Sars is getting tougher – taxpayers need to fight smarter

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JEREMY MAGGS: The South African Revenue Service (Sars) is becoming tougher, more sophisticated and increasingly willing to fight taxpayers all the way to court. Listen to this statistic: winning just over 80% of tax disputes that reached litigation in its last reported financial year.

So I imagine that begs the question: what do you do when Sars says you owe money and you believe the taxman is wrong?

Well, let’s discuss that now with Nico Theron, who is founder of Unicus Tax Specialists. Nico, has the balance of power, do you think, in a tax dispute shifted too far in the favour of Sars?

NICO THERON: I wouldn’t say that it has shifted too far. I think that Sars has just started being more aggressive than what they used to be in the past. No doubt, because they’re under enormous pressure to collect.

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I think it’s not like there’s a shift of balance, it’s more the effective use of the power, I suppose, that’s always been there that has caused these disputes to rise in complexity.

JEREMY MAGGS: So not aggressive, but certainly, as you’re suggesting, a lot better at enforcing the law. And they’re forced to do that because there’s this huge pressure on revenue collection.

NICO THERON: Exactly, it’s their job. Naturally, if tax rates aren’t increased, there are still financial targets that need to be met, then you tend to be more efficient and effective, and, might I suggest, sometimes even creative in trying to make your assessments tick and to reach your targets. So that does take some tenacity to call out and to push back when it’s necessary.

JEREMY MAGGS: Now, that figure that I quoted, the 83% success litigation rate, it is extraordinary. Nico, does that mean that taxpayers are mostly wrong, or that by the time they reach court, many have already just simply mishandled their cases?

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NICO THERON: I think it’s more a matter of the case might have been mishandled. Because we deal with disputes all the time and our success rate looks a lot better than what that stat suggests. But indeed, if the matter proceeds to litigation, it becomes difficult.

Some cases shouldn’t reach litigation. And indeed, if you don’t, I have found that if we get them settled and resolved and properly dealt with before litigation, you’ll get a much better success rate.

But unfortunately, there are the cases that need to go to litigation and, of course, then there are chances of the taxpayer winning. But I think most of the issues are not dealt with correctly from the start, which is why it ends up in litigation.

JEREMY MAGGS: If Sars raises an assessment incorrectly, how much damage can it do to a taxpayer before that mistake is eventually corrected?

NICO THERON: Significant damage. It depends on the facts. There are safeguards put in place in the legislation to prevent that damage from happening whilst the dispute is being resolved.

But the reality is, those safeguards aren’t always available for whatever reasons and then that can create significant damage. Tax clearance statuses are adversely affected, cash flow is adversely affected, and that could really damage an individual or a business entirely.

JEREMY MAGGS: So the argument is the taxpayers have got to treat a disputed assessment as a legal dispute, I think you said almost immediately, in other words, get to it as quickly as you can. But Nico, that could also make ordinary tax compliance very expensive, surely?

NICO THERON: It could but not all matters where Sars raises an assessment requires necessarily the extent of legal expertise. There is a level where one can fairly comfortably deal with it.

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But the reality is that when you look at larger assessments, corporates and high-net-worth individuals, realistically speaking, practically speaking, those high-level assessments should be dealt with as a legal process right from the start.

The court has recently said that objections are governed by a tax court rule, and those rules must be strictly abided by unless the objection is treated as invalid, and those rules can get tricky, especially for a layperson.

JEREMY MAGGS: So how do I know what is high level then?

NICO THERON: Well, I suppose it depends on what is at risk. If you’re sitting with an assessment that’s jeopardising your business, that’s a high risk.

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If you’re sitting with an assessment that’s clearly wrong, that’s affecting your tax clearance, that is affecting your ability to do business or your ability to carry on with your life, that’s a high-risk assessment, and that needs to be addressed immediately and dealt with as a legal process.

JEREMY MAGGS: But the conventional wisdom would suggest that an accountant or a tax practitioner who handles someone’s compliance is generally equipped to handle the dispute, right?

NICO THERON: One would think so and to a large degree, that has always been the case. The unfortunate reality that not all accountants, and even lawyers, are necessarily trained in the nuance of tax dispute resolution and tax dispute resolution rules.

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Whilst in the past it wasn’t necessarily required, whereas nowadays it is because those rules are now more strictly enforced and more strictly applied by Sars. So unfortunately you do require nuanced expertise to deal with these matters.

JEREMY MAGGS: Nico, this is the question that scares me slightly. You warn that Sars often asks questions when it already knows the answer. Should then a taxpayer treat every Sars inquiry as potentially adversarial?

NICO THERON: Yes, I think so. I think the point is that Sars is not necessarily asking a question because they’re interested in knowing the answer. Of course, their job is to ensure that there’s compliance with tax law. So every question that they ask has got a reason, and the reason is to check compliance with tax legislation.

So one must bear in mind that that question is directed at exactly that and answer it appropriately.

The unfortunate reality is, in an attempt, I suppose, to engage amicably, the question isn’t always phrased in a way that you can see what it is they’re testing, and there might be strategic reasons for that too, which I completely respect.

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But one has to consider each request from Sars as saying, what is it that they’re actually testing so that you can respond appropriately and avoid the dispute.

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JEREMY MAGGS: But that kind of undermines the idea of a cooperative relationship between taxpayer and the Revenue Service, doesn’t it?

NICO THERON: I suppose one could interpret it like that. I don’t think that the aim is necessarily for it to be adversarial. The aim is for them to do their job and to ask the question, and if they have to ask the question to check whether there’s compliance, I don’t think that undermines anything. I think that’s just them doing their job.

JEREMY MAGGS: So is there a point, and I guess it would differ from case to case, but is there a point when a taxpayer fights Sars and when they should just accept that the cost and the risk, as you’ve outlined to me, is simply not worth it?

NICO THERON: Yes, most definitely. One of the things that for me is the most important thing when it comes to tax dispute, is keeping in mind the cost versus benefit principle.

One must look at it and say, well, what is the cost going to be of fighting this? What is the prospect, firstly, of success? And secondly, what would the cost be?

Indeed, in many instances I will look at the matter and say, well, best this be settled because the cost is far going to outweigh the benefit if we proceed further, whereas if we settle the matter now, it is more practically acceptable.

JEREMY MAGGS: So let me just finish with maybe more of a philosophical question. Ultimately, a tougher Sars is good for tax morality. I think we all accept that. But is there not the risk of creating a system in which taxpayers become frightened of challenging the revenue authority, even when it’s in the wrong?

NICO THERON: Yes, I think there is that risk, and I think that is a very real risk that I think is already starting to take place. I think that some taxpayers do tend to believe that taking on Sars is not worth the fight because Sars is Sars and they will always win.

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That’s not true, of course, but it does create that perception. I think that perception is already starting to manifest, in my experience at least.

JEREMY MAGGS: Nico Theron, thank you very much indeed. You are the founder of Unicus Tax Specialists, appreciate your time today. Thank you.

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