The South African Revenue Service (SARS) has the authority to appoint a third party to collect outstanding tax from a taxpayer’s retirement benefits, despite the general protections provided by the Pension Funds Act (PFA), a recent High Court judgment has confirmed.
The ruling aligns retirement benefits with other forms of income that SARS can legally access to settle a tax debt, potentially reducing the retirement income of individuals with tax liabilities.
The parties to the case were Sizakele Crosby Piet, a member of the Allan Gray Retirement Annuity Fund, and the Commissioner of SARS.
Piet wanted to withdraw his retirement benefit in August last year when he turned 55. A week later, Allan Gray told him it had paid over the full amount of R145 934.99 to SARS after it received a notice issued under section 179(1) of the Tax Administration Act (TAA) from the revenue collection agency.
Piet challenged the legality of the notice, arguing it was invalid because it was not written by a senior SARS official. Furthermore, SARS did not comply with sections 179(4) and 179(5) of the TAA.
He also claimed that using retirement savings to settle a tax debt contravened section 37A(1) of the PFA, which aims to protect retirement benefits from creditors, and section 27 of the Constitution, which protects his right to social security.
Pre-conditions for third-party collection
Piet sought a declaration that SARS failed to comply with section 179 of the TAA, specifically the appointment of a third party (Allan Gray) to recover outstanding tax from a pension.
Section 179 gives SARS extensive authority to collect unpaid tax debts by appointing third parties to satisfy a taxpayer’s debt directly from funds held for the taxpayer. It enables SARS to issue a notice requiring a third party who holds money for or owes money to a taxpayer to transfer such money to SARS, provided SARS has issued prior final demands and provided debt relief options where applicable.
Section 179(1) explicitly includes a pension: “A senior SARS official may authorise the issue of a notice to a person who holds or owes or will hold or owe any money, including a pension, salary, wage or other remuneration, for or to a taxpayer, requiring the person to pay the money to SARS in satisfaction of the taxpayer’s outstanding tax debt.”
The High Court in Gqeberha found that SARS demonstrated compliance with section 179 by issuing repeated, detailed demands to the taxpayer, offering opportunities for debt relief, and clearly communicating potential recovery actions if the debt remained unpaid.
Allan Gray, as the fund administrator, was legally obliged to act as SARS’s agent upon receiving the IT88 notice, which it did.
Opportunity to request relief
Judge Avinash Govindjee said any complaint in respect of the manner of the notice, including whether it had been issued by a senior SARS official, was to be raised by the third party appointed to satisfy the tax debt.
Although Piet, as the tax debtor, was affected by the notice, his recourse appeared to be limited to the relief in section 179(4). This provides that the taxpayer can ask SARS to reduce the amount to be paid, to allow the taxpayer to pay his and his dependants’ basic living expenses.
Judge Govindjee said it may seem anomalous that the third party (Allan Gray in this case) should notify the taxpayer of the notice, as opposed to SARS. But this interpretation is supported by the inclusion of section 179(5). SARS may only issue the section 179(1) notice after having itself delivered a letter of final demand to the tax debtor. That letter, in the case of a natural person, already includes an opportunity for an application for reduction of the amount to be paid based on the basic living expenses of the tax debtor and his or her dependants.
Piet’s complaint that SARS did not afford him another opportunity to raise his personal circumstances overlooked the purpose of the notice and its intended recipient. The notice is correspondence between SARS and a third party that holds money that must be paid to satisfy a tax debt. The notice follows the delivery, by SARS, of a final demand for payment.
Piet received notification of a final demand for payment before the issue of the notice, as required by the TAA. Any complaint that he was not informed about the notice or given a further opportunity to request an extension of the period over which the amount could be paid, should be directed to the third party.
Later statute takes precedence
The judgment examined the interplay between section 37A of the PFA, section 99 of the Income Tax Act (ITA), and section 179 of the TAA.
Section 37A(1) of the PFA restricts the ability to reduce, transfer, or execute a pension fund benefit to satisfy debts, safeguarding these funds from creditors. However, there are exceptions: deductions are allowed as specified by the PFA itself, the Income Tax Act, and the Maintenance Act.
Before 2011, section 99 of the ITA allowed the Commissioner of SARS to declare a third party as an agent of a taxpayer for tax collection purposes. This agent could then make payments owed by the taxpayer. In effect, section 99 allowed tax deductions directly from retirement funds when a taxpayer had an outstanding tax liability.
Section 99 was repealed in 2011 and replaced by the more detailed section 179 of the TAA, which replicates and expands this power, allowing SARS to collect unpaid taxes directly from third parties through a formal notice (the IT88).
Judge Govindjee said the effect is clearly the same: a third party may be appointed by a senior official of SARS for the purposes of satisfying a tax debt. The third party may do so by paying the money due from money held or owed to the taxpayer in a retirement fund.
“As the abbreviation suggests, the IT88 has its origins in the Income Tax Act. It is seemingly now used, whether or not in modified form, to give effect to the purpose of section 179 of the TAA. Section 37A of the PFA must be interpreted accordingly.”
The court found that the effect of this approach is supported through the doctrine of implied revocation, which holds that a later statute takes precedence over an earlier one if an irreconcilable conflict exists. The Constitutional Court has endorsed this approach, favouring the later enactment when conflicts arise. Therefore, despite the PFA’s restrictions, section 179 of the TAA, as a more recent law, prevails, allowing SARS to deduct tax debts from retirement benefits via appointed agents.
Protection of pensions is limited
The court examined whether the enforcement of tax debt collection against retirement benefits violates the right to access social security, as protected under section 27 of the Constitution.
Piet relied on the case of Mudau v Municipal Employees Pension Fund and Others, which acknowledges the essential role of pensions in securing individuals’ financial stability and fulfilling their right to social security. Specifically, Mudau recognises that pensions allow individuals to prepare for times when they are no longer able to work, thereby contributing to their social security.
However, Judge Govindjee rejected Piet’s claim that tax collection from retirement funds is unconstitutional. He pointed out that section 36 of the Constitution allows for the limitation of rights, provided the limitation is reasonable and justifiable in a democratic society.
The PFA, as a law of general application, inherently includes section 37A, which specifically limits the protection of retirement benefits. Section 37A allows for deductions from pension funds under specific laws, such as the TAA’s section 179.
Judge Govindjee also noted that Piet did not present any arguments against the constitutionality of these sections, and therefore, the application could not succeed on constitutional grounds.
He dismissed the application and ordered each party to pay its own costs.
