We are all tax collection agents now
In 2011 South African Revenue Services (SARS) issued the ITA88 “Agent Appointment” notification that compelled employers to electronically collect outstanding penalties from employees and pay the amounts over to SARS.
It has also appointed banks as collection agents, and now plans to do the same with retirement funds.
This shouldn’t be too much of a surprise, since Section 99 of the Income Tax Act 58 of 1962 empowers the Commissioner of SARS to appoint anyone as its agent. On the other hand, these powers appear so broad it is amazing that they have not been tested in the Constitutional Court.
It’s not just the power SARS has to appoint anyone as its agent, but the fact that the agent can be held liable for any tax, interest or penalty purportedly owed by the taxpayer. The appointed agent can be compelled to hand over any monies he may owe the allegedly delinquent taxpayer. This is because an agent appointed in terms of section 99 of the Act is regarded as a “representative taxpayer” who is deemed personally liable for the tax obligations of the taxpayer in terms of section 79 of the Act.
But section 99 of the Income Tax Act has its limitations. For example, an agent appointed by SARS was required to ensure that it was able to legally comply with the requirements of the appointment. According to an article by legal services firm Bowman Gilfillan, an agent was also entitled to question the correctness of the tax agency appointments. For example, where the agent exceeded the ambit of section 99, the court held that the agent, for example a bank or an employer, had to return the money to its client or employee.
Retirement funds get agency appointment letters from SARS
Now it is the turn of retirement fund managers to join the ranks of SARS collection agents. SARS recently fired off a boat load of agency appointment letters to retirement funds instructing them to deduct outstanding tax from members’ pensions and hand the proceeds over to it.
Johan Esterhuizen, partner in the pension practice at Bowman Gilfillan, says the appointments create a dilemma because the fund, the administrator and the trustees have to balance their fiduciary responsibilities towards the member with the obligation of being appointed as a tax agent.
Several law firms have pointed out a technical flaw in the issue of the SARS appointment letters. Those issued after 1 October 2012 should have referenced section 179 of the recently promulgated Tax Administration Act, but many appear to have been issued in terms of section 99 of the Income Tax Act. Johan Kotze, head of Tax Dispute Resolution at Bowman Gilfillan, says any appointments made in terms of the Income Tax Act should be questioned as to their legal validity.
“The new Tax Administration Act provides for a much needed balanced approach, and it is important for funds to understand their rights and obligations should they be appointed. It is also important that funds inform their members through the normal member communication channels of a tax agency appointment and the consequence it may have,” says Kotze.
The new section 179 of the Tax Administration Act gives SARS the same power, but with greater circumspection, as it had with the old section 99 of the Income Tax Act. Funds should, as part of their fiduciary responsibilities, ensure that the features of the new section 179 have been complied with when an agency appointment is received, advises Kotze.
Included amongst the provisions in section 179 is that only a senior SARS official may appoint a fund to be the agent of its member and that the appointment can only be in relation to monies which the fund holds or owes, or will hold or will owe, to the member. The fund has to advise the member of the appointment, and should give the member an opportunity to confirm the correctness of the appointment.
“It follows that if a fund, or where applicable its administrator, fails to ensure that section 179’s features are considered and applied, and if challenged by a member following a deduction, may have to return the funds to the member. The fund will then have to attempt to recover the funds from SARS at its own costs.
“The rights and obligations of the fund and the administrator, when SARS issues these agency appointments, may have to be dealt with in the service level agreement. It is recommended that the roles of the various parties are properly set out in the service level agreement, to ensure that provision is made should an agency appointment be made by SARS,” said Esterhuizen.
When a bank becomes an agent for SARS
Nedbank vs Pestana is perhaps the most interesting case involving the appointment of a bank as agent for SARS. The facts are as follows: on the morning of 4 March 2006 Mr Pestana, a client of Nedbank Carletonville, went to his branch and instructed the bank to transfer an amount of R500,000 from his account to that of his cousin. This was duly carried out by the bank staff at 11:33 that morning. At 8:33 that same morning Nedbank head office received a fax from the SARS Commissioner appointing the bank as its agent in respect of Mr Pestana and directing it to pay the client’s money over to SARS. The notification only reached the branch by 16:00 the same day, at which point the branch reversed the transaction.
Mr Pestana challenged the reversal of the transaction, and asked the court whether Nedbank, notwithstanding its appointment as an agent for SARS, was entitled to reverse the payment without his permission.The Trial court found that Nedbank was entitled to reverse the payment, and the case was taken on appeal.
In a review of the case in TaxTalk, Advocate C Louw writes that on appeal, the full bench of the court “held that a completed and unconditional payment had been effected when the bank credited plaintiff’s account, with the result that Nedbank could not unilaterally reverse the credit.”
Two facts of the case were emphasised: just because SARS had notified Nedbank head office of its appointment as agent, it was up to the bank to notify its branches as speedily as possible, and; until the branch is notified of its appointment as agent of SARS, it is entitled to carry out its ordinary, everyday activities. Thus it was entitled to accept a valid and lawful mandate from its client, the taxpayer, to transfer money from his account to that of the plaintiff. The Supreme Court of Appeal further held that the fact that the branch subsequently changed its mind and tried to reverse the transaction, cannot undo the validity of the completed transaction. It found that once the debit and credit occurred as it did, it constituted a completed juristic act independent of any underlying iusta causa, writes Adv. Louw.
It has also appointed banks as collection agents, and now plans to do the same with retirement funds.
This shouldn’t be too much of a surprise, since Section 99 of the Income Tax Act 58 of 1962 empowers the Commissioner of SARS to appoint anyone as its agent. On the other hand, these powers appear so broad it is amazing that they have not been tested in the Constitutional Court.
It’s not just the power SARS has to appoint anyone as its agent, but the fact that the agent can be held liable for any tax, interest or penalty purportedly owed by the taxpayer. The appointed agent can be compelled to hand over any monies he may owe the allegedly delinquent taxpayer. This is because an agent appointed in terms of section 99 of the Act is regarded as a “representative taxpayer” who is deemed personally liable for the tax obligations of the taxpayer in terms of section 79 of the Act.
But section 99 of the Income Tax Act has its limitations. For example, an agent appointed by SARS was required to ensure that it was able to legally comply with the requirements of the appointment. According to an article by legal services firm Bowman Gilfillan, an agent was also entitled to question the correctness of the tax agency appointments. For example, where the agent exceeded the ambit of section 99, the court held that the agent, for example a bank or an employer, had to return the money to its client or employee.
Retirement funds get agency appointment letters from SARS
Now it is the turn of retirement fund managers to join the ranks of SARS collection agents. SARS recently fired off a boat load of agency appointment letters to retirement funds instructing them to deduct outstanding tax from members’ pensions and hand the proceeds over to it.
Johan Esterhuizen, partner in the pension practice at Bowman Gilfillan, says the appointments create a dilemma because the fund, the administrator and the trustees have to balance their fiduciary responsibilities towards the member with the obligation of being appointed as a tax agent.
Several law firms have pointed out a technical flaw in the issue of the SARS appointment letters. Those issued after 1 October 2012 should have referenced section 179 of the recently promulgated Tax Administration Act, but many appear to have been issued in terms of section 99 of the Income Tax Act. Johan Kotze, head of Tax Dispute Resolution at Bowman Gilfillan, says any appointments made in terms of the Income Tax Act should be questioned as to their legal validity.
“The new Tax Administration Act provides for a much needed balanced approach, and it is important for funds to understand their rights and obligations should they be appointed. It is also important that funds inform their members through the normal member communication channels of a tax agency appointment and the consequence it may have,” says Kotze.
The new section 179 of the Tax Administration Act gives SARS the same power, but with greater circumspection, as it had with the old section 99 of the Income Tax Act. Funds should, as part of their fiduciary responsibilities, ensure that the features of the new section 179 have been complied with when an agency appointment is received, advises Kotze.
Included amongst the provisions in section 179 is that only a senior SARS official may appoint a fund to be the agent of its member and that the appointment can only be in relation to monies which the fund holds or owes, or will hold or will owe, to the member. The fund has to advise the member of the appointment, and should give the member an opportunity to confirm the correctness of the appointment.
“It follows that if a fund, or where applicable its administrator, fails to ensure that section 179’s features are considered and applied, and if challenged by a member following a deduction, may have to return the funds to the member. The fund will then have to attempt to recover the funds from SARS at its own costs.
“The rights and obligations of the fund and the administrator, when SARS issues these agency appointments, may have to be dealt with in the service level agreement. It is recommended that the roles of the various parties are properly set out in the service level agreement, to ensure that provision is made should an agency appointment be made by SARS,” said Esterhuizen.
When a bank becomes an agent for SARS
Nedbank vs Pestana is perhaps the most interesting case involving the appointment of a bank as agent for SARS. The facts are as follows: on the morning of 4 March 2006 Mr Pestana, a client of Nedbank Carletonville, went to his branch and instructed the bank to transfer an amount of R500,000 from his account to that of his cousin. This was duly carried out by the bank staff at 11:33 that morning. At 8:33 that same morning Nedbank head office received a fax from the SARS Commissioner appointing the bank as its agent in respect of Mr Pestana and directing it to pay the client’s money over to SARS. The notification only reached the branch by 16:00 the same day, at which point the branch reversed the transaction.
Mr Pestana challenged the reversal of the transaction, and asked the court whether Nedbank, notwithstanding its appointment as an agent for SARS, was entitled to reverse the payment without his permission.The Trial court found that Nedbank was entitled to reverse the payment, and the case was taken on appeal.
In a review of the case in TaxTalk, Advocate C Louw writes that on appeal, the full bench of the court “held that a completed and unconditional payment had been effected when the bank credited plaintiff’s account, with the result that Nedbank could not unilaterally reverse the credit.”
Two facts of the case were emphasised: just because SARS had notified Nedbank head office of its appointment as agent, it was up to the bank to notify its branches as speedily as possible, and; until the branch is notified of its appointment as agent of SARS, it is entitled to carry out its ordinary, everyday activities. Thus it was entitled to accept a valid and lawful mandate from its client, the taxpayer, to transfer money from his account to that of the plaintiff. The Supreme Court of Appeal further held that the fact that the branch subsequently changed its mind and tried to reverse the transaction, cannot undo the validity of the completed transaction. It found that once the debit and credit occurred as it did, it constituted a completed juristic act independent of any underlying iusta causa, writes Adv. Louw.