The South African Revenue Service (Sars) continues to face challenges in collecting receivables while addressing ongoing disputes with taxpayers. The Sars Annual Report for 2023/24, showcases that Sars is intensifying its efforts in tax debt collection and dispute resolution, implementing new strategies and refining processes to tackle the challenges that come with enforcing tax compliance. With over R273-billion in receivables currently targeted within various stages of the collection cycle, Sars’ work highlights the complex dynamics of tax administration in the country. Sars’s initiatives are aimed at addressing high-value taxpayer accounts, aged debts, and the high volume of tax disputes while enhancing taxpayer compliance across the board.

Disputes and Audit Assessments: Navigating Section 164(2) of the Tax Administration Act

Disputed audit assessments present unique challenges for Sars. According to Section 164(2) of the Tax Administration Act, Sars is required to suspend collection efforts on disputed amounts until the dispute is resolved, unless the dispute is deemed frivolous or poses a high collection risk. This suspension offers taxpayers some protection from enforcement actions during the dispute process, yet allows Sars to resume collections if necessary.

As of March 2024, Sars recorded R82.8-billion in assessments subject to dispute, reflecting a 12.7% increase over the previous year’s R73.4-billion. Objections alone rose by 17.2%, totalling R26.5-billion, while appeals increased slightly by 0.7% to R56.3-billion. Although Sars has improved its handling of these cases, with 98,191 arrangements finalized (a 32% increase from the previous year), the high volume and complexity of disputes underscore the agency’s ongoing need to refine its processes.

With over R273-billion in receivables actively targeted in various stages of the collection cycle, Sars faces significant challenges in recovery. These challenges are exacerbated by high volumes of aged debt, cases involving deceased estates and liquidations, and businesses that are no longer operational, accounting for roughly R134-billion of the receivables.

In response, Sars has implemented several targeted initiatives to improve collections, including:

1. System and Process Improvements: Enhancements in Third-Party Appointments (TPAs) have shown marked improvement, with collections through employer TPAs rising to R2.6-billion and bank TPAs reaching R3.2-billion.
2. Debt Insourcing Project: To manage recent overdue debt, Sars has allocated R62-billion, deploying both temporary and seconded staff to handle 349,360 cases. This initiative included issuing final demands and TPAs, resulting in over 248,000 phone calls.
3. Debt Outsourcing: A portion of the receivables, valued at R13-billion, has been outsourced to external service providers. This debt, characterized by a low recovery rate (less than 15%) and an age of over 36 months, includes R1.1-billion in temporarily written-off debt.

Managing Significant Receivables and High-Value Taxpayer Accounts

High-value taxpayers, those with debt balances exceeding R50 million, are a key focus for Sars. By March 2024, Sars identified 975 such accounts, up from 736 the previous year, which now represent 45% of total receivables. To manage this segment, Sars has deployed targeted strategies to ensure compliance and collection. Of the high-value cases, 568 were carried forward from prior years, amounting to R128.7-billion, and an additional 407 new cases were registered, adding R76.8-billion in potential receivables.

Sars has also implemented more stringent debt classifications, especially concerning cases that may involve criminal sanctions. Currently, R24.8-billion in debt is under direct investigation, with R14.6-billion linked to entity-level investigations. Collaboration with agencies such as the National Prosecuting Authority (NPA) has further strengthened Sars’ approach to handling complex, high-risk cases.

Performance in Debt Recovery Initiatives

Sars has rolled out several initiatives to address the challenges of debt recovery. The agency’s Third-Party Appointment (TPA) process has shown strong results, with collections from employer TPAs reaching R2.6-billion and bank TPAs hitting R3.2-billion. Additionally, the Debt Insourcing Project assigned R62-billion to manage overdue debt, enabling Sars to contact nearly 350,000 cases and issue numerous final demands. External debt outsourcing initiatives have targeted R13-billion in older receivables, yielding mixed results due to the low recovery rate of these cases.

Dispute Resolution: Increasing Efficiency and Enhancing Compliance

Sars’ Dispute Resolution and Litigation Unit manages the formal dispute resolution process, aiming to resolve tax disputes efficiently. Key statistics from the 2023/24 fiscal year demonstrate the significant volume of disputes:

1. Objections: Sars saw a decrease of 10% in objections filed compared to the prior year. However, the average time to finalize objections has risen from 48 to 58 days. The unit managed to finalize 16% more objections than the previous year, with a noteworthy 59% of objections either fully or partially allowed.
2. Appeals: Appeals declined by 2% in the fiscal year, with 14,094 appeals finalized, a 76% improvement compared to 2022/23. Most appeals (97%) were resolved using the Alternative Dispute Resolution (ADR) process, an increase from the prior year’s 95%.
3. Collection Efficiency and Taxpayer Compliance: Fewer appeals are being conceded by Sars, with the rate of appeals conceded decreasing from 57% to 51%, while taxpayer withdrawal rates increased to 32%. This trend underscores Sars' commitment to applying tax laws rigorously while reducing unnecessary litigation.

Conclusion

Sars continues to improve its processes and policies to address the dual challenges of debt collection and dispute resolution. Through system enhancements, debt insourcing, and targeted outsourcing, Sars is actively managing a large volume of receivables while navigating the complexities of high-value taxpayer accounts and disputed assessments. With a focus on efficiency and compliance, Sars is advancing efforts to resolve disputes promptly, thus ensuring the integrity of South Africa’s tax system.

Written by André Daniels, Head of Tax Controversy & Dispute Resolution at Tax Consulting SA; and Colleen Kaufmann, Senior Tax Attorney at Tax Consulting SA