SARS appointment of retirement funds as tax agents creates dilemma

Johan Kotze

The appointment of retirement funds by the South African Revenue Service (SARS) as tax agents is creating a dilemma for funds trying to balance their fiduciary responsibilities towards members with the obligation of being appointed as a tax agent.

Johan Kotze, Head of Tax Dispute Resolution at leading pan-African legal services group Bowman Gilfillan explained: “Many retirement funds are currently receiving tax agency appointment letters from SARS requesting funds to deduct outstanding tax from members’ pension, and to pay it over to SARS”.

Johan Esterhuizen, Partner in the Pension Practice Group at Bowman Gilfillan, noted that appointments create a dilemma because the fund, the administrator and the trustees have to balance their fiduciary responsibilities towards the member with the obligation of being appointed as a tax agent.

The SARS letters should, from 1 October 2012, have been provided in terms of section 179 of the Tax Administration Act, and prior thereto in terms of section 99 of the Income Tax Act. Many letters, presumably only shortly after the Tax Administration Act was promulgated, were erroneously issued in terms of the Income Tax Act and any appointments made in terms of the latter should be questioned by the fund as to their legal validity, Kotze advised.

SARS has wide ranging powers to collect outstanding tax, and the most effective strategy being used is to appoint a tax agent to collect tax on its behalf.

Section 99 of the Income Tax Act allowed SARS to declare any person to be an agent of a taxpayer and thereafter compelling such agent to pay the taxpayer’s outstanding tax from moneys, including pension and other remuneration, which may be held by the agent.

Many funds and their administrators were not aware that section 99 had certain limitations. In particular, an agent was required to ensure that it was able to legally comply with the requirements of the appointment. An agent 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, for example a bank or an employer, had to return the money to its client or employee.

Said Kotze: “The new Tax Administration Act provides for a much needed balanced approach, and it is important for funds to understand their rights and obligations should they be appointed. It is also important that funds inform their members through the normal member communication channels of a tax agency appointment and the consequence it may have.”

The new section 179 of the Tax Administration Act gives SARS the same power, but with greater circumspection, as it had with the old section 99. Funds should, as part of their fiduciary responsibilities, ensure that the features of the new section 179 have been complied with when an agency appointment is received.

Included amongst the provisions in section 179 is that only a senior SARS official may appoint a fund to be the agent of its member and that the appointment can only be in relation to moneys which the fund holds or owes, or will hold or will owe, to the member. The fund has to advise the member of the appointment, and should give the member an opportunity to confirm the correctness of the appointment.

According to Esterhuizen: “It follows that if a fund, or where applicable its administrator, fails to ensure that section 179’s features are considered and applied, and if challenged by a member following a deduction, may have to return the funds to the member. The fund will then have to attempt to recover the funds from SARS at its own costs.

“The rights and obligations of the fund and the administrator, when SARS issues these agency appointments, may have to be dealt with in the service level agreement. It is recommended that the roles of the various parties are properly set out in the service level agreement, to ensure that provision is made should an agency appointment be made by SARS.”