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New Tax Administration Bill discussed

Sonja FrankThe Tax Administration Bill (TAB) is expected to come into effect during the last quarter of 2012. Some of the most noteworthy advantages and disadvantages of several new provisions of this Bill are discussed here.

Tax Ombud

The Tax Ombud will presumably be introduced to replace the current SARS Service Monitoring Office (SSMO). The mandate of the Tax Ombud is to review any complaint by a taxpayer regarding a service, procedural or administrative matter arising from the application of the provisions of a tax act by SARS. An improvement on the current SSMO is that the Tax Ombud will report directly to the Minister of Finance.

The above should prove to be advantageous to the taxpayer and the fair administration of tax matters, but a disadvantage also exists. The office of the Tax Ombud will be staffed by SARS officials; a fact which calls its independence into question.

The decisions of the Tax Ombud will not be binding, so it may lose most of its usefulness. However, it has been said that the function of the Tax Ombud is to report and bring to light systemic and emerging issues; not to provide another quasi-judicial tier.

Administration of tax acts

Clause 3 is important in light of the fact that SARS may only exercise powers for the purpose of the administration of a tax act. SARS must comply with the jurisdictional facts in this section before any action can be taken.

A disadvantage for the taxpayer is that this new clause expands the powers of SARS considerably and increases their information-gathering powers, e.g. SARS may now call for information on transactions prior to their conclusion.

Decisions by SARS may be withdrawn within three years

Clause 9(2) provides that SARS may withdraw a decision within three years notwithstanding SARS having all material facts at the time of making that decision.

This is a serious disadvantage as it means that SARS decisions will only become final after a three-year period. It creates legal uncertainty because a taxpayer cannot rely on the finality of a decision. Whether the clause is constitutionally sound will have to be decided by the courts.

Relevant material

This is a very wide definition that includes any information, document or thing that is foreseeably relevant for tax risk and showing non-compliance with a tax obligation or showing that a tax offence has been committed.

It is a disadvantage for the taxpayer because it would be difficult or even impossible for a taxpayer to know whether the information sought is “foreseeably relevant” and must be provided. To temper the effect hereof, clause 46(6) provides that any SARS request for relevant material must be referred to with reasonable specificity.

This clause makes so-called “fishing expeditions” by SARS legal.

It was submitted that the extended powers inherent to this clause are meant to counter the current situation where too many requests for information by SARS result in debates as to SARS’ entitlement to that information. The problem with this argument is that words like “may affect”, “foreseeably relevant” and “reasonable specificity” are open for interpretation and will most likely lead to continued debates. This is contrary to the international principle that a revenue agency’s resources should not be wasted on disputes regarding their entitlement to information, but should rather be focused on ensuring that all taxpayers pay the correct amount of tax.

Keeping the taxpayer informed

The practice of SARS to issue a Letter of Findings after an audit but before a revised assessment, will be made compulsory in terms of clause 42(2)(b). The taxpayer will then be afforded 21 business days to respond. (It is a fixed period regulated by statute.)

This is advantageous to the taxpayer. It gives effect to the taxpayers’ constitutional right to just administrative action, and to the right of anyone who has been adversely affected by administrative action, to written reasons.

It can be a disadvantage for a taxpayer as it will force SARS to bring investigations to an end. SARS will constantly be reminded to conclude their audits within a reasonable time period and taxpayers’ reliance on prescription will be far less common.

Jeopardy assessments

This type of assessment goes a step further than the current estimated assessments. Clause 94 provides that SARS may make a jeopardy assessment in advance of the date on which the return would normally be due. This can be done if the Commissioner (not just any SARS official) is satisfied that the collection of tax would otherwise be in jeopardy.

To counter the obvious disadvantage for the taxpayer, a safeguard has been built in. Any affected person may apply to the High Court for a review of the assessment on the basis that it is excessive or that the circumstances giving rise to a jeopardy assessment do not exist. The burden of proof that a jeopardy assessment is reasonable rests with SARS.

Period of limitations for issuing assessments

The TAB distinguishes between an “assessment” and a “self-assessment.” The latter is the determination of the amount of tax payable under a tax act by a taxpayer and includes the submitting of a return or, if no return is required, the making of a tax payment.

The prescription period of three years is dealt with in clause 99. A disadvantage to the taxpayer is that:

  • The period of three years has been extended to five years for self-assessment taxes.
  • In the case of a self-assessment that was a misrepresentation (intentionally or negligently) or was the intentional or negligent non-disclosure of material facts, the matter can be re-opened after five years have passed. This means that mere negligence will be sufficient to cause a taxpayer to lose the prescription period of five years.

Liability of financial manager and shareholders for tax debts

This allows SARS to “pierce the corporate veil” in certain circumstances and is thus a serious disadvantage for taxpayers. Clause 180 provides for the personal liability of a person for a tax debt of a taxpayer to the extent that the person’s negligence or fraud resulted in the failure to pay a tax debt if:

  • that person controls or is regularly involved in the management of the overall financial affairs of the taxpayer, and
  • a senior SARS official is satisfied that the person acted negligently or fraudulently.

Similar provisions already exist in the Companies and VAT Acts. However, the TAB provision goes further and also includes a financial manager who is not a member, shareholder or director.

Clause 181 provides that a shareholder of an unlisted company can be held personally liable for tax debts if he/she received assets from the company within one year of its winding-up, while an outstanding tax debt existed.

Penalties under Chapter 15 and 16

The wording for “additional tax” will be replaced with “penalty.” Chapter 15 of the TAB (which deals with administrative non-compliance penalties) more or less mirrors the regulations issued in terms of section 75B of the Income Tax Act. These regulations, which came into effect on 1 January 2009, provide that SARS may raise a 10% penalty for PAYE and Provisional Tax.

The TAB now gives SARS the power to raise this 10% penalty with regard to any amount of unpaid tax. The powers of SARS have thus been extended to the disadvantage of the taxpayer.

Chapter 16 of the TAB curbs the current discretion to impose understatement penalties of up to 200%. This is done by a new structure where the penalty will be determined by the taxpayer’s behaviour based on objective criteria listed in a table. This holds an advantage for the taxpayer as it creates certainty and consistency. Taxpayers also receive very favourable penalties in case of voluntary disclosures.

A disadvantage that might go unnoticed here is that the understatement penalty will now be calculated on a “shortfall.” This concept includes the difference between the amount of an assessed loss properly carried forward and the amount that would have been carried forward if the “understatement” had been accepted.

Example

Voluntary Disclosure Programme (VDP)

The TAB creates a permanent framework for voluntary disclosures in order to encourage voluntary compliance and ensure good management of the tax system. This framework basically mirrors the framework of the period 28 February 2009 to 31 October 2011. However, the permanent VDP will not cover exchange control relief.

The TAB voluntary disclosure regime provides the following relief:

  • In cases where the taxpayer has remedied all non-compliance under a tax act, 100% relief in respect of an administrative non-compliance penalty (excluding a penalty imposed for the late submission of a return);
  • Relief in respect of any understatement penalty referred to in Chapter 16;
  • No criminal prosecution by SARS.

The programme provides a considerable advantage for a taxpayer who has made a disclosure provided it is a full and complete disclosure and it involves a default which has not previously been disclosed. This is to prevent repeat non-compliance.

The above is only a brief look at some of the provisions of the Tax Administration Bill. There are many more that follow the same trend: the taxpayer is given an advantage as if in exchange for SARS powers being extended, sometimes to unreasonable lengths. Many of the provisions are open to criticism and may not stand up to a constitutional challenge. But until a court has decided against a provision, it will be law and will apply to all taxpayers.

Exceed will host a breakfast seminar on the Tax Administration Bill on Thursday 16 August 2012. For more information, contact Estian Haupt or Sonja Frank of Exceed Tax and Advisory Services, tel. 021 882 8140 or estian@exceed.co.za