SARS COMMISSIONER MAY NOW WRITE OFF OR

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1 LANGA ATTORNEYS Business Brief SARS COMMISSIONER MAY NOW WRITE OFF OR COMPROMISE TAX DEBT Extending the room to negotiate Introduction On 13 April 2007, the Minister of Finance issued regulations by Government Gazette Notice No under section 91A of the Income Tax Act 58 of 1962 prescribing the circumstances under which the Commissioner may write off or compromise any amount of tax, duty, levy, charge, interest, penalty or other amount payable by a person in terms of any Act administered by the Commissioner. Purpose The purpose of these regulations is to grant the Commissioner authority to apply flexible approach in the process of collecting all tax debts. The general provisions of the regulation make it clear that the circumstances calling for flexibility must be to the best advantage of the State. It is of importance to note that the regulations apply only in respect of a tax debt owed by a debtor where the liability to pay tax debt is not disputed by the debtor. PRE 13 April 07 Section 91A (1) stipulates that : The Minister may by regulation prescribe the circumstances under which the Commissioner may waive, write off or compromise in whole or in part any amount of tax, duty, levy, charge or other amount payable by a person in terms of any Act administered by the Commissioner, where that waiver, write off or compromise would be 1

2 to the best advantage of the State. interest would be no go area for waiver or Sub section 2 goes on to stipulate what the reduction by SARS in the process popularly Minister must do, i.e. prescribing the: referred to as negotiation by some taxpayers. Procedures to be followed by the WRITE OFF AND COMPROMISE Commissioner in the process Requirements for reporting by the Of interest at this stage would be what is a Commissioner of any amounts write off, compromise and the qualifying which have been waived, written off circumstances or compromised. Write off POST 13 April 07 Write off is defined to mean a reversal of tax Regulations, procedures and requirements debt in whole or in part. Tax debt may be are now in process, it is now in the hands of written off permanently or temporarily. the Commissioner to implement. This is a Circumstances under which a debt may reactive process by the Commissioner on the be permanently written off request or application by the taxpayer in need to have his/her debt written off or The commissioner may permanently write off compromised. an amount of tax debt to the extent that the Commissioner is satisfied, at that time that What is of interest is that the word interest the tax debt is irrecoverable as contemplated is highlighted in the introductory paragraph below above. The reader will notice that in section It cannot be recovered by action and 91A(1) there is no mention of the word judgment of a court; interest as part of definitions of the amount It is owed by a debtor that has been of debt owing to SARS. The issuing of liquidated or sequestrated regulations makes it clear that interest is being classified as part of amount owing to Important to note is ; a tax debt is not SARS which can be written off or irrecoverable at law if the debtor is a compromised. company or a trust and the Commissioner In practice, before the regulations were has not first explored action against or a issued, a taxpayer would succeed in applying recovery from the personal assets of any for the reduction or waiver of additional director, shareholder, trustee or persons taxes, penalties or charges however acting in the management of that debtor. 2

3 Circumstances of temporary write off of tax debt interest rate applicable during the period that the tax debt was outstanding. The Commissioner may temporarily write off an amount of tax debt if the Commissioner is satisfied that the tax debt is uneconomical to pursue. A debt is considered to be uneconomical to pursue if there is a likelihood that the costs to recover the tax debt will exceed anticipated amount to be recovered in respect of the outstanding tax debt. The regulations stipulate considerations by the Commissioner to arrive at the conclusion whether the costs will exceed debt to be recovered. Amongst the considerations is the financial position of the debtor, including the debtor s assets and liabilities, cash flow and possible future income streams of that debtor. Possible future income might be one of the attractions for the SARS to temporarily write off tax debt against permanently doing so. A decision by the Commissioner to temporarily write off an amount of tax debt does not absolve the debtor form the liability of that tax debt. If the Commissioner at any stage pursues the collection of any amount of tax debt which was temporarily written of, the Commissioner must determine interest for the period from the date that the tax debt was so written off to the date of payment a the COMPROMISE Compromise circumstances The Commissioner may compromise a portion of a tax debt upon written request by a debtor, which complies with the following requirements: Request for compromise to be signed by the tax debtor: All assets and liabilities of the debtor reflecting the current market value of those assets; All amounts received by or accrued to and expenditure incurred by the debtor during the 12 months immediately preceding the request; All assets which have been disposed of in the preceding three years, or such longer period as the Commissioner deems appropriate The value of all assets so disposed of, the consideration received or accrued, the identity of the person who acquired the assets and the relationship between the debtor and the person who acquired the assets (if any) 3

4 The debtor s future interests in any assets, whether certain or contingent or subject to the exercise of a discretionary power by any other person All assets over which the debtor, either alone or with other persons, has any direct or indirect power of appointment of disposal, whether as trustee or otherwise Details of any connected persons in relation to that debtor The debtor s present sources and level of income and the anticipated sources and level of income for the next three years, with an outline of the debtor s financial plans for the future; and The debtor s reasons for seeking a compromise The request must be accompanied by the evidence supporting the debtor s claims for not being able to make payment of the full amount of that tax debt. The debtor must also warrant that the information provided in the application is accurate and complete. The Commissioner may require that the application be supplemented by such further information as may be required. The commissioner will amongst other things consider savings in the costs of collections before granting the request for compromise of tax debt. The purpose of the decision to compromise is to assist a debtor who has become overcommitted to save a business from failure or closure, regardless or whether or not a large number of people depend on the business for employment or the activities of the business serve as a national interest to alleviate harsh or unfair operation of a tax law in particular circumstances or to further a charitable objective or to create a benevolent public image for the Commissioner COMMISSIONER S OBLIGATIONS To maintain a register of all tax debts written off or compromised in terms of these regulations. To report in the SARS financial statements during any financial year the amounts of tax debts written off or compromised. WHAT THIS PROCESS IS NOT Having encountered taxpayers who are of the view that these regulations are a form of Tax Amnesty to non Small Businesses it is worthy to highlight the purpose and the outcomes of the two processes. This may be 4

5 triggered by the timing of publishing the regulations. Regulations come at space of the small business tax amnesty rush hour. Tax Amnesty makes it clear that its purpose is to benefit small businesses who are registered and not registered for purposes of bringing them to the tax net with the aim of assisting them wit their tax debt and some other benefits. The outcomes of this process must be to the best advantage of the state. CONCLUSION Despite authorizing the Commissioner to apply flexible approach towards the debtor in collecting all tax debt the process is carefully crafted to be to the best advantage of the state. The taxpayer or debtor has to advance a strong and clear case for requesting the write- off or compromise. Moreover they provide a room for consideration of interest as an element of debt subject to negotiation. Nelisa Mali LANGA ATTORNEYS For more information visit our website CAUTION Clients should note that this publication is for their information only and that they should not base decisions on the Information contained herein without obtaining prior professional advice LANGA ATTORNEYS 5

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