10 Dec 2013

Corporate & Commercial Law Update, Tax enforcement procedures

Practice Area(s): Corporate & Commercial |

Since October 2012 taxpayers are seeing the effects of the Tax Administration Act 28 of 2011 ("the Act").  Although it has only been a year since this Act has been applicable, taxpayer's are beginning to experience the muscle that the South African Revenue Service ("SARS") is able to flex as a result of it. 

In order to effectively collect a tax debt, SARS has been granted a variety of collection powers.  These powers may be exercised not only against the taxpayer itself but also against certain third parties, to the extent that they are held personally liable for the payment of a taxpayer's tax debt.  Greater care is now needed from financial managers, representative taxpayers, shareholders and members to ensure that a tax debt remains within the taxpayer itself and does fall on such persons as a result of these provisions. 

SARS' ordinary collection powers against the taxpayer are still in existence and are still regularly exercised.  These include the ability of SARS to file a certified statement of a taxpayer's tax debt with the registrar of the High Court, which has the effect of a civil judgment; instituting sequestration and/or liquidation proceedings against a taxpayer; and appointing a third party, which owes or will owe a taxpayer money, as an agent of SARS in order for such monies to instead be paid over to SARS. 

What may be viewed as a particularly harsh enforcement power is the preservation order provision, contained in section 163 of the Act.  SARS has increasingly been willing to make use of this procedure, most notably in SARS' much publicized dispute with Julius Malema.  A preservation order is brought by SARS ex parte on application, meaning that no prior notice is given to the taxpayer.  It essentially enables SARS, in the event that the order is granted, to prohibit any person from dealing in any manner with the taxpayer's assets, subject to certain conditions and exceptions.

A preservation order is ordinarily provisionally granted by the High Court and it calls upon the taxpayer to appear on a certain return date and show cause why the preservation order should not be made final.  However, in the interim period, the order will have immediate effect.  In addition to the preservation order, the court may authorize the seizure of a taxpayer's movable assets, appoint a curator bonis in whom the assets will vest and even realize certain assets in satisfaction of the tax debt.  As long as a tax debt remains, it will be up to taxpayers who find themselves in such a situation to show, at the return date, that the operation of the order will cause undue hardship and that the hardship suffered outweighs the risk that the taxpayer's assets may be transferred or concealed. 

A taxpayer who is the subject of a preservation order is in an invidious position.  All assets of the taxpayer are essentially lost until the proceedings have run their course.  A long and arduous process can be expected with one taxpayer having to exercise most of his decisions regarding his assets through a curator bonis.  Clearly every effort should be made to avoid a preservation order, or to have it set aside once imposed.