Author: Erich Bell (SAIT Technical)
For most tax professionals, standing at a braai and explaining what one’s profession entails may be an uncomfortable experience, especially if one’s guests do not have an accounting or law background. Some of the questions that would normally arise include, ‘oh, so you work for SARS?’ or ‘that’s nice, I’m, however, not keen on talking about my financial affairs’. A couple of moments later, that awkward silence starts to set in. With this example, I’m almost certain that SARS officials receive an even warmer welcome among their fellow guests.
The reality is that tax professionals do not work for SARS, even though they ensure that the fiscus receives what is due to it. The job of a tax professional is a balancing act by attempting to ensure that our clients do not pay too much, nor too little tax. The other reality is that taxpayers would not fear SARS, unless they have tax skeletons in their closet. However, taxpayers do not need to fear SARS, as contrary to popular believe, SARS is in fact lenient and the law provides for this leniency through the so-called ‘voluntary disclosure programme’ (hereinafter ‘VDP’) contained in Part B of Chapter 16 of the Tax Administration Act (No. 28 of 2011) (hereinafter ‘TAA’). For this relief to apply, one needs to come clean with SARS on one’s tax affairs, which would in turn lead to SARS not imposing various penalties and criminal prosecution. Before I continue with the nice part relating to the relief afforded by the VDP, I first need to give an indication to non-compliant taxpayers as to what harm their tax skeletons may cause them.
The harm caused by tax skeletons
Most of the above taxpayers would evade taxes by understating their income (i.e. by not declaring all income) or by overstating deductions (i.e. to claim allowances on personal-use assets) and to pray that SARS does not discover their non-compliance through lodging an audit. This type of behaviour is also known as tax evasion and may lead to the imposition of a fine or even imprisonment for a period not exceeding five years.
In addition to the above, a lot of taxpayers do not submit any returns at all and then hope and pray that SARS doesn’t come knocking on their doors. Although the VDP would not provide relief for the non-submission of a return as there would normally be no understatement, it is nevertheless necessary to bring the ramifications of such non-submission to your attention. Furthermore, for the non-submission of a return, taxpayers are not aware of the fact that SARS has 15 years to recover a tax debt from the date of assessment (which date would only take place once an assessment is issued by SARS based on a return was submitted by the taxpayer for i.e. income tax or the date on which a return was submitted by the taxpayer for a self-assessment tax i.e. VAT). It therefore follows that this 15 year period would only start running once a return was submitted which led to an assessment for income tax purposes or once a return was submitted for i.e. VAT purposes and that this period of 15 years may therefore even become a 100 years if no return was submitted.
If a return was not submitted, SARS has the authority to issue an estimate assessment which would estimate a taxpayer’s tax liability and request payment accordingly. This assessment would not be subject to dispute and the taxpayer would therefore have to pay the outstanding estimated tax liability. Here the only recourse would be to use the Promotion to Administrative Justice Act (No. 3 of 2000) to challenge the fairness of the administrative action (i.e. the issuing of the estimate assessment), but this in itself would not absolve the taxpayer from first paying the tax as per the estimate assessment and it would normally take a long time to get the matter resolved through our South African court system, that is, in instances in which the taxpayer has a valid case (which would rather be the exception than the norm).
Furthermore, the failure to submit a return within the particular deadline would constitute a criminal offence which would lead to a fine or imprisonment for a period of not exceeding two years.
Most of the different tax Acts imposes penalties and interest on the late payment of tax and the notorious understatement penalty may also come into play where a taxpayer understated his/her/its income or overstated his/her/its deductions. These penalties are imposed in order to deter non-compliance and to ensure that the fiscus receives all taxes when due in terms of a tax Act.
How does the VDP work?
A person may generally apply for voluntary disclosure relief if the person has a ‘default’, which may potentially be subject to an understatement penalty and if the disclosure of the default would not result in a refund becoming due to the taxpayer. A ‘default’ generally means the submission of inaccurate or incomplete information to SARS or the failure to submit information to SARS where the aforementioned action resulted in either the taxpayer not being assessed for the correct amount of tax, the correct amount of tax not being paid by the taxpayer or an incorrect refund being made by SARS. It is important to reiterate that this relief would not be available for the non-submission of a return and that it would only be available in instances where income was understated or deduction overstated.
Furthermore, a taxpayer would not be entitled to apply for voluntary disclosure relief if the taxpayer is aware of a pending audit or investigation against him/herself, unless the default would not have been detected during the audit or investigation.
The relief provided by the VDP are as follow:
- SARS would not pursue criminal prosecution for the tax offence resulting from the default;
- SARS would grant relief for the understatement penalty (a penalty of 200 per cent may be reduced by 190 per cent if the application was made before SARS lodged an audit against the taxpayer);
- Relief for penalties imposed on instances of administrative non-compliance, excluding penalties for the late submission of a return or the late payment of a tax.
Should a taxpayer not be sure whether he/she/it would qualify for any relief in terms of the VDP in respect of a particular default, then he/she/it may make an anonymous application to SARS which application does not contain any identifying information of the taxpayer. SARS will then in return issue a non-binding opinion as to whether the taxpayer would qualify for any relief. Although this opinion is not binding between SARS and the taxpayer, it provides a useful tool to the taxpayer to determine beforehand if he/she/it would qualify for the relief before formally applying, which formal application would disclose the taxpayer’s identity.
Should a taxpayer’s application for voluntary disclosure relief be successful, SARS would issue a written agreement which would contain details on the material facts of the default on which the relief is based, the amount of tax, including the amount of the understatement penalty (which may be reduced to R nil in certain instances) payable by the person, the arrangements and date for payment and other undertakings between SARS and the taxpayer. SARS would then normally also issue an assessment to the taxpayer to give effect to the relief provided by the VDP.
In addition to the above relief, should the taxpayer experience financial difficulties, he/she/it may apply to SARS for an instalment payment agreement where the tax debt can be paid in one sum only after a period of time or in instalments over a certain period of time.
Pitfalls when it comes to voluntary disclosure applications
Even though the VDP contains some welcome relief, it imposes harsh sanctions on taxpayers who were not fully honest with their voluntary disclosure applications which gave rise to a written agreement between the taxpayer and SARS. In this regard, if SARS is satisfied that the taxpayer failed to disclose a matter that was material for purposes of the application, SARS may:
- Withdraw any relief granted under the VDP;
- Regard any amount already paid under the voluntary disclosure agreement to constitute part payment of any further tax liability that may stem from the default; and
- Pursue criminal prosecution for the relevant tax offence.
The VDP provides some welcome relief which may chase most tax skeletons out of the closet. There are, however, inherit risks associated with the application which may lead to the imposition of serious sanctions by SARS. For these reasons it is advised that taxpayers make use of SAIT tax professionals to ensure that they mitigate all risks, while at the same time qualifying for some welcome relief in terms of the VDP.