The South African Revenue Service (SARS) is going all out to increase the state's revenue from tax - and SARS has formidable powers at its disposal to do so, Daniel Erasmus, who heads the tax department at Johannesburg-based law firm Moss Morris, warned this week. However, Erasmus also told a meeting of the ipac/Personal Finance Investors Club that, in terms of the Constitution, taxpayers have certain rights that protect them from unfair action.
Tax collection is under threat in South Africa, because the economy is not growing as fast as expected and the government's revenue is expected to decline as taxpayers' incomes fall in real terms, Daniel Erasmus says.
In an effort to compensate for the anticipated revenue shortfall, you can expect the South African Revenue Service (SARS) to investigate more taxpayers and to do so more intensively than in the past, Erasmus says.
Erasmus was a member of a sub-committee of the former Katz Commission, which conducted a major review of South Africa's tax regime, and served on the VAT technical committee of SARS.
Over the past 10 years, he says, the government has granted South Africans R72 billion in tax breaks - although this money was derived from taxpayers in the first place.
Erasmus estimates that SARS could just as easily have collected this R72 billion by investigating 7 200 taxpayers a year over the past 10 years and making them cough up R1 million each. In his experience, R1 million is not an unusually high figure. Typically, about one third of the R1 million would be derived from taxes due and the balance from penalties.
The law sets, as a starting point, a 200 percent penalty on outstanding taxes. The Commissioner of Inland Revenue has the discretion to reduce the penalty.
Lower tax relief
This year's Budget saw lower cuts to personal taxes than in previous years, Erasmus says. Personal income tax relief is down to R4 billion this year from R13 billion last year.
As revenue from taxpayers decreases, Erasmus says, SARS will start reviewing transactions from previous years, looking for anomalies.
Remember that you can be arrested for tax evasion on the mere suspicion by SARS that you are guilty.
Furthermore, he says, it appears from Finance Minister Trevor Manuel's Budget speech that the government believes you have a moral obligation to pay the "right" amount of tax.
Manuel implied that tax avoidance (which is to legally pay less tax than you may otherwise have paid) is morally as bad as tax evasion (which involves breaking the law), Erasmus says. Strictly speaking, he says, this is not what the law requires.
In his speech, Manuel told company chief executives that they must make tax compliance a central issue in corporate governance. Erasmus says these remarks were also intended for the ears of ordinary taxpayers.
Erasmus, who is researching the remedies available to taxpayers when SARS oversteps its powers of investigation, says that although he has not been able to obtain conclusive proof, he believes SARS has appointed crack teams, which are driven by budget targets and assigned specific types of transactions, through which to track down tax offenders.
Erasmus says when SARS does a reassessment of the tax you owe after an investigation, and you are not able to dispute the facts, it will process the reassessment without entertaining any arguments on the legal merits of the assessment.
SARS's attitude in some cases is to ignore cogent legal arguments, with the requirement that the taxpayer to pay now and argue later, he says. However, Erasmus says, the Constitution provides taxpayers with a certain degree of protection.
You have the right to have an administrative decision by a state official reviewed. In addition, you no longer have to show that the official concerned was only acting in bad faith, as was the case prior to the introduction of the Constitution.
If you can prove that a SARS official did not take the relevant aspects of your case into account, or took into account aspects which are irrelevant to your situation, you have the right to challenge the official's decision in the courts, Erasmus says.
Reluctance to act
He says many taxpayers are reluctant to take on SARS, because:
- It is expensive; or
- They might lose their case on a legal technicality; or
- They believe it will result in SARS placing a black mark against their names.
However, he says, law or conduct that is inconsistent with the Constitution is invalid, however difficult it may be to convince the courts of this.
If one person's rights are transgressed in the process of enforcing the law, we are all at risk of having an injustice being committed against us, Erasmus says. However, taxpayers need to challenge SARS in order to enforce the rights they are afforded by the Constitution, he says.
Erasmus's advice if you want to avoid any tax disputes is that you should proceed with caution in the way you structure your transactions.
Seek expert legal opinion before you enter into complex financial transactions and keep records of the legal advice you receive. Also, make sure you carefully choose the experts who give you advice.
Tax planning is important, but tax compliance is even more important, Erasmus says.