SARS’ Power To Recover Tax
30 June 2011
Posted by: Author:Stiaan Klue,Jackie Arendse and Bob Williams
SARS’ Power To Recover Tax
The process for recovery of taxes is similar throughout the various tax acts.These provisions are contained in s 91 of the Income Tax Act, s 40 of the Value-Added Tax Act, s 25 of the Estate Duty Act and s 13A of the Transfer Duty Act.Any tax, duty or interest due and payable under the respective provisions of the acts is deemed to be a debt due to the State and is recoverable by the Commissioner in the manner prescribed. If a person fails to pay any tax or interest when it is due and payable, the Commissioner may file with the clerk or registrar of any competent court a statement, certified by him as correct, setting out the amount of the tax or interest owing. The statement need not differentiate between the tax and the interest owing.
Once filed, this statement has all the effects of a civil judgment lawfully given in that court in favour of the Commissioner for a liquid debt for the amount specified, and any proceedings may be taken thereon as if it were such a judgment. In terms of these provisions, the Commissioner need not sue a taxpayer and obtain a judgment in his favour before he may apply for a writ of execution against him.
Notwithstanding anything contained in the Magistrates’ Courts Act, the Commissioner may file such a statement with the clerk of the court of the magistrate having jurisdiction in respect of the person owing the amount of tax, duty or interest. Since the statement has all the effects of a civil judgment and is given in the absence of the taxpayer, the normal rules applicable to a default judgment apply, which means that the taxpayer may apply for the rescission or variation of the judgment within six weeks of becoming aware of the judgment.It is not competent for any person in any proceedings in connection with such a statement to question the correctness of any assessment on which the statement is based, even if the taxpayer has lodged an objection against the assessment (s 92 of the Income Tax Act).
The Value-Added Tax Act and the Estate Duty Act provide that no person may, in proceedings relating to the statement filed by the Commissioner, question the correctness of any assessment on which the statement is based, even where an objection and appeal may have been lodged against such assessment.
The Transfer Duty Act provides that, pending the conclusion of any internal or court proceedings regarding a dispute as to the amount of duty, additional duty or penalty payable, the statement filed by the Commissioner is deemed to be correct for the purposes of the recovery proceedings under s 13A(2).
The Commissioner may withdraw the above statement by giving written notice to the clerk or registrar of the court and, in such an event, the statement will immediately cease to have any effect. The Commissioner may subsequently institute fresh proceedings if the tax, duty or interest remains unpaid. The Commissioner may institute sequestration proceedings against the estate of any taxpayer and is then deemed to be the creditor in respect of any tax due or interest payable in terms of s 89(2) or s 89quat by the taxpayer.A similar provision in the Value-Added Tax Act provides that the Commissioner may institute sequestration proceedings against the estate of any person and is then deemed to be the creditor in respect of any tax, additional tax, penalty or interest payable by such person under any of the provisions of that act. Where estate duty or subsequent interest is payable in terms of the Estate Duty Act, the Commissioner may institute proceedings for the sequestration of the estate of any person and is then deemed to be the creditor in respect of those amounts so owing.
In Union Government v Milne it was held that the court would require clear proof that the respondent was insolvent before granting a final order of sequestration, since the sequestration of his estate could have disastrous consequences for him.The Commissioner enjoys preference for taxes and interest payable on the insolvency of a taxpayer or a partnership in terms of the Insolvency Act. The Commissioner may obtain a preservation order over assets to secure liability for tax.
In C: SARS v Metlika Trading Ltd the Commissioner succeeded in its request for a declaratory order that certain assets were owned by an individual taxpayer and subject to attachment and to be sold in execution in satisfaction of his tax liability. Although the assets were registered in the name of the respondent, SARS alleged that it was beneficially owned by the individual taxpayer and was subject to attachment, to be sold in execution of his tax liability.
In KBI v van Rooyen en Andere, it was held that the Commissioner is not confined to the statutory powers conferred by s 40 of the Value-Added Tax Act but also has the power to use ordinary common-law court procedures to recover tax. In this instance it had locus stand in judicio to bring applications for the confirmation of interim orders for the freezing of respondents’ bank accounts.The courts have noted that SARS has tremendous powers to collect taxes and have warned that this power "must be exercised within the bounds of the law and constitutional imperatives” and must not be abused.
Recovery value-Added TAX (VAT)
The Commissioner may recover value-added tax directly from the recipient of a supply in certain circumstances. This applies where a vendor has incorrectly calculated tax on a supply at zero per cent or has treated a supply as being exempt as a result of any fraudulent action or misrepresentation by the recipient of the supply. The Commissioner may then, notwithstanding anything to the contrary contained in the act, raise an assessment upon the recipient for the amount of tax payable, plus penalties and resulting interest and the amount is payable in terms of s 40 of the act (see above).
VAT is not recoverable by the Commissioner once five years or more have elapsed from the date on which the tax became payable in terms of the Act if:
(a) the amount is owing for reasons other than a deliberate intention not to make payment of the tax chargeable under the act;
(b) the person responsible paying the tax acted in good faith and on an assumption that the supply or importation concerned was zero-rated, exempt or not subject to tax under the act or that an input tax deduction claimed was valid; and
(c) this assumption was based on reasonable grounds and not due to negligence on the part of the person concerned.The onus of proof rests on the taxpayer. The five-year time limit falls away if an assessment of the unpaid tax has been raised at any time within the five-year period (s 41 (d).)
A special recovery provision exists in s 13 of the Transfer Duty Act. In terms of this provision, the Commissioner may recover any shortfall of duty paid notwithstanding that the transfer of property has already been registered in the deeds office. This shortfall may not be recovered after five years has elapsed since the date on which the duty became payable in terms of the act if it is shown that the failure to pay the full amount was not due to an intent to avoid making the payment and the person liable for the duty or his representative acted in good faith and on an assumption, on reasonable grounds and not due to negligence, that the transaction was not subject to transfer duty.
Appointment of an agent to recover taxes.
The Commissioner is empowered to appoint an agent for the purposes of collecting outstanding taxes. In this regard, s 99 of the Income Tax Act provides that the Commissioner may, if he thinks necessary, declare any person to be the agent of any other person. A person so declared to be an agent is then an agent for the purposes of the relevant act and may be required to pay any tax, interest or penalty from any monies that he holds or owes to the person whose agent he has been declared to be.
A similar provision exists in s 47 of the Value-Added Tax Act, s 12A of the Estate Duty Act and s 13B of the Transfer Duty Act with a proviso that the person declared as an agent must, if he is unable to comply with the requirements of the notice, advise the Commissioner in writing of the reasons for not so complying within the period specified in the notice.
The tax, interest or penalty may be withheld from income such as pensions, grants, salary, wages and other remuneration or from any funds held by the agent on behalf of the taxpayer, such as funds held in trust by an attorney.
The person appointed as an agent for a taxpayer is responsible only for the payment of tax, interest and penalties to the extent that he has in his possession amounts due to the taxpayer and becomes personally responsible only if, after having being notified of the appointment as agent, he parts with any funds belonging to the taxpayer which could have been used for the payment of the amount assessed.
In Hindry v Nedcor Bank Ltd and Another, SARS sought to recover a refund that had been paid to the taxpayer in error and appointed the taxpayer’s bankers as his agent in terms of s 99 of the Income Tax Act, requiring them to pay over the amount owing immediately or as soon as the funds were available in the taxpayer’s bank account. The taxpayer sought an urgent interdict preventing the bank from making any payments to SARS pursuant to the notice and an order setting aside the notice on the basis that s 99 was intended to recover any tax due and did apply to the recovery of a refund erroneously made. In the alternative, the taxpayer argued that s 99 was inconsistent with the Constitution and therefore invalid. The court held that s 99 did apply to the refund that had been paid to the taxpayer in error, as para 28(7) of the Fourth Schedule to the Income Tax Act provided that any refund not properly made was recoverable by the Commissioner as if it were a tax. Furthermore, the court held that the provisions of s 99 limited a person’s rights in order to facilitate and enhance the Commissioner’s ability to recover outstanding taxes promptly and to avoid taxpayers’ assets being put beyond his reach. This was a legitimate limitation which was reasonable and necessary in an open and democratic society.
The question of whether s 99 can apply when the taxpayer’s bank account is in overdraft was raised in the Zimbabwe case of Hunting Industries v Barclays Bank of Zimbabwe Ltd. The Zimbabwe Revenue Authority appointed the bank as the taxpayer’s agent in terms of s 58 of the Zimbabwe Income Tax Act (the equivalent of s 99 of the Income Tax Act) in order to collect an outstanding tax liability. The payment of the tax liability resulted in an increased debit balance on the taxpayer’s account with the bank. The court held that there was nothing preventing the bank from being appointed as an agent for the applicant in terms of s 58. The fact that the account was overdrawn did not necessarily mean that the taxpayer was devoid of income, especially in the case of an operating account into which monies were deposited from time to time.
In Industrial Manpower Projects (Pty) Ltd v Receiver of Revenue, Vereeniging and Others, where the Commissioner had issued notice of the appointment of an agent in terms of s 47 of the Value-Added Tax Act, the issue was whether the vendor was entitled to a hearing before the Commissioner could follow this course of action. The court held that the Commissioner was correct in following the s 47 procedure without prior consultation or a hearing. The court endorsed the process of declaring any person to be the agent of another for purpose of securing the payment of outstanding tax as being not only necessary, but indispensable to the proper functioning of the Vat system.
In Smartphone SP (Pty) Ltd v ABSA Bank Ltd and Another, where the bank had been appointed as an agent in terms of s 47 of the Value-Added Tax Act, the court held that the bank had been appointed as an agent of the applicant and not of SARS and it was obliged to act according to the notice without querying its validity or questioning its lawfulness. Failure to comply with the notice would have incurred the penalties provided for by s 49. In Shaikh v Standard Bank of SA Limited and Another, which upheld the principle established in an earlier case that provided an enabling statute grants the power sought to be exercised (in this case, the power of SARS to appoint an agent), the fact that the notice mentions the wrong provision does not invalidate the legislative or administrative act.
The Income Tax Practice Manual requires SARS’ officials to exercise discretion when applying the provisions of s 99 of the Income Tax Act. It states the following:"It is not intended, for example, that employers shall be indiscriminately appointed agents for employees, merely for the sake of facilitating the collection of tax. Only in those cases where efforts to effect recovery from the taxpayer prove fruitless or an employee is temporarily lost sight of may the employer be appointed agent and then only if it is established that such employer is holding or will hold funds of the employee, including salary or wages due, out of which the tax can be paid.”The Income Tax Practice Manual requires the official to confirm that the taxpayer has actually received notice that taxes are outstanding before an employer is appointed agent for an employee. This notification may take the form either of a registered final demand or an agreement to arrangements for deferred payment.
The Income Tax Act does not contain any specific provision regarding prescription of a liability of a taxpayer. Section 11(a)(iii) of the Prescription Act, however, provides that the period of prescription in respect of any taxation or levy imposed by or under any law is 30 years.
Source: By Stiaan Klue, Jackie Arendse and Bob Williams (TaxTALK)