official may require to audit ... in connection with the administration of a tax Act in relation to the person or another person.’ (own emphasis added).

‘Relevant material’ is very widely defined in sec 1 of the TAA as follow:

‘... means any information, document or thing that is forseeably relevant for the administration of a tax Act as referred to in section 3’.

Please refer to sec 3(2)(a) of the TAA to determine what constitutes the ‘administration of a tax Act’.

In terms of sec 48(2) of the TAA, the referral must contain the following information:

‘(a) state the place where and the date and time that the audit or investigation is due to start (which must be during normal business hours); and

(b) indicate the initial basis and scope of the audit or investigation.’

Should you receive such a ‘referral’, the SARS officials conducting the audit is authorised in terms of sec 41 and the officials produce their identity cards in the case where they physically visit your client’s premises (please see below regarding sec 8), then your client would have to provide ‘reasonable assistance’ during the audit in accordance with sec 49 of the TAA.

Sec 8(2) and (3) states the following:

‘(2)  When a SARS official exercises a power or duty for purposes of the administration of a tax Act in person outside SARS premises, the official must produce the identity card upon request by a member of the public.

(3)  If the official does not produce the identity card, a member of the public is entitled to assume that the person is not a SARS official. (own emphasis added).

Therefore an official would first have to produce his identity card in terms of sec 8(2) if he is not exercising his powers within SARS’ premises, which must be followed by his authorisation from a ‘senior SARS official’ in terms of sec 41. If he cannot produce both, then your client may assume that he is not authorised.

Sec 49 of the TAA sets out the reasonable assistance that needs to be provided by your client and persons present on its premises and states the following:

‘(1) The person on whose premises an audit or criminal investigation is carried out and any other person on the premises, must provide such reasonable assistance as is required by SARS to conduct the audit or investigation, including—

(a) making available appropriate facilities, to the extent that such facilities are available;

(b) answering questions relating to the audit or investigation; and

(c) submitting relevant material as required.

(2)  No person may without just cause—

(a) obstruct a SARS official from carrying out the audit or investigation; or

(b) refuse to give the access or assistance as may be required under subsection (1).

(3)  The person may recover from SARS after completion of the audit or criminal investigation (or, at the person’s request, on a monthly basis) the cost for the use of photocopying facilities in accordance with the fees prescribed in section 92 (1) (b) of the Promotion of Access to Information Act.’

 

The TAA does not provide a time-limit upon SARS for the completion of an audit. Sec 42(1) of the TAA, however, forces SARS to keep the taxpayer informed with ‘progress letters’ and sec 42(2) provides that for a ‘letter of findings’ stating that the audit is concluded and its adjustments. Sec 42(1) states the following:

 

‘A SARS official involved in or responsible for an audit under this Chapter must, in the form and in the manner as may be prescribed by the Commissioner by public notice, provide the taxpayer with a report indicating the stage of completion of the audit.’ (own emphasis added).

The said public notice is Government Notice 788 in Government Gazette 35733 of 1 October 2012 which states the following:

 

‘2.       Due dates for reports

A SARS official involved in or responsible for an audit instituted before but not completed by the commencement date or instituted on or after the commencement date, must provide the taxpayer concerned with a report indicating the stage of completion of the audit-

(a)     in the case of an audit instituted before the commencement date, within 90 days of the commencement date and within 90 day intervals thereafter; and

(b)     in the case of an audit instituted on or after the commencement date, within 90 days of the start of the audit and within 90 day intervals thereafter, until the conclusion of the audit.

3.       Details of report

The report must include the following details as at the date of the report:

(a)     A description of the current scope of the audit;

(b)     The stage of completion of the audit; and

(c)     Relevant material still outstanding from the taxpayer.’

Therefore, as a general rule, SARS must provide the taxpayer with a ‘progress report’ every 90 days containing the details specified in par 3 of the notice. Sec 42(2) of the TAA governs the report that must be issued by SARS on the completion of the audit (‘letter of findings’) and states the following:

‘(2)  Upon conclusion of the audit or a criminal investigation, and where—

(a) the audit or investigation was inconclusive, SARS must inform the taxpayer accordingly within 21 business days; or

(b) the audit identified potential adjustments of a material nature, SARS must within 21 business days, or the further period that may be required based on the complexities of the audit, provide the taxpayer with a document containing the outcome of the audit, including the grounds for the proposed assessment or decision referred to in section 104 (2).’

 

Upon receipt of the ‘letter of findings’ in terms of sec 42(2)(b) of the TAA (where SARS made adjustments to the taxpayer’s assessment), the taxpayer is must respond thereto in writing in terms of sec 42(3) of the TAA which states the following:

‘(3)  Upon receipt of the document described in subsection (2) (b), the taxpayer must within 21 business days of delivery of the document, or the further period requested by the taxpayer that may be allowed by SARS based on the complexities of the audit, respond in writing to the facts and conclusions set out in the document.’

The taxpayer however need not respond to the ‘letter of findings’ where it waived its right to receive the letter in terms of sec 42(3). It should be noted that SARS is allowed not to issue a ‘progress letter’ or ‘letter of findings’ in exceptional circumstances which are set forth in sec 42(5) which states the following:

Subsections (1) and (2) (b) do not apply if a senior SARS official has a reasonable belief that compliance with those subsections would impede or prejudice the purpose, progress or outcome of the audit.’

Conclusion

SARS has vast powers under Chapter 5 of the TAA. Ensuring that a SARS official is properly authorised in terms of sec 8 and 41 and that the officials stays within the scope of the audit provided to you in terms of sec 48(2) may help your client in protecting its/his/her rights. Reasonable assistance should be provided by your client in terms of sec 49, provided that SARS has the necessary authorisation. The TAA does not give a time limit for the conclusion of an audit. The information provided in the ‘progress letters’ which will be issued on a 90-day interval in terms of sec 42(1) may give you an indication as to when the audit may be concluded. A ‘letter of findings’ will be issued upon the conclusion of an audit in terms of sec 42(2) and, in that case, the audit will be considered finalised.


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