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 to provide a more formal approach, when compared to its 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 that employer to complete a form for submission to the South African Revenue Service (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 of the amendment is still to be determined by the Minister by way of Gazette. For 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 remunerati on, 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 liability:
- the 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
- the 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 discretion.
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 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.