SARS Wants to Have its Cake and Eat it Too

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SARS Wants to Have its Cake and Eat it Too

• 23 April 2024
• Individuals Tax
• PwC South Africa

In February 2024, the South African Revenue Service (‘SARS’) issued a Draft Interpretation Note on the Consequences of an Employer’s Failure to Deduct or Withhold Employees’ tax (‘the Draft IN’) for public comment. The Draft IN addresses the employees’ tax and income tax consequences for the employer and the employee where an employer fails to withhold the correct amount of employees’ tax from an employee’s remuneration, but then pays the amount due to SARS in terms of the employer’s personal liability (for the under recovery of the employees’ tax) under the Tax Administration Act 28 of 2011, as amended (‘the TAA’). SARS concludes in the Draft IN that where an employer does not recover the amount paid by the employer to SARS from the employee, the employee will remain liable for income tax on the portion of their remuneration on which the employer failed to withhold the employees’ tax, with no credit for the employees’ tax paid by the employer. SARS’ rationale for this conclusion is that the specific section of the TAA (section 157(2)) that provides that the employer’s payment to SARS will be an amount of income tax paid on behalf of the individual in respect of their income tax liability (under section 5 of the ITA) is in conflict with the provisions of the Fourth Schedule – hence the provisions of the Fourth Schedule will prevail to prevent any tax credit (for the amount paid by the employer) being claimed by the employee against their income tax liability.

We disagree with SARS’ interpretation in this regard and set out the basis for our opposing view in this article, having regard to applicable sections of the Income Tax Act 58 of 1962, as amended (‘the ITA’) and the TAA.

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An Individual’s Income Tax Liability

Section 5(1) of the ITA provides that:

'Subject to the provisions of the Fourth Schedule there shall be paid annually for the benefit of the National Revenue Fund, an income tax (in this Act referred to as the normal tax) in respect of the taxable income received by or accrued to or in favour of…any person (other than a company) during the year of assessment ending during the period of 12 months ending the last day of February each year.’ [Our underlining]

SARS cites the 2002 judgment in the Estate Late GA Pitje case (66 SATC 219 (W), where it was held that:

‘It is thus clear, even on a superficial reading of paragraph 5 in its entirety, that the ultimate liability to pay income tax rests with an employee. It follows, in my view, that the collection mechanism created by the Act to give efficacy to the legislation and in particular the pivotal role played by the employer in that scheme, does not extinguish the liability of the employee.’ [Our underlining]

The Draft IN states that the learned judge in the abovementioned case concluded that the legislature had, in paragraph 28(1)(b), in clear and unambiguous language, placed the burden for the payment of the (income tax) shortfall on the taxpayer, that is, the employee.

Whilst we agree with SARS’ statement that the individual (employee) is ultimately responsible for the payment of any ‘shortfall’ in their income tax liability, the pertinent question is how to determine this ‘shortfall’ for which the individual (employee) is ultimately liable, when having regard to the provisions of the Fourth Schedule of the ITA and the provisions of the TAA (noting that the TAA came into effect in 2012, i.e., post the 2002 judgment in the Pitje case), and numerous changes were also made to the Fourth Schedule subsequent to the TAA coming into effect.

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Employer’s obligations in terms of the ITA and the TAA

Interaction between the provisions of the Fourth Schedule and section 157 of the TAA

The ITA (Fourth Schedule) and the TAA provide for the following obligations and liabilities on the part of an employer:

• In paragraph 2 of the Fourth Schedule – an employees’ tax withholding agent obligation [liability 1]; and
• In section 157 of the TAA – a personal liability [liability 2], if the withholding obligation was not met by the withholding agent (employer).

Where the employer incurs a personal liability [liability 2] under section 157(1) of the TAA, paragraph 5(1) of the Fourth Schedule then provides for the timing of the payment by the employer of this liability: ‘[If] an employer is personally liable for the payment of employees’ tax under Chapter 10 of the Tax Administration Act [i.e., s157], the employer shall pay that amount to the Commissioner not later than the date on which payment should have been made if the employees’ tax had in fact been deducted or withheld in terms of paragraph 2 [of the Fourth Schedule].’

Paragraph 5(1A) provides that if an employer pays over the amount in terms of the personal liability (i.e., settles liability 2), then liability 1 [the withholding agent liability] will also be discharged.

Paragraph 5(3) provides that: ‘An employer who has not been absolved from liability as provided in subparagraph (2) shall have a right of recovery against the employee in respect of the amount paid by the employer in terms of subparagraph (1) [i.e., the amount paid in terms of the employer’s personal liability imposed by s157 of the TAA] in respect of that employee, and such amount may in addition to any other right of recovery be deducted from future remuneration which may become payable by the employer to that employee, in such manner as the Commissioner may determine.’

Accordingly, paragraph 5(1) and paragraph 5(3) specifically refer to section 157 of the TAA, and the employer’s right of recovery against the employee arises because of the employer’s payment [liability 1] made in terms of section 157.

As the employer now has a right of recovery against the employee (individual) for the income tax liability paid on their behalf (in terms of section 157, read with paragraph 5(3)), the legislature provided in section 157(2) of the TAA that the payment by the employer is an amount of income tax paid on behalf of the individual in respect of their income tax liability under section 5 of the ITA.

‘(2) An amount paid or recovered from a withholding agent in terms of subsection (1) is an amount of tax [normal tax] which is paid on behalf of the relevant taxpayer in respect of his or her liability under the relevant tax Act [i.e., normal tax in terms of section 5 of the ITA].’ [Our underlining]

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Are there any conflicts or inconsistencies between section 157(2) of the TAA and the Fourth Schedule?

SARS seemingly takes the position that an employee will not be able to claim the employees’ tax as credit against their normal tax liability by applying the following logic:

‘Although an employees’ tax certificate is prima facie proof of the employees’ tax so deducted or withheld, paragraph 5(4) provides that, until the employee has repaid the amount due under paragraph 5(3) to the employer, the employee is not entitled to an employees’ tax certificate. Only amounts of employees’ tax that were actually deducted or withheld from the employee’s remuneration may be offset against the employee’s income tax liability. If an employer fails to deduct or withhold employees’ tax as required, no tax will have actually been deducted or withheld by the employer. The employee will not be in possession of an employees’ tax certificate, and also will not be able to prove that any employees’ tax was actually deducted or withheld. The employee will therefore not be able to claim any employees’ tax credit on assessment and will be liable to SARS for any shortfall in taxes due.’

SARS goes on to state that:

‘The purpose of paragraph 5(4) is to prevent the employee from claiming any employees’ tax credit on assessment when no taxes were paid via the employees’ tax systems during the course of the year. To the extent that the rule under section 157(2) of the TA Act, which provides that the payment by the employer in discharge of its personal liability is a payment on behalf of the employee for the employee’s liability for income tax, is in conflict with paragraph 5(4) and paragraphs 28(1) and (2), the provisions of the Fourth Schedule will prevail to prevent any tax credit being claimed by the employee.’

Paragraph 5(4) provides that until such time as an employee pays to his employer any amount which is due to the employer in terms of subparagraph (3), such employee shall not be entitled to receive from the employer an employees’ tax certificate in respect of that amount.

Paragraph 28 in turn provides that:

1. There shall be set off against the liability of the taxpayer in respect of any taxes (as defined in subparagraph (8)) due by the taxpayer, the amounts of employees’ tax deducted or withheld by the taxpayer’s employer during any year of assessment for which the taxpayer’s liability for normal tax has been assessed by the Commissioner...
2. The burden of proof that any amount of employees’ tax has been deducted or withheld by his employer shall be upon the taxpayer and any employees’ tax certificate shall be prima facie evidence that the amount of employees’ tax reflected therein has been deducted by the employer. [Our underlining]

We agree with SARS’ comment in the Draft IN that: ‘to the extent that the rule under section 157(2) of the TA Act, which provides that the payment by the employer in discharge of its personal liability is a payment on behalf of the employee for the employee’s liability for income tax, is in conflict with paragraph 5(4) and paragraphs 28(1) and (2), the provisions of the Fourth Schedule will prevail.’

This is in terms of section 4(3) of the TAA, which provides that ‘in the event of any inconsistency between this Act and another tax Act, the other Act prevails’.

However, when applying the principles of interpretation* to section 157 of the TAA and paragraphs 5(4), 28(1) and 28(2) of the Fourth Schedule, there is no conflict or inconsistency as:

• Paragraph 5(4) purely deals with an administrative matter in respect of the collection method (employees’ tax), namely the issuance of the employees’ tax certificate by the employer as and when the employee settles their debt to the employer (i.e., for the income tax paid by the employer on their behalf in terms of section 157(2)). This paragraph does not provide that, until such time that the employees’ tax certificate is issued, the amount paid by the employer may not be regarded as an amount of income tax paid on behalf of the employee as provided for in section 157(2).
• For purposes of paragraph 28(1), the meaning of the phrase ‘deducted or withheld’ should be given a broader meaning than its narrow literal meaning. As soon as the employer pays the amount of tax in accordance with paragraph 5(1), an automatic right of recovery from the employee arises. Paragraph 5(3) gives the employer a right to recover that debt from the employee, which may not necessarily be in the form of a deduction from remuneration. To suggest that the payment of an amount of employees’ tax by an employer on behalf of the employee does not amount to a deduction or withholding of employees’ tax would result in an anomalous, if not absurd, position whereby economic double taxation could arise. That could not possibly have been the purpose of the provision.
• Paragraph 28(2) simply provides that the burden of proof that any amount of employees’ tax has (actually) been deducted or withheld by the employer will be upon the taxpayer, and any employees’ tax certificate shall be prima facie evidence that the amount of employees’ tax reflected therein has (actually) been deducted by the employer. In other words, the employees’ tax certificate is only a mechanism by which to discharge the burden of proof. It is not a prerequisite for the deduction of employees’ tax against the liability for normal tax in terms of section 5 of the ITA.

Accordingly, in terms of section 157(2), the amount paid by the employer (in terms of section 157(1)) should be allowed as a deduction from the employee’s income tax liability when determining whether there is any ‘shortfall’ in the individual’s income tax liability.

The apparent inconsistency (as asserted by SARS) between the ITA and the TAA arises only because, it is submitted, SARS misinterprets the provisions of the ITA in this regard. However, the interpretation advanced by us above eliminates this inconsistency and the anomalous position that would arise on SARS’ interpretation and should therefore be preferred.

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Conclusion

When applying the abovementioned provisions to a scenario where an employer has neglected his withholding agent obligation, but subsequently paid the amount of income tax owing by the employee on the remuneration earned from this employer to SARS in terms of the employer’s personal liability, the outcome is that the fiscus has received the income tax due on the applicable portion of the employee’s income (i.e., remuneration paid by the employer), and the employer has a right to recover the amount paid to the fiscus from the employee, should he wish to do so (noting that in the event that the employer will not be recovering the amount, the amount payable should be grossed up for fringe benefit tax purposes, and the payment of the employees’ tax will not be allowed as an income tax deduction for the employer), with the result that the employees’ tax in question has been deducted or withheld as contemplated in para 2(1) when read with the provisions of para 5(1A).

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* Principles of interpretation

It was held in Natal Joint Municipal Pension Fund v Endumeni Municipality 2012 (4) SA 593 (SCA) that: ‘Interpretation is the process of attributing meaning to the words used in a document, be it legislation, some other statutory instrument, or contract, having regard to the context provided by reading the particular provision or provisions in the light of the document as a whole and the circumstances attendant upon its coming into existence. Whatever the nature of the document, consideration must be given to the language used in the light of the ordinary rules of grammar and syntax; the context in which the provision appears; the apparent purpose to which it is directed; and the material known to those responsible for its production. Where more than one meaning is possible, each possibility must be weighed in the light of all these factors. The process is objective, not subjective. A sensible meaning is to be preferred to one that leads to insensible or unbusinesslike results or undermines the apparent purpose of the document.’

The application of the rules of interpretation to words in a statute was further clarified in Telkom SA SOC Ltd v Commissioner for the South African Revenue Service [2020] ZASCA 19 (25 March 2020). In summary, it was held that (para 14 – 17):

• Context is all important, regardless of the nature of the document. Endumeni (para 18) emphasised this by stating that the interpretation of words used in the document had to take into account ‘... the circumstances attendant upon its coming into existence’.
• It must be emphasised that in Endumeni (para 19) it was stated that this approach to the interpretation of documents was consistent with the emerging trend in statutory construction, with Endumeni adopting the second of the two possible approaches mentioned by Schreiner JA in Jaga v Dönges NO and Another and Bhana v Dönges NO and Another 1950 (4) SA 653 (A) at 662G-663A, namely that from the outset one must consider the context and the language together, with neither predominating over the other.
• It is important to recall that in Jaga, the correct approach to statutory construction was described in the following terms: ‘Certainly no less important than the oft repeated statement that the words and expressions used in a statute must be interpreted according to their ordinary meaning is the statement that they must be interpreted in the light of their context. But it may be useful to stress two points in relation to the application of this principle. The first is that “the context”, as here used, is not limited to the language of the rest of the statute regarded as throwing light of a dictionary kind on the part to be interpreted. Often of more importance is the matter of the statute, its apparent scope and purpose and, within limits, its background.’

This approach is echoed in the words of Endumeni (para 18), namely: ‘The “inevitable point of departure is the language of the provision itself”, read in context and having regard to the purpose of the provision and the background to the preparation and production of the document.’

When applying the above principles to the applicable sections, we note the following:

• The words in the applicable sections of the Fourth Schedule and section 157 of the TAA are clear and there is no ambiguity.
• When considering the ITA as a whole and the context in which the Fourth Schedule appears in the ITA, it is clear that the Fourth Schedule was included in the ITA to implement a monthly income tax collection mechanism for employees’ remuneration, with the purpose of making the tax collection more efficient (see the Judge’s comment in the Estate Late GA Pitje case), i.e., employers are appointed as withholding agents to assist SARS with income tax collection.
• The Fourth Schedule sets out the withholding agent’s (employer’s) obligations, the consequences of the employer’s failure to adhere to their withholding agent obligations and the furnishing of employees’ tax certificates.
• When considering the circumstances attendant when the applicable provisions came into existence, the following should be noted regarding the 2011 tax amendments:
  • Prior to its amendment at the time of the introduction of the TAA (2012), para 5(1) of the Fourth Schedule provided for the employer’s personal liability if they should fail to withhold or deduct the employees’ tax in terms of their withholding agent obligation, i.e., the Fourth Schedule at this time provided for both the withholding agent liability as well as the personal liability of the employer.
  • When the TAA was introduced in 2012, section 157 was included in the TAA to govern the personal liability of the employer, should they fail to deduct or withhold employees’ tax in terms of their withholding agent obligation (in terms of the Fourth Schedule). Accordingly, the TAA removed the employer’s personal liability from the Fourth Schedule (to include it in section 157 of the TAA), and the legislature amended paragraph 5(1) to refer to the TAA (section 157) and to govern the timing of the payment by the employer that arises under section 157 of the TAA. The reason for the reference in the Fourth Schedule to the payment in terms of the employer’s personal liability (in section 157 of the TAA) is to still treat the payment by the employer as employees’ tax for purposes of the Fourth Schedule so as to ensure that interest can be levied on late payment by the employer of the employees’ tax (although it was paid by the employer in respect of their personal liability for the payment of the employees’ tax). - Further, note that the current section 157 was included in its totality (i.e., both sub-sections 1 and 2 were included) in 2011 when the TAA was introduced and has not been amended since its introduction. Accordingly, when having regard to the ‘material known to those responsible for its production’, it is clear that the legislature would have considered the provisions of the Fourth Schedule as it read at that time1 and would not have intended that the introduction of section 157(2) of the TAA would be in conflict or inconsistent with the provisions of the ITA.
• We note that if SARS’ interpretation as set out in the Draft IN were followed, it would result in insensible and unbusinesslike outcomes in that:
  • the fiscus would collect tax twice on the same amount of income, albeit in the hands of different taxpayers;
  • where an employer decides not to recover the employees’ tax from the employee, this would result in an additional liability for employees’ tax and normal tax on the basis of a waiver of a debt, while the employee would still have to pay normal tax with no credit for employees’ tax in relation to the original remuneration on which employees’ tax was not withheld;
  • it may be practically impossible for the employer to recover the debt, e.g. because the employee is uncontactable, has died or has emigrated; and
  • the absurdity is illustrated by the fact that an employer, instead of waiving the debt, could simply elect to pay a once-off amount of remuneration equal to the employees’ tax (grossed up) and set off the amount of employees’ tax recoverable against the once-off remuneration (in our law set-off is regarded as akin to payment).

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Takeaway

Individual taxpayers should be mindful of SARS’ interpretation of the provisions of the Fourth Schedule, read with section 157(2) of the TAA, in the Draft IN and the impact this may have on their personal income tax liabilities where their employer failed to withhold the correct amount of employees’ tax on their remuneration. While submissions have been made to SARS on the Draft IN, SARS may not be persuaded to change its view. Accordingly, taxpayers should monitor developments in this regard and take any actions as appropriate to mitigate the tax risks associated with such a scenario.

 

Source: PWC

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