The level of corruption in South Africa, the complete lack of accountability and the ostensible lack of urgency in bringing offenders to book continues to irk honest law-abiding South Africans.
However, an important weapon available to the state to recover some of the ill-gotten gains is tax, says Aneria Bouwer, tax partner at law firm Bowmans.
She says income from “illegal activities” is still income and subject to income tax, even if the money ending up having to be repaid.
“In the context of corruption, it is more likely that these types of payments have not been declared at all in the tax returns of the recipient, or if they have been declared, that the nature of the amounts was not reflected correctly.”
Flow of millions
Media reports have highlighted a flow of payments to politicians and government officials that has amounted to hundreds of thousands and even millions of rands.
Bouwer says it is highly unlikely that a taxpayer who received a “corrupt payment” would have declared this amount as income in their tax return.
“Although the taxpayer would not be subject to tax if the payment was gratuitous, it is probably unlikely that the donor would have reflected the ‘donations’ in their tax return, especially in light of the donor’s potential 20% ‘donations’ tax liability.”
And it is quite likely that in many instances there would have been a liability since the monetary threshold for donations made by a natural person is R100 000 per annum.
Bouwer says the South African Revenue Service (Sars) cannot just issue an assessment, but must take steps that are procedurally and administratively fair.
“It must follow the relevant steps as provided for in the Tax Administration Act.
“The act provides Sars with extensive powers in respect of audits and inquiries to assist it with information gathering.”
One such tool is the ‘lifestyle audit’. Sars Commissioner Edward Kieswetter was asked about this mechanism during the annual Tax Indaba hosted by the South African Institute of Tax Professionals (Sait).
At the time he said the highest risk for the under-declaration of income came from large corporates and the high-net-worth individuals on Sars’s register.
They are the ones who would be offering bribes to public officials, but Patricia Williams, partner at Bowmans, “firmly believes” this is incorrect.
“Proper investigation would find that the people paying bribes would not be reflected on Sars’s system as being higher income corporates and individuals, but rather systematic evaders who are not registering their relevant affiliates for applicable taxes, or who are systematically under-declaring their income so that they do not appear on Sars’s system to be ‘large’ or ‘high net worth’ [individuals],” she says.
Proper investigations could include routine lifestyle audits of public officials.
However, there may be some practical obstacles to this given the current state of affairs at Sars. The tax collector lost highly skilled people during the time of Kieswetter’s predecessor Tom Moyane.
Williams says the commissioner has requested additional funding in order to facilitate the rebuilding process. “Practically, then, with so many areas in which Sars needs to work harder to improve its performance, large-scale lifestyle audits of public officials may not be possible at this stage.”
Sars should start selecting lifestyle audit targets
If Sars is not able to conduct large-scale lifestyle audits, it should start implementing these on a smaller scale, selecting people to audit on a “reasonable and fair basis”.
Williams says it makes sense for Sars to respond to the issues in the public eye that give rise to reasonable suspicions that there may be underpayments of tax.
Sait CEO Keith Engel agrees that a crackdown on the beneficiaries of corruption (bribery and tenderpreneurs) is key to restoring the tax system.
“The difficulty is indeed a question of capacity,” he says. “The problem of corruption requires the NPA [National Prosecuting Authority] and similar agencies to take the lead, with Sars as a supporting role player.”
It would be an unfair expectation to put the onus of criminal enforcement mainly on Sars’s shoulders without rebuilding the capacity of the NPA, says Engel.
Williams points out that the constitution states that “people’s needs must be responded to”, and there is therefore arguably a duty on Sars to investigate issues of public concern that have potential tax implications.
“Apparent issues identified by the media would be a sensible place for Sars to start in meeting this duty,” she says.
From a constitutional and administrative justice perspective, a selection process that is fair will be critical.
She refers to the Sars audit of EFF leader Julius Malema a few years ago, and the assessments and settlements that resulted.
“Sars needs to be careful not to behave in an unfair or unreasonable manner in its selection of cases for audit. Sars cannot lawfully target only members of certain political parties.”
She adds that apart from actually being fair, it is also important for Sars to be seen as being fair – to prevent further erosion of trust.