New tax law explains why Malema stays in Parliament – despite owing SARS millions

There have been many grumbles amongst compliant taxpayers regarding Julius Malema apparently coming to some form of arrangement with SARS regarding his arrear taxes.

All sorts the rumours abound. The purpose of this article is specifically not to feed the controversy, but rather to put it all in context. Then maybe we can all learn something.

The story surrounds the relatively new tax administration act, 2011, ‘TAA”, effective 1 October 2012. When TAA was introduced to Parliament SARS argued that its purpose was to protect both the taxpayer and SARS. And in some instances, come to workable solutions in the interests of both. TAA establishes the ground rules for tax disputes. These rules have to have to be observed no matter what the merits of the case may be.

Lesson 1

When SARS raises an income tax assessment the ball lands in the taxpayer’s court. Either the taxpayer must play the ball back into the SARS court by formally objecting to the assessment or pay the amount demanded. TAA is very specific in this regard and taxpayers who depart from the rule are at huge peril. SARS has the narrowest of grounds to reduce the assessment without an objection.

Lesson 2

If the taxpayer objects on time SARS has to reconsider the case.  The payment of tax is not suspended by objection. But the taxpayer can request an extension of time for payment. This is generally granted unless SARS is of the view that the taxpayer has no case.

Even if extension of payment is granted it does not stop the interest clock from running while the objection is handled by SARS. In years gone by taxpayers often objected to assessments on the basis of ‘never a faint heart won fair lady.’ Today this can rebound horribly on the taxpayer in the form of a nasty interest charge.

Lesson 3

If SARS disallows the objection the assessment becomes final and binding unless the taxpayer lodges an appeal to the income tax special court within the specified period. If no appeal is lodged the assessment becomes final and binding regardless of the merits of the case. There are very limited grounds for SARS to condone a late objection or appeal, even if SARS is sympathetic to the taxpayer’s case.

It appears as if Malema fell short at Lesson 3. He did not lodge an appeal so the assessments became final and binding.  Game over! At best Malema could only request deferred terms of payment.

Lesson 4:

If the taxpayer does not pay and the assessments have become final and binding the case is dead in the water. SARS must then initiate recovery proceedings in terms of TAA.  In Malema’s case culminated in a provisional sequestration order.

‘Aha,’ cry the crowd, ‘ at last we’ve nailed him!’

Maybe Not!

Lesson 5

Prior to TAA, SARS simply had no authority to come to a compromise with the taxpayer. But today Provisional sequestration/liquidation opens up whole new chapters in TAA.

SARS does not want to pursue sequestration or liquidation proceedings against a taxpayer if there is no prospect of recovery. If SARS were to follow every debt to final sequestration or liquidation it could even become liable to pay the liquidators and trustees, thereby wasting taxpayers’ money in the pursuit of the unpursuable.

So TAA allows SARS to consider the prospect of recovery and deal with the matter by way of a postponement of payment, a total write-off of the debt or a compromise arrangement. A confidential written agreement is then concluded with a senior SARS officer resulting in the matter being dealt with in the most efficient manner possible.

This is all-consistent with the new business rescue provisions within the companies act and is considered best practice in King III.

The above remedy is available to all taxpayers. But there are important caveats that must be observed, primarily that the taxpayer has to prove financial distress.  As is demonstrated by Malema this is best achieved through a provisional sequestration/ liquidation order or the initiation of business rescue proceedings in terms of the companies act.

A further requirement exists that the taxpayer must be able to bring all arrear tax returns up to date. It is interesting that Malema made a public statement agreeing to tend to this.

The irony of the story is that provisional sequestration is not the end of the road. In Malema’s case it may be his savior.

If Malema can come to an agreement with SARS he will not be placed in final liquidation and the debate as to whether he can be a member of parliament then becomes irrelevant.

There is a consolation for the taxpayer. At least TAA provides a remedy for cases of financial distress. This is far better than the old days where liquidation proceedings brought by SARS was the end of the taxpayer, the concurrent creditors and all the jobs that went along with the business.

We live in a kinder business world that allows people to try again. Provided one plays to the rules of the game.

TAA may rescue Malema and he can now represent the 6% of voters who are unhappy with the ANC. They need to be represented.

So now if the rules of TAA, promulgated by Parliament can save Julius, can Julius now obey the rules of parliament? Can we please see a little less circus and bit more constructive debate. Then we could all be winners.

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