Funds collecting tax for SARS – who bears liability?

Fiona Zerbst, FAnews Online Editor

Earlier this month, we ran a release informing readers that SARS has been appointing retirement funds as tax agents. This bears following up on because of the potential effect on fund members. Many retirement funds are currently receiving tax agency app

The reality is that SARS will look to pension funds because this is a relatively easy target for them – if, for example, 200 members of a retirement fund owe SARS R1 000 each it is much easier to approach the fund rather than each individual. Funds need to recognise that they could be appointed as agents regardless of the fact that the day-to-day administration has been delegated to a third-party service provider. The trustees have to ensure that this is dealt with in service-level agreements – if it’s not, there may be extra costs because this may be deemed to be an additional service.

It is therefore up to fund administrators, principal officers and trustees to look closely at agreements and perhaps renegotiate them where necessary. Because funds are required to review contracts with service providers, this won’t place an undue burden on the trustees.

Section 99 vs. Section 179

Let’s briefly look at the legal background. Section 99 of the Income Tax Act was effectively replaced by section 179 of the Tax Administration Act in October last year. Section 179 gives SARS the same power it had in terms of Section 99, but with greater circumspection.

Section 99 had certain limitations, from a taxpayer’s perspective. In particular, an agent was required to ensure that it was able to legally comply with the requirements of the appointment and it was also entitled to question the correctness of the tax agency appointments. For example, where the agent exceeded the ambit of section 99, the court held that the agent, such as a bank or an employer, had to return the money to its client or employee.

In terms of Section 179, there are some provisions worth noting:

* Only a senior SARS official may appoint a fund to be the agent of its member. A senior SARS official is a SARS official with specific written authority from the Commissioner or a SARS official occupying a post designated by the Commissioner.

* The appointment can only be in relation to moneys which the fund holds or owes, or will hold or will owe, to the member.

* SARS may, on request, allow the agent to deduct an amount over a period and not as a once-off payment, to allow the member and/or his or her dependent a basic living expense. There is no indication in the Tax Administration Act what the basic living expense is and it is likely to be determined on a case to case basis.

The Act does not, however, clarify who is ultimately liable for any problems that arise in terms of collecting outstanding money on behalf of SARS, which means that funds could find themselves in hot water. Who is responsible if there is no explicit agreement in this regard between a fund and a fund administrator?

SARS is most likely to make an employer responsible, which is the fund in a defined sense, but it is actually the administrator who will be expected to do the work. If the administrator neglects to do this, who can be held liable? If charges are brought against the administrator, the fund’s bottom line will be affected, which will hurt fund members.

Challenges for funds

According to Johan Kotze, head of tax dispute resolution at Bowman Gilfillan, if there is no agreement between the administrator and the fund, which regulates this specific obligation, it could result in the fund’s having to ensure compliance. This will be impractical as it is not the fund that is responsible for the day-to-day administration. Bear in mind that if only one member of a retirement fund has outstanding taxes and the fund is held liable for collecting these, but fails to do so or does so incorrectly, every single member of the fund could be affected by potential litigation if that member or SARS decide to dispute the obligation to deduct.

If the fund or its administrator fails to ensure that section 179’s features have been applied, money recovered from a member would have to be repaid to the member if he or she challenges a deduction. The fund would then have to recover the money from SARS at its own cost.

Johan Esterhuizen, partner in the employee benefits practice group at Bowman Gilfillan, says funds need to be sure of the following:

* Service-level agreements are in place to make provision for these kinds of eventualities. Because a fund usually delegates its functions, including its administration, to third-party service providers, this requires that a service-level agreement be put in place. The agreement describes the services which the administrator will be required to perform. With SARS issuing the agency letters, the funds must ensure that the function to comply with the SARS appointment is dealt with in the service-level agreement. If not, the fund will not be able to hold the administrator liable if an instruction from SARS to withhold certain moneys isn’t given effect to. They communicate with their members and inform them if SARS has asked them to collect outstanding taxes on its behalf, outlining any possible costs involved, which may need to be borne by the members collectively. “It is important that funds inform their members through the normal member communication channels of a tax agency appointment and the consequence it may have,” says Kotze.

* When members, for example, consider early retirement they usually request the administrator to provide them with an estimate of their benefit. When providing this estimate, it is normally assumed that the member’s tax affairs are in order and the benefit calculation is made accordingly. These calculations are normally not far of the mark as to the benefit a member will ultimately receive. A member will then take a decision based on these facts, but when the time to pay comes around and it is discovered that the member had outstanding tax liabilities this could have serious ramifications for the member. This is because the member planned his/her retirement having a certain amount in mind, but the amount received could be much less, leaving the member in dire circumstances as he/she would have left his/her employment and is unlikely to be reappointed or find alternative employment.

* If members are considering early retirement, for example, but their tax affairs are not in order, this should influence their planning. Member should inform funds if their tax affairs are not in order but, similarly, funds should educate members about the ramifications if their tax affairs are not up to date. The administrators could also consider inserting in their quote to members to state that the figures are preliminary and calculated on the assumption that the members’ tax affairs are in order.

Editor’s thoughts: It is crucial that funds understand their rights and obligations because failing to do so could have some costly ramifications. These need to be dealt with in service-legal agreements, which may need to be renegotiated to make provision for, for example, agency appointments made by SARS. But members should also take time to look into their own tax affairs, because many don’t have first-hand knowledge of this. “There may be tax and penalties outstanding and they may be quite unaware of this,” says Esterhuizen, who emphasises that member education is a critical step to prevent fall-out when some nasty tax ‘surprises’ occur later on. Should funds be obliged to advise their members to keep their tax affairs up to date? Comment below or email fiona@fanews.co.za.