An amendment to a somewhat odd provision
22 March 2016
Posted by: Author: Ruaan van Eeden
Author: Ruaan van Eeden (Cliffe Dekker Hofmeyr)
law regarding how an employer can be absolved from liability for failing to
collect tax from its employee has been clarified. But is the matter still too
The Taxation Laws Amendment Act,
No 23 of 2015 (TLAA) contains an amendment to a somewhat odd provision, that
has seemingly stood the test of time since the introduction of the Fourth
Schedule into the Income Tax Act, No 58 of 1962.
Paragraph 5(2) of the Fourth
Schedule, dealing with absolving an employer from liability in respect of
employees’ tax, has now been amended (although the amendment is not yet
enacted) to provide a more formal approach, when compared to the previous
version, which is still riddled with discretionary powers.
The amendment essentially seeks to
formalise the process of an employer requesting to be absolved from an
employees’ tax liability, by requiring the employer to complete a form for
submission to SARS. It remains uncertain whether such a form must be submitted
to SARS’ Legal and Policy division or the local branch office – the former is
preferred as the local branch office may not have been given the requisite
discretionary powers to deal with the application.
The effective date when the amendment
comes into operation is still to be determined by the Minister by way of
Gazette. For the reasons set out below, the more formal approach is welcomed
but it may be more prudent for SARS to go a step further and issue an
interpretation note or a binding general ruling on the practical application of
paragraph 5(2) of the Fourth Schedule.
As a basic principle, paragraph
2(1) of the Fourth Schedule places an obligation on an employer who pays, or
becomes liable to pay amounts by way of remuneration, to deduct and withhold
employees’ tax, unless the Commissioner has granted authority to the contrary. Paragraph
4 of the Fourth Schedule goes further to state that the amount of employees’
tax deducted is a debt due to the State and that the obligation to deduct or
withhold employees’ tax (unless directed otherwise) rests with the employer, as
well as the ultimate liability and due payment thereof.
It was necessary for the
legislature to provide a remedy, by way of paragraph 5(2) of the Fourth
Schedule, where an employer unintentionally (which could be a very subjective
test) failed to withhold or pay to the Commissioner the correct amount of
employees’ tax. Where an employer fails to deduct the required employees’ tax
from remuneration under paragraph 2(1) of the Fourth Schedule, then in terms of
paragraph 5(1) of the Fourth Schedule a personal liability is incurred for the
unpaid amount. Paragraph 5(1) of the Fourth Schedule is subject to paragraph
5(2) of the Fourth Schedule, meaning that the Commissioner may absolve an
employer, despite the fact that a personal liability has been incurred. The
reference to "may absolve” establishes a discretionary power, the exercise of
which could be subject to review.
Where the Commissioner does not
exercise his discretion to absolve in favour of an employer, then paragraph
5(3) of the Fourth Schedule provides for a right of recovery by the employer of
the unpaid employees’ tax from the employee concerned. An employer may not
issue an IRP5 tax certificate until such time as the employee’s tax is
recovered from the employee (paragraph 5(4) of the Fourth Schedule).
The mere act of absolving is not
straight forward and an employer does not automatically qualify for the remedy.
Regarding the previous wording of paragraph 5(2) of the Fourth Schedule, two
basic, but not necessarily straightforward, requirements needed to be met before
the Commissioner may decide to absolve an employer from employees’ tax
Commissioner must have been satisfied that the employer’s failure to deduct or
withhold employees’ tax was not due to an intent to postpone payment of tax or
to evade its obligations; and
Commissioner must be satisfied that there is a reasonable prospect of
ultimately recovering the tax from the employee.
If one or both of the
requirements, as mentioned above, were not satisfied then the Commissioner
could not absolve the employer from liability under paragraph 5(1) of the
Fourth Schedule. The amendment under the TLAA deleted the reference to "…
the Commissioner must be satisfied that …” and essentially replaced it
with the formal approach, by way of application. The amendment doesn’t appear
to have taken away or reduced any of the discretionary powers in the provision,
meaning that if the employer does in fact satisfy the minimum criteria, there
still remains a discretionary power in the Commissioner’s hands not to absolve
the employer. From an employer’s perspective it would be preferable to remove
the additional discretionary power and amend the provision to oblige the
Commissioner to absolve, if the minimum criteria is met. There are however
certain practical impediments to the aforementioned, which is probably why
paragraph 5(2) of the Fourth Schedule will remain riddled with
Intent to evade or postpone
employees’ tax liability
Under the first minimum
requirement, the employer would need to prove, on a balance of probabilities,
that it had no intention to evade or postpone its liabilities under the Fourth
Schedule. For purposes of paragraph 5(2) of the Fourth Schedule an employer
would need to mitigate its position by dealing with direct intent, indirect
intent, dolus eventualis and negligence upon application.
In most cases, an employer would
find an application under paragraph 5(2) of the Fourth Schedule will hinge on
the potential negligence factor. The general test to determine negligence is to
look at what the so called "reasonable person” would have done, if presented
with the same set of circumstances. Payroll procedures, responsible persons and
other relevant factual circumstances will come into play in determining whether
negligence is present.
Reasonable prospect of ultimate
recovery from the employee
The second minimum requirement has
both a subjective test and practical impediment. The Commissioner must be
satisfied that there is a reasonable prospect of ultimately recovering the tax
from the employee – this would be done by way of assessing the employee for
normal tax. Where the matter involves only one or a handful of individuals, the
process of ultimately recovering the tax from the employee will likely not have
a material impact on the administrative burden of collecting taxes by SARS or
be a drain on the financial resources of SARS.
But identifying the employee is
only one factor to consider. If SARS is of the view that ultimate recovery of
the tax is not possible, the employer would not be absolved. Where would SARS
however draw the line on employee numbers and what would it regard as a
"reasonable prospect” to recover the tax? The aforementioned are both
subjective considerations, coupled with the practical burden of having to
assess individuals, rather than one employer. Clarity could be provided through
a binding general ruling or an interpretation note.
Although paragraph 5(2) of the Fourth
Schedule will now be formalised, it remains subject to a discretionary power
and employers should consider carefully whether an application is in its best interest.
This article first appeared on the March/April 2016 edition on Tax Talk.