The management of tax debts, including interest and penalties, in unusual circumstances

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The management of tax debts, including interest and penalties, in unusual circumstances

• 25 May 2020
• Tax Administration
• PWC

Keeping in good standing with the South African Revenue Authority (‘SARS’) is of the utmost importance for good corporate citizens. Managing this relationship is something most taxpayers are well versed with. However, what happens when you are faced with extraordinary circumstances, and when the landscape has changed due to events beyond your control?

Challenging as a situation may be, in order to avoid the imposition of interest and penalties it will be crucial for taxpayers to carefully manage the payment of their tax debts to the SARS. This article considers the available options to taxpayers.

Instalment payment agreements where taxpayers cannot afford to pay their tax debts in full

One way to manage the payment of tax debts to SARS is by entering into an instalment payment agreement with SARS where a taxpayer can demonstrate a shortterm cash flow problem and is unable to settle the tax debt in one payment. 

Section 167(1) of the Tax Administration Act, No. 28 of 2011 (‘TAA’), provides that a senior SARS official may enter into an agreement with a taxpayer in the prescribed form under which the taxpayer is allowed to pay a tax debt in instalments within the agreed period, if SARS is satisfied that the relevant criteria or risks have been duly taken into consideration and the agreement facilitates the collection of the tax debt. 

A senior SARS official will consider the following criteria for an instalment payment agreement in terms of section 168 of the TAA:

• Whether a taxpayer suffers from a deficiency of assets or liquidity which is reasonably certain to be remedied in the future,
• Whether the taxpayer anticipates income or other receipts which can be used to satisfy the tax debt, 
• If the prospects of immediate collection activity are poor or uneconomical but are likely to improve in the future, 
• If collection activity would be harsh in the particular case and the deferral or instalment agreement is unlikely to prejudice tax collection, or 
• The taxpayer provides the security as may be required by the SARS official.

Before entering into an instalment payment agreement with the taxpayer, SARS will typically request financial information in order to confirm that the taxpayer is presently unable to settle the tax debt. This is done by requiring the taxpayer to complete a Collection Information Statement.

This calls for a wide range of financial information from the applicant, including:

• A written explanation of why full payment cannot be made;
• Full details of the business, its directors, bank accounts, investment policies and listed and unlisted shares;
• The latest annual financial statements;
• Management accounts for the financial year up to the date of application and cash flow forecast for the next 12 months;
• Detailed bank statements of all bank accounts for the last six months;
• Schedules of all assets owned;
• Details of tenders applied for;
• Schedules of all debtors and creditors, reflecting the amounts involved as well as the names and telephone numbers of all debtors and creditors;
• Details of all connected party loans and outstanding balances, interest rates, repayment terms and security;
• A list of all persons who have an interest in the business and details of all entities and structures connected to the taxpayer; and
• Details of any trusts to which the taxpayer may be connected as a beneficiary thereof.

It must be noted that the documents to be submitted to SARS must be comprehensive and must provide an accurate indication of the financial position of the taxpayer.

Where a taxpayer has an existing instalment payment agreement in place with SARS and foresees that it will be unable to meet the terms of the agreement, a taxpayer must be proactive and approach SARS for the purposes of modifying the existing agreement. Section 167(5) of the TAA provides that an instalment payment agreement may be modified if a senior SARS official is satisfied that:

• The collection of the tax is in jeopardy;
• The taxpayer has supplied materially incorrect information in applying for the agreement; or
• The taxpayer's financial condition has materially changed.

Interest imposed by SARS 

With respect to late payments of employees' tax and provisional tax, section 89bis(2) of the Income Tax Act, No. 58 of 1962 (‘ITA’), provides SARS with a broad discretion to remit the interest levied after ‘having regard to the circumstances of the case’ in question.

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This article first appeared on pwc.co.za.

Webinar Commentary

Further webinar commentary on Reducing SARS interest and penalties can also be accessed here: https://taxfaculty.ac.za/webinars_on_demand/show/2019-reducing-sars-penalties-and-interests

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