Risks of being the representative of a taxpayer at SARS

The general perception is that a business, conducted through a company, is totally separate from the owner, which in a legal sense is correct.

But, when the time comes to pay taxes, business owners often simply shrug and turn their heads the other way believing that they cannot be held liable for the tax debts.

It is clear and correct by law that the liability for a tax debt is considered to rest with the taxpayer first but it is wrong to blissfully assume that this segregation may protect you against the wrath of SARS.

SARS has far-reaching powers under the Tax Administration Act (TAA) to enforce the collection of a company’s tax debt, against another person.

The majority of persons acting as accounting officers of a company e.g., “representative taxpayer” in terms of section 153 of the TAA are unaware of the risk to which they are exposed, being held personally liable by SARS.

SARS may hold a person personally liable for the tax debt of another taxpayer and the persons at risk fall into three categories, namely “representative taxpayers”, “withholding agents” and “responsible third parties”.

Representative taxpayers are people who are “responsible for paying the tax liability of another person as an agent …”, according to sections 153 to 155 of the TAA.

These people would in general include public officers, specifically appointed agents for tax purposes, and trustees, among others.

Representative taxpayers could, for example, be considered personally liable for tax that is payable in their representative capacity if, while that tax remains unpaid, they dispose of money in their possession or control before or after the tax becomes payable and the tax could legally have been paid from that money.

An example is where a payroll service provider fails to pay over PAYE to SARS.

Withholding agents are people who must, under a tax act, withhold an amount of tax and pay it to SARS. This is according to sections 156 and 157 of the TAA.

In other words, withholding agents have a statutory obligation to withhold and pay certain taxes to SARS. They are considered personally liable for tax which is withheld and not paid to SARS, or for tax which should have been, but was not, withheld in the first place.

The agent appointment process involves a third party (employer, bank or any other person who has the management, custody or control of any income, monies or property of the taxpayer) to collect any outstanding taxes including administrative penalty amounts from a taxpayer. The third party is responsible to pay the relevant amount to SARS on the taxpayer’s behalf.

For example, where the required formalities are not complied with to claim an exemption from dividends tax, this would make the relevant withholding agent personally liable.

Responsible third party is probably of most interest to executives and tax advisors. This means a person other than a representative taxpayer or withholding agent who becomes liable for the tax liability of a company or trust, in a personal or representative capacity.

Whether a responsible third party is personally liable for another taxpayer’s tax depends on the type of responsible third party. This is dealt with in sections 158 and 159, as well as sections 179 to184 of the TAA.

Arguably the most important type of responsible third party is “financial management” referred to in section 180. This relates to a person who “controls” or is “regularly involved in” the “management” of the “overall financial affairs” of a taxpayer.

This description could have a very wide application. Some examples include, for instance, the financial director or manager in a business. The definition could also include shareholders in certain circumstances, or even “non-finance” board members who “regularly” vote on financial affairs.

Whether people in these positions could become personally liable for the taxes of another company or person will depend on whether the requirement of “financial management” or “control” is met, and whether that person’s negligence or fraud resulted in the failure to pay the tax. In addition, a “senior SARS official” must be “satisfied” that the negligence or fraud took place.

The risk for liability as a responsible third party is potentially quite low. To determine whether the person had acted negligently, one would have to apply the “reasonable person” test. In other words, what steps would a “reasonable financial manager” take to guard against the risk that the tax was not paid?

However, the further prerequisite which requires that a “senior SARS official” must be “satisfied” of the taxpayer’s negligence could be an important limiting feature of this kind of third-party tax liability.

In terms of case law, SARS would be required to provide evidence to a court that it was “satisfied” as to the person’s negligence or fraud, having applied its mind to the matter.

Article by BH Groenewald
Director (Tax),
BVSA Chartered Accountants (Pty) Ltd
bennieg@bvsa.ltd