Tax judgments are no ordinary judgments

The South African Revenue Service (SARS) recently published a Draft Interpretation Note on the consequences of an employer’s failure to deduct or withhold employees’ tax. While Interpretation Notes are not in any way binding on taxpayers, they do provide taxpayers with some insight on how SARS will interpret and apply the law.

Employees tax, commonly referred to Pay As You Earn (PAYE), is deducted or withheld by an employer when paying remuneration to an employee. There are two obligations placed upon the employer. First, the employer must deduct or withhold from the employee’s remuneration PAYE. Second, the employer must pay the amount deducted or withheld to SARS within seven days following the month in which it was deducted or withheld.

Employees, on the other hand, are liable to pay income tax on their taxable income on assessment by SARS. The amount of PAYE deducted or withheld by the employer during the year of assessment is setoff against the employee’s tax liability determined by SARS upon assessment.

SARS’s Interpretation Note points out that an employer’s failure to deduct or withhold PAYE has tax consequences for both the employer and the employee. If an employer fails to deduct or withhold the tax, SARS will usually issue an original or additional assessment for the under-deducted PAYE. The employer’s failure to withhold or deduct will trigger the personal liability provisions in section 157(1)(b) of the Tax Administration Act. Because the amount due will be a late payment of PAYE, the amount will be subject to a penalty and interest.

If an employer has been held personally liable to pay the PAYE on behalf of their employee, the employer has an automatic statutory right to recover the amount of tax from the employee. This statutory right is in addition to any right of recovery that the employer may have in terms of the employment contract or in terms of the common law, such as an enrichment claim. Where an employer seeks to recover an amount from an employee’s future remuneration, the employer must first obtain a directive from SARS. Furthermore, an employee is not entitled to an IRP5 tax certificate from his or her employer until the amount due to the employer has been paid.

The employee is ultimately liable to pay any tax due by him or her on assessment, including any amount the employer failed to deduct or withhold. Only amounts that were in fact withheld or deducted by an employer can be offset against an employee’s income tax liability.

The SARS Interpretation Note also addresses the question of double taxation. Many tax practitioners are of the view that requiring an employee to pay income tax on the same amount that an employer is personally liable to pay is tantamount to double taxation. SARS however says that double taxation is the taxing of the same amount of income twice in the hands of the same person. They point out that it is not double taxation if the same amount is taxed twice in the hands of different persons, on different grounds. Furthermore, where the employer is held personally liable, the amount is deemed a penalty in the hands of the employer and not a tax.


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