In a world where mobile devices flash “suspected scam” and the boundary between curiosity and caution blurs, answering that unknown caller or responding to that dodgy email is a gamble. Phishing and spam aside, what if it’s another debt collector on the line, demanding and reminding you of payment for a debt – you know the ones – unpaid bills, loans or credit card balances – that you thought had long since vanished into the ether?
The complex world of prescribed debt in South Africa is rather puzzling – hiding both opportunity and peril for all involved. Geo Kilian, tax attorney at Hobbs Sinclair Advisory, a specialist tax and audit firm, gives the lowdown on prescribed debt, the do’s and don’ts and SARS’ recent ruling on taxpayers being handed over to external debt collectors.
Prescribed debt: what you need to know
Legal debt can and does expire after three years of becoming due and payable. This means that after this period the debt becomes unenforceable in court. However, many people wonder why collection agencies persist in calling when the debt has legally expired. The answer is twofold.
On the one hand, creditors retain the right to seek repayment even after a debt has been prescribed. On the other hand, debtors have options to discharge their obligation once a claim has been initiated after the three-year mark.
“The essential point here is that a debtor can only use the defence of prescription (expiration of a legal claim) when a legal debt is officially demanded through a summons, which halts the claim in its tracks,” states Kilian.
The catch? If a debtor unintentionally acknowledges a prescribed debt or makes a payment, they unwittingly waive their prescription defence. This leaves them responsible for the entire debt, including accumulated interest and fees over the years. Some debtors use this tactic to coerce individuals into settling debts that would otherwise be null and void due to the passage of time.
Tax debt and its expiry
While the concept of prescribed debt can keep us up at night, it’s important to recognise that tax debts are not exempt from these rules. Under the Tax Administration Act, 2011, a tax debt is defined as an amount of tax due or payable under a tax Act, making it akin to any other form of debt, albeit with its unique set of regulations.
The regulations surrounding tax debt expiration have undergone significant changes over the years. “Prior to the enactment of the Tax Administration Act in 2011, tax debts were governed by Section 11(a)(iii) of the Prescription Act, 1969, which allowed for tax debts to expire after an astonishing 30 years. However, the landscape changed dramatically with the introduction of the Tax Administration Act,” states Kilian.
Limits on tax debt collection
As of October 1, 2012, Section 171 of the Tax Administration Act redefined the rules for tax debt expiration. The South African Revenue Service (SARS), cannot initiate recovery proceedings after 15 years from two key milestones:
- The date when the assessment of tax becomes final,
- A decision subject to objection and appeal, giving rise to a tax liability.
“Notably, if SARS has not issued an assessment for a specific tax, often due to a taxpayer’s failure to disclose income, the 15-year period does not begin. The countdown only commences when SARS issues the assessment or the relevant ‘decision’.’” adds Kilian.
Varying prescription periods
While the 15-year limitation serves as the general rule for tax debt expiration, specific prescription periods differ based on the type of tax:
Income tax: Three years after the date of the assessment of an original assessment by SARS.
Value-added tax (VAT): Five years after the date of assessment, whether through self-assessment or a return.
Tax periods with no return requirement: Five years from the date of tax payment or the effective date (if no payment is made).
Furthermore, SARS has recently put out a notice that taxpayers with debts older than five years will soon be on the menu for external third-party debt collectors starting from October 2023. Taxpayers who receive a notification from SARS and fail to make payment arrangements or settle their debt immediately will be notified via letter that their debt has been handed over to SARS appointed debt collectors.
In conclusion, both regular debts and tax debts can expire in South Africa. Understanding these rules is essential for both taxpayers and SARS as they navigate the complexities of debt management and collections. “As a taxpayer, staying informed and proactive is the key to avoiding unwelcome surprises and potential legal consequences,” cautions Kilian.