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Surprise – you have to pay my tax

2 May 2017
– 5 Minute Read


With SARS’ fiscal year having come to an end on 31 March, many executives and tax advisors will have been working hard to ensure their companies and clients pay their fair share of tax.

Sometimes, however, the tax buck does not stop with the taxpayer itself. In certain circumstances, SARS may hold a person personally liable for the tax debt of another taxpayer. Broadly, the at-risk third parties fall into three categories: “representative taxpayers”, “withholding agents” and “responsible third parties”. This is according to Rob Hare, a senior associate in the Tax Practice Group at Bowmans.

Closer look at the three categories

Representative taxpayers are people who are “responsible for paying the tax liability of another person as an agent…”, according to sections 153 to 155 of the Tax Administration Act, 2011 (TAA).

Hare says these people would include public officers, specifically appointed agents for tax purposes, and trustees, among others.

“Representative taxpayers could, for example, be considered personally liable for tax that is payable in their representative capacity if, while that tax remains unpaid, they disposed of money in their possession before or after the tax becomes payable, and the tax could ‘legally have been paid from’ that money,” Hare explains.

“Such a scenario could arise where a payroll service provider fails to pay over PAYE to SARS.”

Withholding agents, by comparison, are people who “must under a tax Act withhold an amount of tax and pay it to SARS”. This is according to sections 156 and 157 of the TAA.

“In other words, withholding agents have a statutory obligation to withhold and pay certain taxes to SARS. They are considered personally liable for tax which is withheld and not paid to SARS, or for tax which should have been, but was not, withheld in the first place,” Hare says.

“For example, where the required formalities are not complied with to claim an exemption from, or reduced rate of, dividends tax, this would make the relevant withholding agent personally liable.”

Third category has widest application

The category that is probably of most interest to executives and tax advisors is that of the “responsible third party”. This means a person other than a representative taxpayer or withholding agent who becomes liable for the tax liability of another person in a personal or representative capacity.

“Whether a responsible third party is personally liable for another taxpayer’s tax depends on the type of responsible third party,” says Hare, adding that this is dealt with in sections 158 and 159, as well as Part D of Chapter 11, of the TAA.

Arguably the most important type of responsible third party is “financial management” (section 180). This is defined as a person who “controls” or is “regularly involved in” the “management” of the “overall financial affairs” of a taxpayer.

This description could have a very wide application, Hare says. Some examples include, for instance, the CFO or head of Group Tax in a business. The definition could also include shareholders in certain circumstances, or even “non-finance” board members who “regularly” vote on financial affairs.

 “Whether people in these kinds of positions could become personally liable for the taxes of another company or person will depend on whether the description of ‘financial management’ is met, and whether that person’s negligence or fraud resulted in the failure to pay the tax. In addition, a ‘senior SARS official’ must be ‘satisfied’ that the negligence or fraud took place,” he explains.

Liability threshold is low

Hare says the threshold for liability as a responsible third party is potentially quite low. “To determine whether the person had acted negligently,” he says, “one would have to apply the ‘reasonable person’ test. In other words, what steps would a ‘reasonable financial manager’ take to guard against the risk that the tax was not paid?”

However, the fact that a “senior SARS official” must be “satisfied” of the taxpayer’s negligence could be an important limiting feature of this kind of third party tax liability. 

“There is case law that is arguably applicable in this scenario, which would require SARS to actually provide some evidence to a court that it was ‘satisfied’ as to the person’s negligence or fraud, having applied its mind to the matter. The person must have been informed of the evidence of SARS’ satisfaction in this regard; they should not have to guess as to why SARS is satisfied that they were negligent or fraudulent.”

The net widens

Hare says other types of responsible third party include people who knowingly assist in dissipating another taxpayer’s assets in order to obstruct the collection of that taxpayer’s tax (section 183 of the TAA). Then there are shareholders that receive company assets (such as by way of a dividend or dividend in specie) within one year before that company is voluntarily wound up (section 181). Yet another type is “connected persons” who receive an asset for no consideration or a consideration below fair market value (section 182). These other types of responsible third party could also have wide application.

In conclusion, Hare warns that people who could potentially fall within the definitions of “representative taxpayers”, “withholding agents”, or “responsible third parties” should be aware of the situations in which they may be held liable for someone else’s tax debt. This is especially important because SARS has the same powers of recovery against these parties as it has against the taxpayers themselves.

There is some relief for these third parties, as they will also have a right of recovery against the original taxpayer for any tax paid on its behalf, Hare notes. Still, it’s preferable not to be caught by surprise in the first place. Vigilance pays.