The Tax Administration Laws Amendment Bill, No. 40 of 2013 was introduced in Parliament on 24 October 2013. The President of the Republic of South Africa must still assent to the Bill and it must then be published in the Government Gazette before it becomes an Act. The Tax Administration Laws Amendment Bill (“TALAB”) contains various amendments of an administrative nature to various tax Acts administered by the Commissioner: South African Revenue Service. In this article it is not possible to deal with all of the amendments contained in the Bill and only the more important changes to the Tax Administration Act, No. 28 of 2011 will be dealt with.
Section 1 of the Tax Administration Act (“TAA”) will be amended to define “outstanding tax debt” as meaning a tax debt not paid by the day referred to in section 162 of the TAA. The intention of the new definition seeks to clarify that the recovery powers contained in the TAA may only be used if an amount of tax is not paid within the period prescribed for payment. The definition of “relevant material” which is used extensively throughout the TAA will in future mean any information, document or thing that is foreseeably relevant for the administration of a tax Act as referred to in section 3 of the TAA. The purpose of this amendment is to ensure that there is a nexus between the material or information requested by SARS and the administration of the tax Act for the purposes for which the material is required.
Legal Proceedings and the Commissioner
Section 11 of the TAA is being amended to provide that no legal proceedings may be instituted against the Commissioner unless the applicant has supplied the Commissioner written notice of at least one week of the applicant’s intention to institute the legal proceedings against the Commissioner. Furthermore, the notice or any process whereby the legal proceedings instituted against the Commissioner must be served at the address specified by the Commissioner by public notice. Previously, taxpayers would institute proceedings against the Commissioner and serve documents at the office of the State Attorney, local SARS branch offices or the office of the Commissioner. It is intended that in future all papers relating to litigation must be served at a central point so that they can be properly managed by the Commissioner’s legal representatives.
Section 27 of the TAA is being amended to provide that a senior SARS official may require a person to submit further or a more detailed return regarding any matter for which a return under section 25 or 26 is required or prescribed by a tax Act. In addition, section 25 of the TAA will require a person to submit returns other than those specifically referred to in a tax Act and such returns must contain the information prescribed by a tax Act or by the Commissioner. As a result, the Commissioner will be entitled to direct that certain persons must submit a particular type of return to SARS in the manner prescribed.
The Bill amends section 46 of the TAA to the effect that a senior SARS official may require that relevant material, if required for purposes of a criminal investigation is supplied under oath or solemn declaration and if necessary, in accordance with the requirements of the Criminal Procedure Act, No. 51 of 1977.
SARS Confidential Information
Section 68 of the TAA will be amended such that information relating to the verification or audit selection procedure or method used by SARS which could be expected to jeopardise the effectiveness of SARS’ audit procedures is included in the extensive definition of SARS confidential information. The purpose of the amendment is to ensure that the effectiveness of SARS’ audits and investigations are not prejudiced by a taxpayer becoming aware of the basis on which SARS’ audits and similar enforcement related procedures are undertaken.
Withdrawal of Assessments
Section 98 of the TAA will be amended to allow for SARS to reduce an assessment in certain very specific and narrow circumstances even though more than three years may have passed since the date on which the assessment was issued. For a taxpayer to benefit from these new provisions the Commissioner must be satisfied that the assessment in issue was based on an undisputed factual error made by the taxpayer in the return or a processing error made by SARS or a tax return was fraudulently submitted by a person not authorised by the taxpayer. In addition, the assessment imposes an unintended tax debt in respect of an amount that the taxpayer should not have been taxed on and the recovery of the tax debt arising under that assessment would produce an anomalous or inequitable result.
The new rules will only be available where there is no other remedy to the taxpayer and it is in the interest of the good management of the tax system to allow for the assessment to be withdrawn. Where an assessment is withdrawn as envisaged under the amended section 98 it will not be subject to an objection or appeal. The purpose of the amendment is to allow SARS to correct assessments incorrectly issued to a taxpayer which are not rectified within the period of three years or where someone other than the taxpayer has filed a tax return, to the detriment of the taxpayer without the taxpayer’s knowledge and consent.
Rules for Dispute Resolution
Section 103 of the TAA is amended to authorise the Commissioner to prescribe the form of the document required to be completed and delivered by a taxpayer under the rules governing dispute resolution. The amendment effectively confers on the Commissioner a limited authority to prescribe the form of documents, such as the notices of objections and appeals required under the dispute resolution rules. It is important to point out that the dispute resolution rules promulgated under 107A of the Income Tax Act 58 of 1962, as amended (“the Act”) will be replaced by a new set of rules governing dispute resolution. SARS has previously published the draft rules for public comment and is consulting with stakeholders with a view to finalising those rules which will in all likelihood be promulgated in the early part of 2014.
Jurisdiction of Tax Court
By way of an amendment to section 117 of the TAA the Tax Court will in future be entitled to hear and decide on applications made regarding a procedural matter relating to a dispute under the provisions of chapter 9 of the TAA which deals with dispute resolution. Thus, where SARS fails to deal with an objection or appeal within the time frame specified in the rules governing dispute resolution, a taxpayer will be entitled to approach the Tax Court for relief regarding the breach of procedure and will not be required to launch proceedings in the High Court.
Decision by Tax Court
Section 129 of the TAA is being amended to clarify that the Tax Court in considering an appeal against the imposition of the understatement penalty is not limited to the behavioural category selected be SARS. The Tax Court may decide, based on the evidence heard by the court that another behavioural category in the table contained in section 223 of the TAA is more appropriate and may reduce or increase the understatement penalty. Amendments will also be made to section 129 to clarify the treatment of test cases designated under section 106(6) of the TAA. The explanatory memorandum on the TALAB indicates that the judgment delivered by the Tax Court in a test case will not be binding on other Tax Courts but will only be binding on taxpayers whose objections or appeals were stayed or selected for the test case. The remedies of those taxpayers who are selected by SARS but who do not wish to participate in the test case will be regulated in the new dispute resolution rules which will be issued shortly by SARS under section 103 of the TAA. Those taxpayers who agree to a stay of their disputes, or have been ordered by a Tax Court order to stay their disputes will be bound by a final judgment. In addition, taxpayers who exercise the right to participate as co-appellants in the test case will be entitled to further appeal the test case.
Furthermore, where a taxpayer is of the opinion that the test case judgment does not apply to the facts and issues of their particular circumstances, the dispute resolution rules will allow the taxpayer to approach the Tax Court for an order to pursue the resolution of their dispute with SARS independently. Furthermore, section 130 of the TAA is being amended to enable the Tax Court to award costs as dealt with in the dispute resolution rules in a test case, interlocutory application or application in a procedural matter instituted under the rules. The dispute resolution rules will also cater for the question of costs
relating to cases stayed pending the outcome of the test case.
Section 163 of the TAA which deals with the circumstances under which SARS may apply for a preservation order is being amended. The amendment seeks to clarify the purpose of a preservation order which is not to ensure the recovery of tax which is dealt with in chapter 11 of the TAA but rather deals with a situation where a taxpayer is subject to an audit and transfers assets to avoid the payment of tax properly chargeable and the taxpayer takes such steps once there is a quantified tax liability. Where there is an audit on a taxpayer’s affairs that is not completed and the tax debt is not yet quantified the section will now require that a senior SARS official must, on reasonable grounds, be satisfied that tax may be due and payable. Furthermore, the amendments made to section 163 provide for the appointment of a curator bonis by SARS to safeguard the assets seized before the granting of a preservation order under section 163(7) and the ability of the court to confirm the appointment of the curator bonis where one was appointed by SARS or where a curator was not appointed to make such appointment.
Payment of Tax Pending Objection and Appeal
The TALAB amends section164 to make it clear that the section cannot apply to that part of the assessment which is not disputed. Therefore, where a taxpayer accepts some of the adjustments made to the assessment are correct it will not be possible to postpone the payment thereof as that amount is not in dispute. In addition, the section is clarified to deal with the situation where the taxpayer has requested reasons for the assessment issued by SARS and needs more time to formulate the grounds of objection.
Filing of Statement at Court
Under section 172 of the TAA, SARS may file a statement at court which will have the effect of a civil judgment against the taxpayer in respect of outstanding tax. The section is being amended to make it clear that the statement referred to in section 172(2) may only be filed after the period referred to in section 164(6) has expired. Thus, section 172 may only be invoked in respect of an outstanding tax debt. Section 164(6) of the TAA has the result that during the period commencing on the day that SARS receives a request for suspension of payment of tax in dispute from a taxpayer and ending ten business days after the issue of SARS’s decision or revocation no recovery proceedings may be taken against the taxpayer unless SARS has a reasonable belief that there is a risk that the taxpayer will dissipate their assets.
Where SARS does not supply the necessary notice under section 164(6) of the TAA, the ten day period does not commence and SARS is not entitled to commence recovery proceedings. The amendment to section to 172 makes it clearer that the statement referred to in subsection (2) may only be filed after the period referred to in section 164(6) has expired. The difficulty that arises in practice is what a taxpayer is entitled to do where SARS does not comply with the procedure set out in section 172 of the TAA. Section 176 is being amended to provide that where SARS is satisfied that a taxpayer has paid the full amount of the tax due reflected in its statement filed under 172 and has no other outstanding tax debt, SARS is compelled to withdraw the statement if requested by the taxpayer in the prescribed form and manner.
Section 190 of the TAA is being amended to make it clear that where an amount is erroneously paid by SARS as a refund it will be regarded as an outstanding tax debt and recoverable by SARS using the provisions contained in the TAA to do so.
The amendments made to section 222 give effect to the announcement contained in the 2013 budget that no understatement penalty will arise as a result of a bona fide inadvertent error made by a taxpayer. It has been proposed that this provision will apply with effect from 1 October 2012 and will also apply to understatements made in returns submitted before 1 October 2012. In the draft memorandum on the objects of the TALAB it was indicated that the following circumstances would be taken into account to
determine if a bona fide inadvertent error has been made:
In the context of factual errors –
If the standard of care taken by the taxpayer in completing the return is commensurate with the taxpayer’s knowledge, education, experience and skill and the care of a reasonable person in the same circumstances would have exercised;
The size or quantum, nature and frequency of the error;
Where a similar error was made in a return submitted during the preceding year; or
In the case of an arithmetical error, whether the taxpayer had procedures in place to detect
In the case of a legal interpretive error –
The relevant provisions of a tax Act is generally regarded as complex;
The taxpayer took steps to understand it including following available explanatory material or making reasonable enquiries; or
The taxpayer relied on information, that although incorrect or misleading, came from reputable sources and a reasonable person in the same circumstances would be likely to find the relevant information complex.
Unfortunately, in the final version of the explanatory memorandum the abovementioned criteria have been removed. SARS indicated that it will develop guidance regarding the meaning of the phrase “bona fide inadvertent error” and will publish that for the use of taxpayers and SARS officials.
Furthermore, section 222 is being amended to provide that where there is more than one understatement made in a return it is necessary that the applicable behavioural category is determined in respect of each understatement. Thus, for example, where one understatement may result from reasonable care not taken while another may result from gross negligence, it is necessary to apply the percentage applicable to each category and not to apply the highest penalty percentage to the total understatement.
The TALAB also amends the quantum of the understatement penalty which may be imposed according to the current table contained in section 223(1) of the TAA. The commentary on the TALAB states that the percentages contained in the amended table table will now be more aligned with comparative tax jurisdictions where similar regimes apply. Taking account of the comments contained in the explanatory memorandum it would have been more equitable if the amendments to the percentages of the understatement penalty took effect from the date on which the TAA took effect namely, 1 October 2012. It is most unfortunate that the reductions in the understatement penalty table will only take effect once the TALAB is promulgated.
It is important to note that where a taxpayer chooses to rely on an opinion in the manner prescribed in section 223(3) of the TAA that opinion must be procured from an independent tax practitioner and SARS will not take account of opinions prepared by in-house tax practitioners in line with the amendments contained in the TALAB in deciding whether the penalty should be remitted. Section 224 of the TAA is being amended to make it quite clear that where a taxpayer is aggrieved with the understatement penalty imposed they are entitled to object to that decision.
Registration of Tax Practitioners and Reporting of Unprofessional Conduct
The TALAB contains amendments dealing with the registration of tax practitioners under the TAA. The amendment made to section 240 seeks to address concerns raised by the tax practitioner industry that “intermediate managers” between trainees or articled clerks and the partner or director must also register as tax practitioners. The explanatory memorandum points out that the exclusion from registration for subordinates is required to be balanced against the need to ensure that a registered tax practitioner is accountable for the actions of the subordinate. The amendment will have the effect that a partner or director who is responsible for the intermediate manager will be regarded as accountable for the actions of the persons performing the functions for purposes of complaints by taxpayers or SARS to the relevant recognised controlling body. The TAA is also being amended in section 242 to provide that SARS may disclose the appropriate “taxpayer information” to a controlling body regarding a taxpayer and the tax practitioner against whom a complaint is lodged under the TAA.
Significant amendments are being made to the transitional provisions contained in section 270 of the TAA to deal largely with the imposition of the understatement penalty as opposed to the additional tax which may have been leviable under another tax Act. It is indicated in the explanatory memorandum on the TALAB that during the drafting of the Tax Administration Bill that SARS consulted with international experts from the International Monetary Fund and that the constitutionality of the Bill was reviewed by both expert constitutional counsel and the state law advisors who certified the Bill as constitutional. The memorandum states that during the Parliamentary process, whereby the TAA was enacted, the general transitional approach in drafting the Tax Administration Bill was that the new act will apply to an act, admission or proceeding taken, occurring on or instituted before the commencement date. It was intended that this applied also to the imposition of the understatement penalty such that that penalty would apply from the outset.
It is apparent from the commentary on the TALAB that to have continued these actions or proceedings under the previous legislation would have required different processes and systems within SARS into the indefinite future which would have increased the cost of the tax administration. The view is expressed that the general transitional approach contained in section 270(6) of the TAA was enacted to permit the imposition of additional tax, as opposed to the understatement penalty, if the verification, audit and investigation had been completed before the TAA commenced but the amended assessment had not yet been issued. The section previously required that the additional tax must have been “capable of” being imposed, meaning that all other requirements for the intended imposition of the additional tax must have been met before the TAA commenced but was not yet imposed. The commentary on the TALAB indicates that uncertainty has arisen in practice whether section 270(6) of the TAA means that additional tax must be imposed in respect of all returns containing understatements submitted before the commencement date of the TAA.
As a result of the abovementioned uncertainty amendments are being made to section 270(6) to clarify that if an understatement penalty cannot be imposed, additional tax may be imposed. In principle the previous regime whereby additional tax was imposed contained a discretion whereby the Commissioner could levy a penalty ranging from 0 to 200%. In those cases, where it could be shown that there was no intention to evade tax and there were extenuating circumstances, SARS generally levied a nominal penalty ranging from 5 to 10%. Where, however, the taxpayer had intended to evade tax the penalty levied would amount to anything from 100 to 200%.
As a result of the uncertainties relating to the imposition of the understatement penalty various new subsections are introduced to section 270(6) of the TAA. The new section 270(6A) of the TAA seeks to clarify that the purpose of 270(6) was that additional tax may be imposed if capable of being imposed which would only be the case where the verification or audit necessary to determine the additional tax, penalty interest had been completed before the commencement date of the TAA, namely, 1 October 2012. The new section 270(6B) of the TAA seeks to address those cases where a taxpayer was not in a position to comply with the tax opinion requirement contained in section 223 of the TAA by virtue of the fact that the tax return, for example, 2010 was filed prior to the enactment of the TAA. Under section 223 no penalty may be imposed where the taxpayer obtains an opinion in the prescribed manner before the filing of the tax return in question. This requirement is done away with in respect of tax returns filed before 1 October 2012. Thus, where the taxpayer obtains an opinion after the return was filed that will assist in mitigating the penalty.
Section 270(6C) of the TAA will provide that where taxpayers made a voluntary disclosure before 1 October 2012 they may qualify for relief from an understatement penalty if the audit of their tax affairs was concluded after 1 October 2012. In addition, a new section 270(6D)(a) is being introduced to allow a senior SARS official who considers an objection by the taxpayer against an understatement penalty imposed as a result of an understatement made in a return submitted before 1 October 2012 to reduce that penalty if he is satisfied that there were extenuating circumstances. To some extent this reintroduces the discretion which was available to SARS in section 76 of the Act.
Finally, section 270(6D)(b) of the TAA deals with additional tax imposed under the Value-Added Tax Act which could only be imposed if there was an intent to evade tax. Under the new understatement penalty regime a penalty may be levied if reasonable care was not taken, no reasonable tax position existed or gross negligence existed. Thus, the TAA removes the intent requirement as the basis for levying additional tax under the VAT Act. The explanatory memorandum recognises that it may be difficult for vendors to argue that they had known about the application of the understatement penalty regime to VAT returns submitted before 1 October 2012. The amendment provides that a senior SARS official who considers an objection lodged by a taxpayer against an understatement penalty as a result of an understatement made in a VAT return filed before 1 October 2012 must be reduce the penalty in full where there was no intent to evade tax.
The TALAB contains various amendments to the administrative provisions of a variety of tax Acts and significant amendments to the TAA. The reduction in the level of penalties imposed under the penalty table contained in section 223 is to be supported but it is questioned why that reduction does not take place with effect from 1 October 2012. Furthermore, the amendments to the transitional rules may alleviate a number of the concerns raised regarding the imposition of understatement penalties in respect of tax returns filed before 1 October 2012.
This article first appeared on the Jan/Feb edition of TaxTalk.