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SARS and the never ending cycle of inappropriate verifications

The Office of the Tax Ombud recently identified repeated verifications of the same tax risk by the South African Revenue Service (Sars) as a systemic issue. These inappropriate verifications were discovered during an analysis to determine the root causes behind delays in the payment of refunds.

Taxpayers who find themselves frustrated by being subjected to a verification process again and again can now go straight to the ombud to deal with the matter.

In the test case investigated by the ombud the taxpayer’s assessment was selected for a verification at the end of June 2021 and the matter was only resolved in March 2022 after numerous verifications, objections and adjusted assessments.

Read: Sars versus taxpayers

Deliberate, or not?

“It [the case] is so unreal that you wonder whether it was deliberate on the part of anyone,” says Thabo Legwaila, CEO of Office of the Tax Ombud.

“Was it deliberate on the part of Sars? I do not know.

“You do not want to think that it is deliberate, because if so it is a total travesty of justice for our taxpayers and our tax system in its totality. It is sabotage.”

Legwaila says during their monitoring process they noticed that verification cases were created after Sars had finalised disputes in taxpayers’ favour and revised the assessments accordingly.

When Sars reduces an assessment it should be safe to assume that it has had the opportunity to look at all the documents relating to the particular matter.

It should be common cause that the matter has been ventilated and there has been a determination in the form of a reduced assessment.

Legwaila says he finds it “shocking” that one official looks at the merits of the matter and decides that the assessment has to be reduced, only to have someone else come along and start afresh.

“That is why I am frustrated and worried that somebody might just be deliberately acting in a way that disadvantages taxpayers,” Legwaila says.

The case

When the first verification was finalised in July 2021 Sars issued an additional assessment saying that the taxpayer did not submit bank statements or payslips during the verification. The taxpayer objected – disputing the disallowance of the pay-as-you-earn (PAYE) credit – and submitted the required documentation.

Sars allowed the objection and issued a reduced assessment (allowing the credit) but the very next day selected the taxpayer again for verification. Almost six months later Sars again disallowed the credit and said no bank statements were provided.

Once again the taxpayer objected, Sars allowed the objection, and in February 2022 a reduced assessment was again issued.

But, lo and behold, the same assessment that was issued on February 23 was selected for verification on February 24. Then on March 23 the verification was finalised with no adjustments. The refund of R11 985 was only paid on 26 March.

‘Remedy the problem’

In its recommendation the ombud requested that Sars remedy the problem.

Sars needs to see in how many instances it verifies the same risk and flags assessments that have already been verified.

“If there is more than a handful, Sars needs to introduce checks and balances to prevent this from happening,” says Legwaila.

“If they are doing the same thing over and over again in terms of the same tax return, the same tax type and the same information, that is just crazy. It is unacceptable.”

Legwaila says there are numerous cases similar to the ombud’s test case. That is why the ombud’s office has classified it as systemic. A systemic issue is a matter that can be regarded as the underlying cause of a complaint that affects many taxpayers in the tax system.

Beatrie Gouws, head of stakeholder management and strategic development at the South African Institute of Taxation, confirms that it has been receiving queries from its members along the same lines. These queries have been sent to regional Sars offices individually, where they have been resolved satisfactorily in the end.

Shortcut with systemic issues

Legwaila says Sars should be correcting its systems to put an end to complaints of a similar nature.

If it does not implement the recommendations or partly implement it, the ombud’s office will raise the issue in parliament and with the minister of finance.

When a complaint has been identified as being systemic in nature taxpayers who find themselves in similar situations can take their compliant directly to the ombud’s office without having to follow the normal complaint process.

Sars has not responded to a request for comment on whether the recommendations have been implemented.

In its 2020/21 Annual Report, the Office of the Tax Ombud identified 10 systemic and emerging issues.

Thousands of retirees are paying more tax on their pensions – can that be right?

  • Higher tax deductions have started to hit thousands of retirees in recent weeks.  
  • This is as a result of administrators implementing tax directives from SARS to ensure the correct tax is collected upfront from retirees who receive more than one pension or a pension and salary income.  
  • Most taxpayers earning more than one pension or a pension and salary income, have not had enough PAYE tax deducted in the past.

Thousands of retirees would have find lower-than-expected pensions in their bank accounts at the end of April owing to higher tax deductions. Thousands more already had this experience at the end of March.

This is because of administrators implementing tax directives issued by the South African Revenue Service (SARS) in an attempt to ensure the correct tax is collected upfront from retirees who receive more than one pension or a pension and salary income.

While in many cases the tax deductions may still be too low, there are a few cases where errors have crept into the tax directives applied to pensions being paid to retirees with more than one income, according to a large retirement fund administrator.

Nazrien Kader, head of tax at Old Mutual, confirmed that some pensioners have highlighted that they do not have any other sources of income and do not understand why an increased rate has been proposed by SARS.

Kader says Old Mutual continues to engage with SARS on the new tax rates and will keep pensioners informed on updates and changes to their policies.

Reasons for high rates

There are, however, also logical explanations for some directives that appear to set the tax rates too high, Gordon says.

The tax rates in the directives have been calculated by SARS based on your aggregated pension and salary income in the last tax year for which you have been assessed.

Most taxpayers earning more than one pension or a pension and salary income, have not had enough Pay as you Earn (PAYE) tax deducted in the past, as each annuity provider or employer applies the tax rates and the tax rebates as if the income they pay you is the only income you are receiving.

This results in you potentially having to pay in tax when your income is combined and your final tax is assessed at the end of the tax year. Many pensioners have found themselves indebted to SARS as a result.

SARS has now considered retirees’ total pension and salary income and instructed annuity providers to deduct tax based on pre-determined fixed tax rates in an effort to prevent this under-recovery of tax. Gordon says SARS has explained that it may have instructed one annuity provider to deduct all the under-recovered tax rather than spreading it across different providers or instructing employers paying those in semi-retirement to change their tax rates.

This means you may be taxed at a fixed rate of more than 45% on one pension – but never more than 50%, she says.

Consider your effective rate

When the tax collected through the fixed rate on your pensions or pension plus other salary income is determined as a percentage of your total income, it should be close to your actual effective tax rate (the average rate of tax you pay on your income when the tax brackets and rebates are applied).

In many cases retirees may over the tax year still be paying too little tax, Angus McDonald, senior policy adviser at the Association for Savings and Investment South Africa, cautions.

He says the fixed tax rates in the directives issued by SARS are based on a retiree’s income in the previous tax year and if a retiree has had an increase in their income this year, the tax deducted may still be too low.

Opting out

SARS has for years been encouraging pensioners to opt for higher upfront tax rates and avoid a debt to the revenue authority on assessment. This has not been successful. It has now asked administrators to apply the fixed rates it has calculated to retirees’ pensions instead.

You do, however, have the option to opt out of the tax rates SARS has calculated for you.

Kader says to date fewer pensioners than expected have opted out of SARS’s fixed rates.

If you opt out of the tax rate SARS has instructed your pension administrator to deduct, you will be warned by the administrator that you must be in a position to pay any tax you owe at the end of the tax year, McDonald says.

If you ignore that warning, do not expect SARS to write off the debt you owe it when you are assessed – the onus is on you to set aside the appropriate tax and to manage your cash flow, he says.

If you choose to opt-out, you may ask your pension administrator to tax you as if the income it is paying is your only income, or at a higher PAYE rate that you regard as appropriate.

McDonald says if you opt-out, SARS allows the administrators to determine the date from which your choice of the tax rate will apply.

Depending on how you have chosen the to opt-out from the SARS rate and how the administrator deals with your opt-out request, you may owe tax on assessment or be owed a refund.

Before opting out

Before you opt-out, ask yourself if the tax that is being deducted is a more accurate reflection of what you should be paying, McDonald says.

If you had to pay in tax at the end of the last tax year, it was in all likelihood because each administrator and employer treated your pension/s and salary income as your only income, he says.

Work out, or get your financial or tax adviser to help you work out what your combined pension and salary income from all sources for the year will be. Then apply the tax rates, rebates and the expected medical tax credits for your age to determine how much tax you will be liable for.

Compare that to what is being deducted from your pension/s and salary now, he says. Remember if you opt-out of allowing your administrator to deduct the fixed tax rate from your pension, you have to set aside money to pay any tax that may be due to SARS on assessment at the end of the tax year, McDonald says.

If you are unable to do so, it will be better to allow the administrator to deduct tax at the SARS fixed rate from your pension and to adapt to the lower monthly payment, he says.

New legal case deals with moonlighting and side hustles in South Africa

Moonlighting has become more common for those looking to earn additional income, but do employees need to disclose their side businesses to their employers, especially when a conflict of interest is possible?

This was recently dealt with in the case of Bakenrug meat (PTY) Ltd t/a Joostenberg Meat v CCMA and others in which this question was considered by the court, said legal firm ENSAfrica.

“The employer’s business in this matter was the production and sale of a range of meat products. The employee was a sales representative at the business. However, the employee also operated a business of her own in which she marketed biltong.

“When the employer became aware of this, she was dismissed after being found guilty of the charge ‘that she took up employment while working in another capacity’. Aggrieved by this, the employee then referred the matter to the Commission for Conciliation, Mediation and Arbitration (CCMA), alleging that her dismissal was substantively unfair.”

CCMA referral

The CCMA commissioner found that the dismissal was substantively fair because the employee independently operated a formal business that marketed a meat product while the employer was also producing and selling meat products in which she was the salesperson.

“As a result, the employer should have been made aware of the employee’s activities to decide whether there was a conflict of interest. The failure to inform the employer amounted to dishonesty, and it was insignificant that the employee did not market identical meat products in comparison to the employer,” ENSAfrica said.

Labour Court

Aggrieved by the commissioner’s findings, the employee launched a review application in the Labour Court.

The ruling justice Cele found that the dismissal was substantively unfair. He gave two main reasons for this finding:

  • Firstly, he accepted that there is no duty for an employee to inform their employer about a potential conflict of interest. An employee is only required to inform an employer of a potential conflict where there is competition of some sort.
  • Secondly, on assessing the evidence, Cele found that the employee operated her business on the weekends. Accordingly, there was no “nexus” that her “side-line” business negatively affected/impacted the performance of her duties towards the employer during the week.

Cele then found that the evidence failed to establish that the employee was guilty of the charge that she ‘took on employment whilst also working in another capacity.

“The learned judge concluded that the commissioner’s decision that the dismissal was substantively fair would not have been reached by a reasonable decision-maker, and he set aside the award,” ENSAfrica said.

Labour Appeal Court

The Labour Appeal Court (LAC) overturned the Labour Court’s decision on appeal.

The ruling justice Davis held that there was clear evidence that the employee did not disclose an essential and material fact that she was independently operating a business in marketing meat products, even if the meat products were not identical to the employer’s.

“The fact that operating her business did not affect her performance was insignificant. What was important is that she was employed as a sales representative in a business marketing meat products, while she was also involved in marketing meat products.

“Her failure to inform the employer of these martial activities amounted to dishonesty and a violation of her duty of good faith towards the employer. Davis JA, therefore, found that based on the evidence, the commissioner arrived at a reasonable decision that the dismissal was substantively fair and set aside the judgment of the court a quo.”

Conclusion

“The importance of this case is that it illustrates the extent of the “duty of good faith” that employees owe to their employer and that there can be far-reaching consequences for an employee if this duty is breached,” ENSAfrica said.

  • Commentary by Kerrie-Lee Olivier of ENSAfrica.

The Advantages And Disadvantages Of a Living Trust

And what you should be aware of when setting one up.

A living trust can be a very useful estate planning if set up correctly and for the appropriate purposes, but before determining whether a trust is suitable for your purposes, it is important to weigh up the advantages and disadvantages of doing so. In this article, we unpack the pros and cons of a living trust, and what you should be aware of when setting one up.

ADVANTAGES

Estate-pegging

A significant advantage of a living trust is that it allows you to peg the value of the assets in your personal estate while allowing the growth in those assets to take place in the trust, thus reducing your estate duty and other tax liabilities. As such, moving growth assets such as a second property or a share portfolio into a living trust can be an effective mechanism for fixing the value of your personal estate for estate duty purposes. By using your annual donations tax exemption of R100 000, you can effectively reduce the value of the loan account each year, thereby reducing your estate duty liability.

Asset protection

A living trust can be used to protect assets from creditors, although it is important to ensure that the trust is not set up specifically to prejudice your creditors. When selling assets to a trust, keep in mind that the loan account appears in your personal estate as an asset that can be attacked by your creditors. It is only once the value of your loan account decreases over time that the full benefits of asset protection will arise. In the event of high-risk business ventures, a living trust be an effective way of protecting your personal assets from potential creditors.

Providing for those with disability

If you have a child or dependant who suffers from a disability that renders that person unable to manage their financial affairs, you are able to set up what is referred to as a Special Trust Type A in terms of Section 6B (1) of the Income Tax Act. This type of trust is ideal for parents of special needs children who are concerned about how they will be cared for when they are no longer around. It is important to note, however, that this type of trust must be registered for the sole benefit of a beneficiary with a permanent mental or physical disability in order to qualify for the favourable tax benefits enjoyed by such trusts. If correctly registered, Type A trusts are taxed at rates applicable to natural persons ranging from 18% to 45%. Further, the annual CGT exclusion of R40 000, as well as the primary residence exclusion of R2 million, is applicable.

Flexibility

A trust structure can allow for greater flexibility in terms of providing for beneficiaries without ownership transferring directly to them, especially if setting up a discretionary trust where the trustees can exercise their discretion as to the distribution of trust capital and income, taking into account uncertainties such as death, divorce, insolvency, changes in legislation, and changes in personal circumstances.

Dementia

As an estate planner, you can use a living trust to administer your financial affairs if you are concerned about losing mental capacity such as if you are diagnosed with early-stage dementia. While you still have mental capacity, you can transfer assets into a living trust structure to be used for your future living expenses and nominate trustees who you believe will administer those assets in your best interests. 

Transfer assets to future generations

Trusts do not die which means that the assets housed in your trust can transfer from generation to generation without having to go through the estate administration process. This means that the trust assets can evade the estate administration of consecutive estates while providing for different generations of beneficiaries. It can also alleviate the problems involved in leaving an indivisible asset to multiple heirs such as in the case of a holiday home or family farm. Further, while assets in your personal estate can be interrupted by events such as divorce, insolvency or family disputes, the assets held in trust are less likely to be affected by such eventualities.

Access to capital in the event of death

When it comes to ensuring that your loved ones and beneficiaries have access to capital and income after your death, a living trust can offer an ideal solution. While your personal accounts may be frozen as part of the estate administration process, bear in mind that your trust’s accounts, which do not form part of your personal estate, will continue unaffected. The estate administration process, which is currently experiencing delays as a result of Covid interruptions, can take up to two years to finalise (sometimes longer), making a living trust an effective solution ensuring ongoing financial provision to your loved ones after your death.

Professional asset management

Depending on the nature of the assets housed in your trust, appointing professional trustees with investment management experience can be a significant advantage, particularly if the trust is used to house investments intended for your loved ones after your death and where optimal investment returns are important to their future financial security.

DISADVANTAGES

Loss of control

As a trust founder, it is important to fully appreciate that by transferring assets to a trust, you must divest yourself of ownership and control of those assets, failing which the trust may be deemed invalid. It must be clear that your intention is to relinquish control of the assets to the trustees, and that you do not interfere in their management of the trust assets. As such, be cautious of transferring assets earmarked for your retirement to a trust as you will effectively hand over control of those assets to your trustees who may have other intentions for them. Further, it is important to ensure that your trust deed is correctly drafted so as to clearly outline the mandate of your trustees.

Administrative costs

When contemplating a trust structure, do not lose sight of the fact that running a trust adds a layer of complexity and costs to your financial affairs. When setting up a family trust, keep in mind that you will be required to appoint an independent trustee and, if you’re planning to appoint a professional trustee you will need to budget for their professional fee. In addition, keep in mind the set-up costs as well as the costs of maintaining the trust bank accounts and ensuring that the secretarial functions of the trust are attended to.

Choosing the wrong trustees

It is absolutely essential to make the right decision when appointing your trustees as you will effectively be handing control of the trust assets to them. It is therefore critical that you trust them implicitly to manage the affairs of the trust in the beneficiaries’ best interest. For instance, many fiduciary experts advise against appointing your children as trustees while you are still alive as very often they have different intentions for the trust assets, and family dynamics and tensions can give way to unintended consequences when it comes to how those assets are dealt with. 

Being regarded sham or alter-ego trust

If the court feels that there is not sufficient separation of control between the trust founder and the trust assets, the courts can pierce through the veil of the trust to establish whether the trust is an alter-ego or sham trust which can result in the trust being declared void from the date of inception. 

Selling assets to the trust

If you intend to sell assets to the trust and then use your annual donations tax exemption to reduce your loan account over time it is important to remember that you can only reduce this loan account by R100 000 per year without incurring any additional donations taxes. It is also important to bear in mind that the sale of the asset will trigger a capital gains event and you may be liable for CGT when the sale takes place. Further, as the value of your loan account will reduce over time as and when you use your donations tax exemption, there may still be estate duty implications in your deceased estate should you pass away prior to the loan being paid off.

In closing, keep in mind that living trusts are not appropriate for everyone. If correctly set up and administered, they provide significant advantages to the estate planner, and it is always advisable to seek professional fiduciary advice before creating a trust.

Here’s when your boss can read your emails in South Africa

Several South African companies have established an email monitoring policy in their employment contracts. This policy often covers both private and business use of emails, but there are often questions about how intrusive it should be, says Roy Bregman, director at Bregman Moodley Attorneys.

“Our Constitution respects a person’s right to privacy. The Protection of Personal Information Act (POPIA) further entrenches personal data protection rights,” he said. “An employer is entitled to expect that employees will not use their emails to violate company policies, use inappropriate language, break confidentiality, or run their own business on company time.”

Bregman added that employment contracts usually contain clauses dealing with the monitoring and interception of emails.

These clauses typically provide that employees should not expect privacy when sending, receiving, downloading, uploading, printing or otherwise transmitting emails. And that employees must use emails for bona fide business purposes only.

In terms of POPIA, an employer who processes an employee’s personal information must:

  • Do so reasonably and without negatively impacting their rights as data subjects.
  • Do so with the data subject’s informed, express, and voluntary consent.
  • Explain the purpose of such monitoring interception, to enable the employees to perform their duties and assist the employer in meeting its legal, business, administrative and management obligations.

WhatsApp and confidentiality 

These policies can also include other forms of communication – including messaging services such as WhatsApp and Slack.

An employer is typically responsible for the conduct of its employee where the employees are acting within the course and scope of their employment, said Karl Blom, senior associate at legal firm Webber

For that reason, if an employee is using WhatsApp to conduct the business of their employer, the employer must ensure that these activities are POPIA compliant, he said.

He added that there are several provisions that may apply under POPIA, including requirements pertaining to:

  • The transfer of data to third parties outside South Africa;
  • The retention of personal information;
  • The security of the personal information;
  • The purpose for which the personal information is being used.

“If an employer is making use of WhatsApp, it must treat these messages as it treats any other technology – such as emails, VOIP, regular mail etc.”

Employers should also be mindful of any contractual confidentiality provisions that may apply to it – including those that may restrict its use of certain technologies, such as WhatsApp, he said.

“Finally, it is important to remember that WhatsApp and other messaging tools are operated by third parties, so employers should always be mindful of any regulatory requirements that may restrict how they provide data to third parties.

“For example, employers in the legal, educational, medical or insurance industry should be mindful of the specific requirements that apply in those sectors.”