Back in July, the Western Cape High Court handed down its controversial judgment in Fastmould Specialist. The court ruled in favour of the South African Revenue Service (SARS) and held the company liable for tax charges. The contentious point, however, was that SARS did not provide an assessment showing the amount due as it normally would before obtaining a judgment in the magistrates' court.
Practitioners considered that before the decision, SARS already had, what one tax professional considered, "very wide powers." This decision may indicate the development of how those powers are to be used as South Africa's self assessment tax system develops.
The Fastmould case could set a precedent that allows SARS to enforce judgments against taxpayers without issuing an assessment. The Tax Administration Bill (TAB) presently being discussed in parliament is expected to clarify whether an assessment is needed for self assessed charges, but until then taxpayers should be aware of the Fastmould decision and its implications.
Dispute details
Fastmould Specialist, a mould and plastics manufacturer, had insufficient funds to meet its VAT and employee pay as you earn (PAYE) liabilities but did complete and file all its tax returns on time. The company's returns accurately showed the sums owed to SARS despite its inability to pay them.
Karl Barend Smit, Fastmould's financial manager, and SARS representatives were unable to agree a schedule for the company to pay the amount outstanding. SARS subsequently obtained judgment against the company for the sums due in the magistrates' court.
Fastmould successfully applied for the decision to be overturned due to the absence of an assessment in accordance with Part 28 of the Value Added Tax Act.
On appeal to the Western Cape High Court, it was held that where there is an obligation for companies to calculate the amount owed to SARS in their tax returns, as with VAT and PAYE, there was no need for SARS to issue an assessment. In such cases, Part 40 of the VAT Act gives SARS the authority to seek a judgment to obtain outstanding taxes.
The pertinent question however, is what does the judgment mean for corporate taxpayers in South Africa? Are there other circumstances where could SARS obtain judgment against taxpayers without an assessment?
Implications
Bartman J suggested in his judgment that SARS could only take enforcement action against Fastmould since the company knew exactly how much tax was due, evidenced by the returns it completed.
"[Section 28 of the VAT] Act places an obligation on each VAT vendor to keep records of the tax payable to [SARS] and submit returns to [SARS] in which that information is supplied. The VAT Act therefore creates a system whereby the vendor assesses its own tax liability. The debt became due when [SARS] accepted the correctness of [the company's] returns," Bartman said.
Emil Brincker, head of tax at Cliffe Dekker Hofmeyr, Johannesburg, stressed that the decision applied to self assessed taxes only and noted the TAB in parliament will formally expand the scope of tax charges SARS can enforce without an assessment. Brincker said that the legislation fundamentally "changes the principle" of when SARS can recover tax charges.
The Bill includes a broader definition of assessment which means that in some instances taxpayers' returns can amount to an assessment from SARS. The Bill makes clear that where taxpayers are obliged to calculate their liability, the date they submit their returns to SARS will also operate as the date of assessment by SARS.
Importantly, under this definition SARS will still need to issue an assessment before enforcing income tax liability since taxpayers do not asses their own liability.
However, presently SARS can recover a broad range of taxes without an assessment as Fastmould suggests. Adrian Lackay, a SARS spokesman, noted that the judgment confirms that if a taxpayer has not paid an amount self assessed, then "SARS may collect it without raising an assessment." This includes securities transfer tax, the skills development levy and some customs and excise duties as well as VAT and PAYE.
Lackay confirmed that the judgement could apply to any of these taxes since they are self assessed. He stressed in the interests of clarity that SARS could take enforcement action from the point liability for the sums owed by a taxpayers arises.
"The ability of SARS to take judgment only arises once a tax liability exists; a tax liability is created either by self assessment or once SARS raises an assessment [in which case] SARS is required to give notice of the liability before taking judgement," he said.
Action to take
"Be quite careful in how you calculate your obligations. If no assessment is required then whatever is on the return will be what you are liable for. Companies should be aware of this and make sure that their return reflects the taxes they owe as accurately as possible to avoid any uncertainty," said Brincker
Peter Surtees, a director at Norton Rose in Cape Town, added that taxpayers should at first instance seek to negotiate repayment with SARS if they encounter financial difficulty.
[Taxpayers] should enter into negotiations with SARS if they have cash flow problems. They should honour any payment arrangements agreed upon and should ensure that any arrangement is reduced to writing and signed by a duly authorised SARS official," he advised.
SARS also stressed the need for taxpayers to work with officials if they find themselves unable to satisfy their tax liabilities.
"If they are not able to pay an amount of tax that they have self-assessed, they should approach SARS to arrange for a deferred or instalment payment arrangement," said a SARS spokesman.
