Many taxpayers face the wrath of SARS when there is outstanding tax debt.

SARS has a number of mechanisms to collect outstanding tax debt. One of them is to hold another person personally liable for the taxpayer’s outstanding tax debt.

Where a person is in SARS’ crosshairs for another taxpayer’s tax debt, the following is worth noting.

Section 180 of the Tax Administration Act provides for when a person may be held liable for another taxpayer’s tax debt.  Personal liability under section 180 is, as a matter of logic on a plain reading of the section, limited on three levels (of which a senior SARS official has to be satisfied with):

• firstly, only if ‘the person controls or is regularly involved in the management of the overall financial affairs of the taxpayer’, in other words, a financial administrator in charge of the taxpayer’s financial affairs,
• secondly, a certain level of connection is required, i.e. personal liability is only triggered ‘to the extent’ to which certain conduct of the person ‘resulted in the failure (by the taxpayer) to pay the tax debt’, and
• lastly, the failure by the taxpayer to pay the outstanding tax debt must have resulted from ‘negligence or fraud’ on the part of the person sought to be held personally liable.

The TA Act does not provide word definitions of the terms ‘negligence’ and ‘fraud’, nor have our courts crafted a tailored test to determine personal liability for the debts of another taxpayer based on the person’s conduct. In the circumstances, the ordinary common law tests for negligence and fraud have to apply.

The time-honoured formulation of the common law test for negligence, calibrated to the provisions of section 180, would be whether a person who was involved in a taxpayer’s overall financial affairs (e.g. the reasonable financial controller, administrator or director):

• would have foreseen that due to his / her conduct, a reasonable risk existed that the taxpayer would have failed to make payment of an outstanding tax debt;
• would have taken reasonable steps to ensure that such a risk did not materialise; and
• having foreseen such risk, nevertheless failed to take steps to guard against the risk of non-payment by the taxpayer of the outstanding tax debt materialising.

Whether particular conduct would constitute negligence and result in personal liability under section 180, must be determined against the backdrop of the type of individual the law considers to be sufficiently diligent, namely:

‘not (that of) a timorous faintheart always in trepidation lest he or others suffer some injury; on the contrary, he ventures out into the world, engages in affairs and takes reasonable chances. He takes reasonable precautions to protect his person and property and expects others to do likewise.’ (Herschel v Mrupe 1954 (3) SA 464 (A), 490F)

Our courts have consistently held that ‘no hard and fast basis can be laid down’, because negligence-based liability has to be with reference to the individual facts of each case.

The comparison is not against the general ‘reasonable person’, but against the standard expected of a reasonable person with comparable skills and experience in the specific role.

The ‘reasonable person’ standard is a legal fiction used to establish acceptable conduct in society. A person is considered negligent if their conduct falls below the standard of behaviour expected of a reasonably prudent person in the same circumstances. It is an external test that largely disregards the defendant's personal characteristics, but is flexible enough to take into account the surrounding circumstances, such as the inherent risk of the activity.

It is a well-established principle of our law that in determining whether a person ought to have taken preventative measures: a court must balance various factors to establish whether liability should arise due to the failure to implement such steps, including the extent of the particular potential harm, the degree of risk of the harm actually manifesting, and the availability and the cost of preventative measures.

Fraud is a question of intent, which was recently demonstrated in the Supreme Court of Appeal case of Naraidu v the State (87 SATC 408 (SCA); [2024] JOL 67130 (SCA)):

Unterhalter JA held the following:

• That there is a great deal that was unsatisfactory about Mr Naraidu’s evidence, i.e. how he came to be retained; that he was, on his own version, willing to engage SARS on behalf of a client he knew next to nothing about; that he took an instruction without any proper mandate; and then pursue a claim in ignorance of the claim that was being made – all of this suggests a reckless disregard for his duties as a tax practitioner.
• But that is not the charge he was facing. The question is whether he made himself party to the fraud perpetrated upon SARS. And the primary evidence relied upon by the State to make that case was the emails sent to SARS by Mr Naraidu.
• That Mr Naraidu acted recklessly is plainly the case. He lent his efforts to secure the payment of a fraudulent claim. But despite the absence of proof beyond a reasonable doubt that he knew the claim to be fraudulent, he cannot be said to have made himself party to the fraud.
• There is an absence of proof that Mr Naraidu had the intention required to be guilty of fraud. His conviction on the charges of common law fraud is thus unsafe and must be set aside.

A senior SARS official needs to be satisfied, which requires:

• the gathering of the objective facts,
• to test whether there was indeed conduct in the form of negligence or fraud, and
• then to determine the extent of the causation between the conduct and the taxpayer’s failure to have paid its tax debt.