The Risk of Incurring a Liability for Another Party’s Tax Debts
The Risk of Incurring a Liability for Another Party’s Tax Debts
By Doria Cucciolillo, Assistant Manager and Associate Professor David Warneke, Director
In the recent case of Christoffel Hendrik Wiese and Others (‘the Appellants’) v CSARS (1307/2022) [2024] ZASCA 111, one of the questions before the Supreme Court of Appeal (‘SCA’) was whether a ‘tax debt’ existed for purposes of section 183 of the Tax Administration Act (‘the TAA’) even where an assessment for the amount in question had not yet been raised by SARS. The import of the question was that, if the answer to this question was in the affirmative and if the other requirements of section 183 were met (which was not decided), the Appellants could have been held jointly and severally liable for the tax debts of another taxpayer in terms of this section.
The facts were that in January 2007, Energy Africa (Pty) Ltd (‘the taxpayer’) disposed of shares and claims held in Energy Africa Holdings (Pty) Ltd (‘EAH’), which resulted in a capital gain that was not disclosed in the taxpayer’s 2007 income tax return. Following an audit of the transaction that gave rise to the disposal, the South African Revenue Service (‘SARS’) notified the taxpayer of its intention to raise an additional assessment for income tax to reflect the capital gain and also to raise an assessment to give effect to a liability for secondary tax on companies (‘STC’) relating to the transaction.
In April 2013, the taxpayer disputed SARS’ audit findings and thereafter disposed of its sole asset, a loan account claim, to its holding company through the distribution of a dividend in specie. SARS finalised its audit and raised assessments that reflected tax liabilities relating to income tax (for capital gains tax) and STC, during August 2013. The taxpayer objected against these assessments, which objections SARS allowed in part. The taxpayer chose not to appeal the disallowance of the objections, whereafter SARS issued a final demand in respect of both assessments but was informed that the taxpayer was dormant.
In July 2015, SARS lodged an inquiry in terms of Part C of Chapter 5 of the TAA at which the
Appellants testified. SARS contended that the Appellants had knowingly assisted the taxpayer to part with its sole asset with the intention of obstructing the collection of a tax debt owed by the taxpayer to SARS. SARS issued notices of personal liability to the Appellants in terms of section 183 of the TAA. Section 183, as currently worded, imposes an individual and joint liability on a person for a taxpayer’s tax debt, to the extent that such a person knowingly assists a taxpayer in dissipating its assets in order to obstruct the collection of a tax debt. The Appellants maintained that, since the distribution of the dividend in specie preceded the date of issuance of the additional assessments, no ‘tax debt’ as defined in the TAA existed at the date of the distribution.
The matter proceeded to the Western Cape High Court, which ruled in favour of SARS. The High Court found, amongst other things, that section 183 of the TAA did not require of SARS to have issued an assessment for a tax debt to have been in existence at the time of the distribution. The Court found, among other things, that the taxpayer’s tax debt relating to capital gains tax and STC existed prior to the assessments being issued by SARS. The taxpayer then proceeded with an appeal to the SCA against the High Court’s decision.
The SCA had to decide, among other things, whether the term ‘tax debt’ as contemplated in section 183 of the TAA requires that an assessed tax debt should have existed at the date that the dissipation of assets occurs. It was noted that, in considering the definition of ‘taxable event’ in section 1 of the TAA, the occurrence of an event, such as the disposal of a capital asset for CGT purposes, triggers a taxpayer’s liability for tax. The SCA pointed out that a ‘tax debt’ represents an amount of tax payable by a taxpayer to SARS. Although the amount of tax due to SARS is established in terms of an assessment, the assessment itself does not impose a liability for tax. Instead, a liability for tax is imposed through the operation of law regardless of whether an assessment exists.
Therefore, the SCA held that a tax debt was in existence at the time the dissipation of the taxpayer’s assets by the distribution of the dividend in specie occurred, despite the absence of assessments quantifying the amount of the tax debt at that stage. The question whether the remaining requirements of section 183 of the TAA are met such that the Appellants, or some of them, may be held jointly and severally liable for the tax debt of the taxpayer, was not considered by the SCA and doubtless will form the subject of subsequent court proceedings.
Besides the existence of a ‘tax debt’ at the time dissipation of a taxpayer’s assets occurs, section 183 requires that:
(a) The third person should ‘knowingly assist in the dissipation of a taxpayer’s assets’;
(b) the dissipation should be undertaken ‘in order to obstruct the collection of a tax debt’; and
(c) the assistance should have rendered the taxpayer unable to discharge the tax debt.
Apart from section 183, which imposes a liability on a third party for the purposeful obstruction of the collection of a tax debt owed by a taxpayer to SARS, the SCA considered other specific provisions in the TAA which provide for the collection or recovery of a tax debt owed by a taxpayer from other persons. These sections are briefly discussed below.
Section 169(2) of the TAA authorises SARS to recover a tax debt from a representative taxpayer, who is not personally liable under section 155, by confiscating any assets belonging to the taxpayer that are in possession of the representative taxpayer or under such person’s management or control. A representative taxpayer includes, among other persons, the public officer of a company.
An alternative avenue for the collection of an outstanding tax debt owed by a taxpayer, is in terms of section 179 of the TAA. This provision allows for a senior SARS official to issue a notice to a so-called agent who would be required to settle the taxpayer’s ‘outstanding tax debt’ from an amount of money that is or will be held for or owed by such a person to the taxpayer. The term ‘outstanding tax debt’ is defined in section 1 of the TAA and pre-supposes that SARS must have issued an assessment for the amount of the outstanding tax. In this manner, section 179 of the TAA authorises SARS to collect the outstanding tax debt from money, including a pension, salary, wage or other remuneration, due to a taxpayer from a third-party agent. Such recovery may occur regardless of whether the tax debt in question is under dispute.
Under section 180, a person that controls or is regularly involved in the management of the overall financial affairs of a taxpayer may also face personal liability for the outstanding tax debt of a taxpayer. This would be the case if a senior SARS official is satisfied that such person’s negligence or fraud resulted in the failure to pay such debt. Once again, this provision uses the term ‘outstanding tax debt’, which implies that SARS must have issued an assessment for the amount of the outstanding tax.
If a company is wound up without settling any ‘outstanding tax debt’ owed by that company, including its liability as a personal responsible third party, section 181 of the TAA may impose a personal liability to settle the tax debt on the company’s shareholders. Persons who were shareholders of the company within one year preceding its winding up, are jointly and individually liable to settle the company’s tax debt to the extent that they received assets of the company in their capacity as shareholders within one year prior to its winding up. This only applies if the tax debt existed or would have existed at the time of receipt of such assets, had the company complied with its obligations under a tax Act. Notwithstanding the use of the term ‘outstanding tax debt’ in section 181(1), in its judgment the SCA concluded that because section 181(2) refers to tax debt that existed or would have existed at the time of receipt of such assets, the provision could apply even if the tax debt in question had not been determined by SARS in an assessment at the time the shareholder had received the assets of the company. However, it should be noted that listed companies are expressly excluded from the scope of section 181.
Finally, section 182 provides that where a person receives an asset from a taxpayer (not necessarily a company) who is a ‘connected person’ in relation to such taxpayer without consideration or for consideration below the fair market value of the asset, that person is liable for the ‘outstanding tax debt’ of such taxpayer. Similar to section 181, the liability of the connected person is limited to the lesser of the tax debt that existed or would have existed at the time of receipt of such assets, had such taxpayer complied with its obligations under a tax Act, and the fair market value of the asset at the time of the transfer, reduced by the fair market value of any consideration paid for the asset. In commenting on this provision, the SCA also concluded that notwithstanding the use of the term ‘outstanding tax debt’, because it refers to tax debt that existed or would have existed at the time of receipt of such assets, the provision could apply even if the tax debt in question had not been determined by SARS in an assessment at the time the shareholder had received the assets of such taxpayer.
In the present case, the provisions of section 183 were the focal point under consideration. The SCA held that the purpose of section 183 is to impose a liability to pay a taxpayer’s tax debt on a third party where such party knowingly assisted the taxpayer to obstruct the collection of tax. The SCA reiterated that whether the other requirements of section 183 were met was not a consideration before the Court. The Court merely had to decide the question whether a tax debt existed at the time the dissipation of assets occurred, even though the dissipation of assets preceded the date of the assessments under which the quantum of the tax debt was determined and, as noted above, decided this question in the affirmative.
The case illustrates the importance for those involved in the affairs of other taxpayers to be aware of instances where they could potentially be held liable for the tax debts of the other taxpayer, either through their positive action or inaction.
In the recent case of Christoffel Hendrik Wiese and Others (‘the Appellants’) v CSARS (1307/2022) [2024] ZASCA 111, one of the questions before the Supreme Court of Appeal (‘SCA’) was whether a ‘tax debt’ existed for purposes of section 183 of the Tax Administration Act (‘the TAA’) even where an assessment for the amount in question had not yet been raised by SARS. The import of the question was that, if the answer to this question was in the affirmative and if the other requirements of section 183 were met (which was not decided), the Appellants could have been held jointly and severally liable for the tax debts of another taxpayer in terms of this section.
The facts were that in January 2007, Energy Africa (Pty) Ltd (‘the taxpayer’) disposed of shares and claims held in Energy Africa Holdings (Pty) Ltd (‘EAH’), which resulted in a capital gain that was not disclosed in the taxpayer’s 2007 income tax return. Following an audit of the transaction that gave rise to the disposal, the South African Revenue Service (‘SARS’) notified the taxpayer of its intention to raise an additional assessment for income tax to reflect the capital gain and also to raise an assessment to give effect to a liability for secondary tax on companies (‘STC’) relating to the transaction.
In April 2013, the taxpayer disputed SARS’ audit findings and thereafter disposed of its sole asset, a loan account claim, to its holding company through the distribution of a dividend in specie. SARS finalised its audit and raised assessments that reflected tax liabilities relating to income tax (for capital gains tax) and STC, during August 2013. The taxpayer objected against these assessments, which objections SARS allowed in part. The taxpayer chose not to appeal the disallowance of the objections, whereafter SARS issued a final demand in respect of both assessments but was informed that the taxpayer was dormant.
In July 2015, SARS lodged an inquiry in terms of Part C of Chapter 5 of the TAA at which the
Appellants testified. SARS contended that the Appellants had knowingly assisted the taxpayer to part with its sole asset with the intention of obstructing the collection of a tax debt owed by the taxpayer to SARS. SARS issued notices of personal liability to the Appellants in terms of section 183 of the TAA. Section 183, as currently worded, imposes an individual and joint liability on a person for a taxpayer’s tax debt, to the extent that such a person knowingly assists a taxpayer in dissipating its assets in order to obstruct the collection of a tax debt. The Appellants maintained that, since the distribution of the dividend in specie preceded the date of issuance of the additional assessments, no ‘tax debt’ as defined in the TAA existed at the date of the distribution.
The matter proceeded to the Western Cape High Court, which ruled in favour of SARS. The High Court found, amongst other things, that section 183 of the TAA did not require of SARS to have issued an assessment for a tax debt to have been in existence at the time of the distribution. The Court found, among other things, that the taxpayer’s tax debt relating to capital gains tax and STC existed prior to the assessments being issued by SARS. The taxpayer then proceeded with an appeal to the SCA against the High Court’s decision.
The SCA had to decide, among other things, whether the term ‘tax debt’ as contemplated in section 183 of the TAA requires that an assessed tax debt should have existed at the date that the dissipation of assets occurs. It was noted that, in considering the definition of ‘taxable event’ in section 1 of the TAA, the occurrence of an event, such as the disposal of a capital asset for CGT purposes, triggers a taxpayer’s liability for tax. The SCA pointed out that a ‘tax debt’ represents an amount of tax payable by a taxpayer to SARS. Although the amount of tax due to SARS is established in terms of an assessment, the assessment itself does not impose a liability for tax. Instead, a liability for tax is imposed through the operation of law regardless of whether an assessment exists.
Therefore, the SCA held that a tax debt was in existence at the time the dissipation of the taxpayer’s assets by the distribution of the dividend in specie occurred, despite the absence of assessments quantifying the amount of the tax debt at that stage. The question whether the remaining requirements of section 183 of the TAA are met such that the Appellants, or some of them, may be held jointly and severally liable for the tax debt of the taxpayer, was not considered by the SCA and doubtless will form the subject of subsequent court proceedings.
Besides the existence of a ‘tax debt’ at the time dissipation of a taxpayer’s assets occurs, section 183 requires that:
(a) The third person should ‘knowingly assist in the dissipation of a taxpayer’s assets’;
(b) the dissipation should be undertaken ‘in order to obstruct the collection of a tax debt’; and
(c) the assistance should have rendered the taxpayer unable to discharge the tax debt.
Apart from section 183, which imposes a liability on a third party for the purposeful obstruction of the collection of a tax debt owed by a taxpayer to SARS, the SCA considered other specific provisions in the TAA which provide for the collection or recovery of a tax debt owed by a taxpayer from other persons. These sections are briefly discussed below.
Section 169(2) of the TAA authorises SARS to recover a tax debt from a representative taxpayer, who is not personally liable under section 155, by confiscating any assets belonging to the taxpayer that are in possession of the representative taxpayer or under such person’s management or control. A representative taxpayer includes, among other persons, the public officer of a company.
An alternative avenue for the collection of an outstanding tax debt owed by a taxpayer, is in terms of section 179 of the TAA. This provision allows for a senior SARS official to issue a notice to a so-called agent who would be required to settle the taxpayer’s ‘outstanding tax debt’ from an amount of money that is or will be held for or owed by such a person to the taxpayer. The term ‘outstanding tax debt’ is defined in section 1 of the TAA and pre-supposes that SARS must have issued an assessment for the amount of the outstanding tax. In this manner, section 179 of the TAA authorises SARS to collect the outstanding tax debt from money, including a pension, salary, wage or other remuneration, due to a taxpayer from a third-party agent. Such recovery may occur regardless of whether the tax debt in question is under dispute.
Under section 180, a person that controls or is regularly involved in the management of the overall financial affairs of a taxpayer may also face personal liability for the outstanding tax debt of a taxpayer. This would be the case if a senior SARS official is satisfied that such person’s negligence or fraud resulted in the failure to pay such debt. Once again, this provision uses the term ‘outstanding tax debt’, which implies that SARS must have issued an assessment for the amount of the outstanding tax.
If a company is wound up without settling any ‘outstanding tax debt’ owed by that company, including its liability as a personal responsible third party, section 181 of the TAA may impose a personal liability to settle the tax debt on the company’s shareholders. Persons who were shareholders of the company within one year preceding its winding up, are jointly and individually liable to settle the company’s tax debt to the extent that they received assets of the company in their capacity as shareholders within one year prior to its winding up. This only applies if the tax debt existed or would have existed at the time of receipt of such assets, had the company complied with its obligations under a tax Act. Notwithstanding the use of the term ‘outstanding tax debt’ in section 181(1), in its judgment the SCA concluded that because section 181(2) refers to tax debt that existed or would have existed at the time of receipt of such assets, the provision could apply even if the tax debt in question had not been determined by SARS in an assessment at the time the shareholder had received the assets of the company. However, it should be noted that listed companies are expressly excluded from the scope of section 181.
Finally, section 182 provides that where a person receives an asset from a taxpayer (not necessarily a company) who is a ‘connected person’ in relation to such taxpayer without consideration or for consideration below the fair market value of the asset, that person is liable for the ‘outstanding tax debt’ of such taxpayer. Similar to section 181, the liability of the connected person is limited to the lesser of the tax debt that existed or would have existed at the time of receipt of such assets, had such taxpayer complied with its obligations under a tax Act, and the fair market value of the asset at the time of the transfer, reduced by the fair market value of any consideration paid for the asset. In commenting on this provision, the SCA also concluded that notwithstanding the use of the term ‘outstanding tax debt’, because it refers to tax debt that existed or would have existed at the time of receipt of such assets, the provision could apply even if the tax debt in question had not been determined by SARS in an assessment at the time the shareholder had received the assets of such taxpayer.
In the present case, the provisions of section 183 were the focal point under consideration. The SCA held that the purpose of section 183 is to impose a liability to pay a taxpayer’s tax debt on a third party where such party knowingly assisted the taxpayer to obstruct the collection of tax. The SCA reiterated that whether the other requirements of section 183 were met was not a consideration before the Court. The Court merely had to decide the question whether a tax debt existed at the time the dissipation of assets occurred, even though the dissipation of assets preceded the date of the assessments under which the quantum of the tax debt was determined and, as noted above, decided this question in the affirmative.
The case illustrates the importance for those involved in the affairs of other taxpayers to be aware of instances where they could potentially be held liable for the tax debts of the other taxpayer, either through their positive action or inaction.