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Tax Administration FAQ: 16 April 2014

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

1. Remedies available after the three years to lodge an objection has lapsed.

Q: My client's 2010 tax return was submitted and assessed on 26 November 2010. The client moved tax affairs over to me and asked me to investigate why he did not get a refund for the year. It came out that the previous tax practitioner did not claim a deduction for contributions to retirement annuities amounting to R40 000 for the said year of assessment. I tried to redo the tax return, but the SARS system gave a message that you cannot request correction for assessments older than 3 years and I that have to go the NOO route.

A: Sec 93 of the Tax Administration Act (No. 28 of 2011) (hereinafter referred to as ‘the TAA’) provides that SARS may issue a reduced assessment if:

‘(a) the taxpayer successfully disputed the assessment under Chapter 9;

(b) necessary to give effect to a settlement under Part F of Chapter 9;

(c) necessary to give effect to a judgment pursuant to an appeal under Part E of Chapter 9 and there is no right of further appeal; or

(d) SARS is satisfied that there is an error in the assessment as a result of an undisputed error by—

(i) SARS; or

(ii) the taxpayer in a return.

(2)  SARS may reduce an assessment despite the fact that no objection has been lodged or appeal noted.’

 

Despite the relief provided for in sec 93 of the TAA, your remedies in this particular case are really limited. This is due to the reasons described below.

1. Sec 99(1)(a) of the TAA provides that, as a general rule, SARS may not issue an assessment (including a reduced assessment) ‘three years after the date of assessment of an original assessment by SARS’. Therefore the message that you’ve received on eFiling was based on sec 93 of the TAA which were limited in terms of sec 99(1)(a) of the TAA.

2. Sec 99(2)(d) of the TAA provides that sec 99(1) of the TAA (therefore in your case, the three year limitation for the issuance of an assessment) does not apply to the extent that it is necessary to give effect to:

‘the resolution of a dispute under Chapter 9 ...’.

However, the three year period provided in terms of sec 104(5)(b) read with sec 104(4) for lodging an objection has already lapsed and you therefore would not be able to take the dispute resolution route in respect of the assessment.

Therefore, the only remedy that may be available to your client is to take the route provided for by sec 98(1)(d) read with sec 98(2) and sec 99(2)(d)(iii) of the TAA. Although it is submitted that the scope of sec 98(1)(d) is really narrow, given the fact that your client does not have any other remedies available, it may be worth a try.

Sec 98 of the TAA states the following

‘98.   Withdrawal of assessments.—(1)  SARS may, despite the fact that no objection has been lodged or appeal noted, withdraw an assessment which—

(a) was issued to the incorrect taxpayer;

(b) was issued in respect of the incorrect tax period;

(c) was issued as a result of an incorrect payment allocation; or

(d) in respect of which the Commissioner is satisfied that—

(i) it was based on—

(aa) an undisputed factual error by the taxpayer in a return; or

(bb) a processing error by SARS; or

(cc) a return fraudulently submitted by a person not authorised by the taxpayer;

(ii) it imposes an unintended tax debt in respect of an amount that the taxpayer should not have been taxed on;

(iii) the recovery of the tax debt under the assessment would produce an anomalous or inequitable result;

(iv) there is no other remedy available to the taxpayer; and

(v) it is in the interest of the good management of the tax system.

(2) An assessment withdrawn under this section is regarded not to have been issued, unless a senior SARS official agrees in writing with the taxpayer as to the amount of tax properly chargeable for the relevant tax period and accordingly issues a revised original, additional or reduced assessment, as the case may be, which assessment is not subject to objection or appeal.’

 

Sec 99(2)(d) of the TAA further determines that sec 99(1) does not apply to the extent that it is ‘... necessary to give effect to ... an assessment referred to in section 98(2). This would allow SARS to issue a reduced assessment after the three year period for personal income tax.

The Memorandum of the Object of the Tax Administration Laws Amendment Bill, 2013 stated the following with regards to the amendment to sec 98:

‘In practice, erroneous assessments are often only discovered after all prescription periods and remedies have expired and it becomes apparent that it would be unreasonable and inequitable to recover the tax due under such assessments. Examples are assessments that result from fraud by a person not authorised by the taxpayer to complete or submit a return, an undisputed error by the taxpayer in a return or a processing error by SARS in making the assessment ...’ (own emphasis added).

Sec 98(1)(d)(i)(aa) of the TAA requires that there must be an ‘undisputed factual error’ in order for the assessment to be withdrawn. SARS’ interpretation of an ‘undisputed factual error’ is that one should not encounter any interpretation problems when applying the law to the facts. A simple sec 11(n) RAF deduction is assumed not to provide disputed factual errors.

Sec 98(1)(d)(iv) requires that no other remedy must be available to the taxpayer. Due to fact that three years have already lapsed since the date of assessment, your client has no further right to force SARS to consider its objection and also cannot make use of sec 93. It can thus be argued that no other remedy will be available and this requirement may therefore be met.

Conclusion

Given the fact that the three years have lapsed since the date of assessment sec 98(1)(d) of the TAA may be your client’s last remedy. In terms of sec 98(1)(d), the ‘Commissioner’ (whose powers may be delegated in terms of sec 6(2) and 10  of the TAA) must be satisfied that the requirements are met. Furthermore, the Memorandum of the Object of the Tax Administration Laws Amendment Bill, 2013 reiterates the fact that the amendments to sec 98 of the TAA will only be applied in narrow circumstances. One can therefore expect that a strict approach would be followed for the authorisation of an application for sec 98(1)(d). It is difficult to express an opinion as to whether your application in terms of sec 98(1)(d) will succeed, but it is worth a try.

2. Relief measures if a taxpayer cannot satisfy a tax debt

Q: What relief measures are available to a taxpayer if he/she/it has a substantial tax debt and is not able to pay it? Would it be better to apply for a relief measure or to object to the assessment?

A: Whether it would be better to apply for an instalment payment agreement or a compromise vs. objecting to the assessments would depend on the facts of each case. This query will set out guidance as to the channels that the company can follow, other than liquidation. If a taxpayer is in financial distress, there are two options available for possible relief. Chapter 10 Part D of the Tax Administration Act (No. 28 of 2011) (hereinafter referred to as ‘the TAA’) provides for a tax debt to be paid in one sum after a period of time or in instalments, whilst Chapter 14 provides for the write of or compromise of tax debts. Each of these mechanisms will now be described below.

Relief provided in terms of Chapter 10 Part D

Sec 167(1) of the TAA provides that an instalment payment agreement may be granted and states the following:

‘A senior SARS official may enter into an agreement with a taxpayer in the prescribed form under which the taxpayer is allowed to pay a tax debt in one sum or in instalments, within the agreed period if satisfied that—

(a) criteria or risks that may be prescribed by the Commissioner by public notice have been duly taken into consideration; and

(b) the agreement facilitates the collection of the debt.’ (own emphasis added).

 

Sec 168 of the TAA sets out the following criteria in which SARS can enter into an instalment credit agreement and states the following:

‘A senior SARS official may enter into an instalment payment agreement only if

(a) the taxpayer suffers from a deficiency of assets or liquidity which is reasonably certain to be remedied in the future;

(b) the taxpayer anticipates income or other receipts which can be used to satisfy the tax debt;

(c) prospects of immediate collection activity are poor or uneconomical but are likely to improve in the future;

(d) collection activity would be harsh in the particular case and the deferral or instalment agreement is unlikely to prejudice tax collection; or

(e) the taxpayer provides the security as may be required by the official.’ (own emphasis added).

 

From the information provided it would seem as if the company does not have sufficient assets to provide security as set out in par (e), and the company may therefore attempt to rely on par (a).  However, in order to qualify for the relief, the deficiency of assets or liquidity must only be temporary i.e. there must be reasonable prospects of the liquidity increasing in the future in order to settle the outstanding tax debt.

The SARS Short Guide to the Tax Administration Act states the following in this regard

‘Where a taxpayer is unable to pay a tax debt in a single amount within the prescribed payment period, provision is made for a formal instalment payment arrangement in accordance with prescribed criteria and procedures. A tax debt may be paid at a later date or in instalments through an agreement referred to as a deferral. This is different to a settlement or a compromise in that it does not involve the discharge of a tax debt by the payment of a lesser amount.

This is essentially a debt relief mechanism but is only applicable if the criteria to qualify for such an arrangement are met. The overriding intention of a deferral is to provide temporary relief when the taxpayer’s financial position does not make immediate payment possible. It is, therefore, an option only when the taxpayer’s financial position is anticipated to improve. A taxpayer must satisfy a senior SARS official that a deferral should be granted, and must submit all information and documentation requested.

A senior SARS official may enter into such an agreement with a taxpayer, under which the taxpayer may be allowed to pay a tax debt in a single amount after a prescribed period or in instalments. The agreement must set out all the terms and conditions, including the dates when instalments are to be paid. Compliance with the terms will then be monitored by SARS.’

 

Relief provided in Chapter 14

It should be noted that SARS will apply this Chapter in the narrowest of circumstances. In terms of sec 194 of the TAA, Chapter 14 would apply:

... in respect of a tax debt owed by a ‘debtor’ if the liability to pay the tax debt is not disputed by the ‘debtor’.’ (own emphasis added).

From the above wording, it is clear that a ‘write-off’ or ‘compromise’ may only be provided if the tax debt is not being disputed in terms of Chapter 9 of the TAA.

The relief measures provided in terms of Chapter 14 are the following:

Sec 195 and 196 of the TAA: Temporary write-off of a tax debt. This serves merely as suspension of the recovery of the tax debt and the debt may still be recovered during the subscription period of 15 years as set out in sec 171. A taxpayer cannot apply for this provision and it will be invoked at SARS’ discretion.

Sec 197 to 199 of the TAA: Permanent write-off of a tax debt. This write-off is permanent. Sec 197 of the TAA states the following:

‘(1)  A senior SARS official may authorise the permanent ‘write off’ of an amount of tax debt—

(a) to the extent satisfied that the tax debt is irrecoverable at law as referred to in section 198; or

(b) if the debt is ‘compromised’ in terms of Part D.

(2)  SARS must notify the ‘debtor’ in writing of the amount of tax debt ‘written off’.’ (own emphasis added).

 

Sec 198 of the TAA deems a tax debt to be ‘irrecoverable at law’ if either one of the following circumstances are present:

‘(a) it cannot be recovered by action and judgment of a court; or

(b) it is owed by a ‘debtor’ that is in liquidation or sequestration and it represents the balance outstanding after notice is given by the liquidator or trustee that no further dividend is to be paid or a final dividend has been paid to the creditors of the estate; or

(c) it is owed by a ‘debtor’ that is subject to a business rescue plan referred to in Part D of Chapter 6 of the ‘Companies Act’, to the extent that it is not enforceable in terms of section 154 of that Act.

(2)  A tax debt is not irrecoverable at law if SARS has not first explored action against or recovery from the assets of the persons who may be liable for the debt under Part D of Chapter 11.

 

Therefore, generally if a company is not the subject of one of the above procedures, the debt cannot be permanently written off. Furthermore, sec 198(2) has the effect that a tax debt will not be ‘irrecoverable at law’ if SARS has not attempted to hold a ‘responsible third party’ liable for the company’s tax debt. Again from the wording of sec 197(1)(a), read with sec 198, SARS must decide whether the debt is ‘irrecoverable at law’ and the taxpayer cannot apply for this.

In terms of sec 201 of the TAA, a debt will be ‘compromised’ under the following circumstances:

‘A senior SARS official may authorise the ‘compromise’ of a portion of a tax debt upon request by a ‘debtor’, which complies with the requirements of section 201, if—

(a) the purpose of the ‘compromise’ is to secure the highest net return from the recovery of the tax debt; and

(b) the ‘compromise’ is consistent with considerations of good management of the tax system and administrative efficiency.’ (own emphasis added)

 

A ‘compromise’ must therefore be applied for by the debtor and the following procedures would have to be followed in terms of sec 201:

201.   Request by debtor for compromise of tax debt.—(1)  A request by a ‘debtor’ for a tax debt to be ‘compromised’ must be signed by the ‘debtor’ and be supported by a detailed statement setting out—

(a) the assets and liabilities of the ‘debtor’ reflecting their current fair market value;

(b) the amounts received by or accrued to, and expenditure incurred by, the ‘debtor’ during the 12 months immediately preceding the request;

(c) the assets which have been disposed of in the preceding three years, or such longer period as a senior SARS official deems appropriate, together with their value, the consideration received or accrued, the identity of the person who acquired the assets and the relationship between the ‘debtor’ and the person who acquired the assets, if any;

(d) the ‘debtor’s’ future interests in any assets, whether certain or contingent or subject to the exercise of a discretionary power by another person;

(e) the assets over which the ‘debtor’, either alone or with other persons, has a direct or indirect power of appointment or disposal, whether as trustee or otherwise;

( f ) details of any connected person in relation to that ‘debtor’;

(g) the ‘debtor’s’ present sources and level of income and the anticipated sources and level of income for the next three years, with an outline of the ‘debtor’s’ financial plans for the future; and

(h) the ‘debtor’s’ reasons for seeking a ‘compromise’.

(2)  The request must be accompanied by the evidence supporting the ‘debtor’s’ claims for not being able to make payment of the full amount of the tax debt.

(3)  The ‘debtor’ must warrant that the information provided in the application is accurate and complete.

(4)  A senior SARS official may require that the application be supplemented by such further information as may be required.

 

Please refer to sec 202 of the TAA to determine SARS’ considerations before a tax debt would be compromised and sec 203 for the circumstances in which a ‘compromise’ will not be made.

Conclusion

As a ‘debtor’, a taxpayer may either apply for an instalment payment agreement in terms of Chapter 10 Part D or for a ‘compromise’ in terms of Chapter 14 Part D. SARS is however in the business of collecting taxes and it may therefore be difficult in obtaining relieve in terms of the above procedures. It should be noted that the relief provided for in terms of Chapter 14 are not available if the tax debt is disputed.

Should the taxpayer object to the various assessments, it may apply to SARS to have the payment of the tax due suspended under an assessment which is disputed in terms of sec 164(2). Please refer to sec 164 of the TAA for all the rules relevant in this regard.


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