How Sars is enforcing personal liability for tax debts

Sars is leveraging its powers under the Tax Administration Act, which provides for instances in which the Directors, Public Officers, or other representative taxpayers can be held personally liable for a company’s tax debt!

Unlike the pre-COVID era, these representatives must err on the side of caution, as Sars has rapidly upskilled its Debt Management Team for swift and potentially fatal collections, from your bank account, or even sequestration of personal estates.

Mismanagement burden to be discharged

 Although aggressive with their collections, Sars does, in the Notice of Personal Liability, afford the implicated individual an opportunity to contest their personal liability. This is, however, not the fire escape it may sound like, as proving no personal liability entails what could be construed as an admission on why the taxes were not paid, and what better use were the funds put to.

In discharging the burden of personal liability, certified bank statements must be submitted to Sars, across all accounts. This includes those of the representative taxpayer themselves. In conjunction with this, the last 5 years’ worth of Annual Financial Statements and Management Accounts must be submitted to Sars, confirming there was no mismanagement of funds or improper performance of financial duties!

 Where there is uncertainty as to who can be held personally liable, a distinct legislative guideline is that individuals involved in the financial management of a company, even informally, could find themselves personally liable for its unpaid tax debts. Sars’ broad powers extend beyond just the taxpayer, potentially implicating directors, shareholders, and other key individuals in a company’s financial affairs.

Personal Liability Under Section 180 of the Tax Administration Act (“the TAA”)

 Section 180 of the TAA empowers Sars to hold third parties personally responsible for a company’s tax debt if:

• The person “controls or is regularly involved in the management of the overall financial affairs of a taxpayer”; and

• Sars determines that the person acted negligently or fraudulently concerning the taxpayer’s tax debt.

Where a tax debt exists, this would include liability for capital sums due, as well as related penalties and interest.

Holding an official financial title within the company is not necessary. Merely being involved in financial decisions can make an individual a target. Directors, shareholders, financial officers, and even informal advisors can be held liable if their actions (or inaction) contribute to tax non-compliance.

 The role of representative taxpayers - Sars won’t stop at civil liability

Sars’s collection arsenal is not limited to section 180. For example, sections 153 to 155 of the TAA impose personal liability on a “representative taxpayer”, any person responsible for managing the tax affairs of a company. This includes public officers, who may be held personally accountable for the company’s unpaid income tax.

The threat of personal liability extends beyond financial penalties. Sars has the power to initiate criminal proceedings against individuals controlling non-compliant companies. This means that merely paying a fine may not be enough:  offenders could face criminal charges, and even imprisonment.

Negligence is no excuse. Even if tax non-compliance is due to oversight rather than deliberate fraud, individuals can still be held accountable. Sars has made it clear that ignorance or mismanagement will not shield individuals from legal consequences. This includes where taxpayers are guilty of non-submission of tax returns or non-payment of taxes rightfully due.

Criminality of non-compliance

Section 234 of the TAA outlines the acts and omissions which Sars considers as criminal offences, relating to non-compliance with tax Acts. This section further states that any person who wilfully commits one of the listed acts, or wilfully / negligently fails to act, may be liable, upon conviction, to a fine, or imprisonment of up to 2 years.

This is only the tip of the iceberg, however, as Section 235 of the TAA goes even further, speaking to tax evasion and obtaining undue refunds through fraud or theft. This comes with a 5-year potential imprisonment:

Be proactive: protect your finances, and freedom

Where the tax debt owed is in the millions, Sars are often aggressive in collections, and having an attorney with trial advocacy experience under their belt gives you an undisputed edge in negotiating on the legal papers submitted.

Sars’s crackdown, by extension, means that those involved in financial decisions, even informally, could face devastating financial and legal consequences.

Where there is a significant risk of Sars pursuing personal liability, or a large tax debt due under the name of a company that requires settlement, legal professional privilege is essential in all Sars engagements. Consulting with a tax attorney to understand potential exposure and implement a proactive strategy is crucial, as well as a compliance “health-check” on any “linked entities”.

If a personal liability notice has already been issued, seeking legal advice is critical to protecting one’s assets, including liquid funds, and mitigating the risk of further prosecution by Sars. This is not the time to bury your head in the sand; being proactive rather than reactive could be the difference between financial ruin and business recovery!

* Baijoo is the associate director and head of strategic engagement and compliance at Tax Consulting SA.

PERSONAL FINANCE