What constitutes a ‘tax debt’ in the context of recovering debt from third parties

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What constitutes a ‘tax debt’ in the context of recovering debt from third parties

• 11 January 2023
• Tax Administration
• Kyle Mandy and Elle-Sarah Rossato

On 9 September 2022, the Western Cape High Court (“the Court”) delivered a judgment in the matter of The Commissioner for The South African Revenue Service v Wiese and Others (15065/17) [2022] ZAWCHC 188. The Court pronounced on two issues. This article addresses only the one issue, namely, whether the secondary tax on companies (“STC”) and capital gains tax (“CGT”) as referred to in the Particulars of Claim each constitute a ‘tax debt’ for purposes of section 183 of the Tax Administration Act (“the TAA”).

The case stemmed from the South African Revenue Service (“SARS”) seeking an order declaring four defendants, jointly and severally, personally liable for an outstanding tax debt of R216.6 million in terms of sections 183 and 184 of the TAA. According to SARS, the four defendants knowingly caused or assisted Energy Africa Proprietary Limited (“Energy Africa”/ “the taxpayer”) with the dissipation of a loan claim (“the loan claim”) against Titan Share Dealers Proprietary Limited (“TSD”) in the amount of R216.6 million, by declaring and transferring it as a dividend in specie to its holding company, Elandspad Investments Proprietary Limited, (“Elandspad”), in order to obstruct the collection of certain tax debts.

Background

During January 2007, Tullow Oil Plc and its subsidiaries (“Tullow Group”) restructured its African operations. Prior to the restructure, the taxpayer formed part of the Tullow Group. On 25 January 2007, the taxpayer proceeded to sell its shares and claims in Energy Africa Holdings (Pty) Ltd (“EAH”) to Tullow Overseas Holdings BV (“TOH”).

On 16 November 2012, SARS issued the Taxpayer with a notice in terms of s 80J(1) (“the notice”) of the TAA, which notice stated SARS’ intention to make adjustments to the taxpayer’s 2007 assessment, following the completion of an audit into the taxpayer’s tax affairs. In its notice, SARS stated that the taxpayer was liable for CGT and STC amounting to R453 million and R487 million, respectively, on the basis that the transaction in question was, essentially, an impermissible tax avoidance arrangement as defined in s 80L of the Income Tax Act (“the Act”).

According to SARS, during April 2013, the First Defendant instructed the Second Defendant to secure the distribution of the loan claim against TSD to Titan Premier Investments (Pty) Ltd (“TPI”) and the sale of the taxpayer to Friedshelf 1395 (Pty) Ltd.

On 15 April 2013, the taxpayer’s attorney submitted a response to SARS, wherein any tax liability was disputed on the grounds as relied upon by SARS, being ‘substance over form’ and, alternatively, under the general anti-tax avoidance rules (GAAR). It was also noted that the aforementioned loan claim was the taxpayer’s only asset at the time.

On 19 April 2013, before SARS could assess the taxpayer, the taxpayer disposed of the loan claim by making a distribution thereof to Elandspad, being its sole shareholder. The distribution was then immediately on-distributed to Elandspad’s holding company, TPI.

SARS asserted in its pleadings that:

• The Defendant caused the taxpayer to declare the dividend in specie to Elandspad, which in turn declared and transferred the loan claim as a dividend in specie to its own holding company TPI (the dissipation) with full knowledge that the taxpayer had been assessed to income tax in the amount of R122,420,199.72 plus interest and was liable for STC in the amount of R487,205,316.
• On 21 August 2013, SARS addressed a finalization of audit letter to the taxpayer in which the taxpayer’s additional income tax liability for the 2007 year of assessment was fully described, resulting in the inclusion of capital gains tax (CGT) on the disposal of a subsidiary in the amount of R453,126,518 and understatement penalties of R679,689,777.

Following the conclusion of the sale of shares agreement in September 2013, the taxpayer’s attorney responded to SARS’ finalisation of audit letter, which again stated that the taxpayer disputes any liability. In addition, the taxpayer’s attorney submitted that the taxpayer did not have any cash or assets and was not in a position to make payment towards the disputed tax. On 24 October 2014, SARS was then informed that the taxpayer was dormant and in April 2016 the taxpayer was wound-up by an order of the High Court.

The issues

As a preliminary issue, the parties agreed that the definition of the term “tax debt”, as defined in section 1 of the TAA should be that which applied prior to its retrospective amendment in 2014.

• Prior to the amendment, the definition of “tax debt” in section 1 of the TAA stated that: “tax debt’ means an amount of tax due by a person in terms of a tax Act.”
• After the amendment, section 1 of the TAA defined “tax debt” as an amount referred to in section 169(1) of the TAA, which states (and had so stated at the relevant time): “A debt due to SARS. – (1) an amount of tax due or payable in terms of a tax Act is a tax debt due to SARS for the benefit of the national revenue fund.”

Summary of SARS’ Argument

• Section 183 of the TAA falls under Chapter 11, which deals with the recovery of tax and the reference to a ‘tax debt’ as contemplated in section 183 should be read in context. Reading it in its context and having regard to its manifest purpose section 183 of the TAA is applicable in circumstances where an assessment is anticipated and not whether the tax debt is in existence as such an interpretation would negate or seriously undermine the purpose of the section. In this regard, the amounts ultimately assessed by SARS on 21 August 2013, in the instance of both STC and CGT, constituted tax debts as contemplated in section 183 of the TAA.
• On the issue of ‘due or payable’, SARS submitted that the CGT and STC argument, for which the taxpayer was subsequently assessed, need not be traversed to find in favour of SARS. SARS argued that the effect of assessing a taxpayer to tax is to retrospectively render tax due and payable when it ought to have been paid. In this instance, the STC on the deemed dividend, as assessed in August 2013, was due and payable by the end of the relevant dividend period and in the case of CGT, it was payable on 30 September 2007 which was the end of the 2007 income tax year.

Defendants’ argument

The Defendants’ argument was that in order for there to be a ‘tax debt’, SARS was required to first issue an assessment to the taxpayer before it could invoke the provisions of section 183 of the TAA. The Defendants noted that, in its correspondence, SARS had repeatedly acknowledged that the raising of the STC and CGT assessments only occurred on 21 August 2013, after the distribution was made on 19 April 2013.

In respect of the alternative GAAR argument, the Defendants’ witness submitted that the EAH disposal could only have been re-characterised from the date of the assessment, being 21 August 2013. Therefore, at the time of the distribution, there was no assessment issued and no ‘tax debt’ existed.

The judgment

In its discussion, the Court stated that the language of the provisions themselves, the context and the purpose thereof was the point of departure in determining whether the contested term “tax debt” required SARS to issue an assessment before invoking section 183 of the TAA or whether the contested term could be read through the prism of section 169 of the TAA (which allowed SARS to issue a notice in anticipation of an adjusted assessment and thereafter determine the taxpayer’s tax liability).

Section 183 of the TAA provides:

“183. Liability of person assisting in dissipation of assets – If a person knowingly assists in dissipating a taxpayer’s assets in order to obstruct the collection of a tax debt, the person is jointly and severally liable with the taxpayer for the tax debt to the extent that the person’s assistance reduces the assets available to pay the taxpayer’s tax debt.”

It is, therefore, clear that section 183 had a particular objective and purpose, which was to hold a person(s) jointly and severally liable for knowingly assisting with dissipating a taxpayer’s assets to obstruct the collection of a tax debt. The sting of the provision is therefore against parties other than the taxpayer. It is therefore important to interpret the words, sentences and concepts in section 183 taking into account the context and structure of the provisions within the TAA to elucidate the text.

Regard must be had to the text and structure of the provisions of section 183 and whether the words ‘tax debt’, in its context indicate that it is used differently and with a different meaning or whether it falls within the same meaning included in the definitions contained in section 1 of the TAA.

The Court further stated that the provisions of section 183 are anchored in Chapter 11 of the TAA under the ‘Recovery of Tax’ heading. The phrase ‘Debt due to SARS’ is defined in the heading of section 169(1) of the TAA and refers to an amount ‘due or payable’. The latter, therefore, has a different meaning to that as defined in section 1 of the TAA.

At [44], the Court considered the submission made by the Defendants witness that the “contested term must be interpreted as contemplated in s 165 to 168 in Part C of the TAA where those provisions envisage a ‘tax debt’ in the context of an assessment that had been raised and as such only become due, once an assessment has been made by SARS and the taxpayer notified of such assessment”. The Court found this view to be unsustainable, concluding that:

“Such an interpretation would not only be unbusinesslike but will also emasculate the very purpose of the TAA as a whole.”

At [46], the Court noted that where the purpose and aim of the TAA is to hold a third party liable (as envisioned in section 183) a notice, such as the one issued by SARS on 16 November 2012, which included the notice in terms of section 80J(1), is more than sufficient to fall within the true meaning of a ‘tax debt’ as contemplated in section 183 and to interpret any differently, would undermine the purpose and context of section 183 and the TAA as a whole.

It continued:

“[47] It will also lead to absurd consequences where, for instance, a party who knowingly assists the taxpayer dissipating assets where an assessment had been raised and a tax debt established “due or payable” to SARS, would be struck by the section, but if the same person assists the taxpayer, a day before the event that renders the tax debt due or payable, disposes of the assets in order to obstruct the collection thereof, would escape liability. The same would apply where a party who intentionally assists in the dissipation of a taxpayer’s assets in order to obstruct the collection of a future tax debt, even if that tax debt were objectively uncertain at the time of the assistance, will escape liability…

[49] It follows that the meaning to be ascribed to the phrase ‘tax debt’ where it appears in section 183 must prevail over that as defined in section 1 and must be read as reference to an amount of tax due or payable in terms of the TAA as advanced by SARS.” [Our emphasis]

In addition, it was stated at [51], that reading section 183 with section 169 will not lead to two irreconcilable constructions and that in the taxpayer’s case, the CGT and STC, which were subsequently assessed, constituted amounts that were already owing at the time of the dissipation (i.e. on 19 April 2013) under the TAA. In this instance, after considering the cases of Singh v Commissioner, South African Revenue Service2 and Commissioner for Inland Revenue v Janke3 the Court found (at [53]) that:

“…where the taxpayer’s liability to pay CGT and STC was disputed, a subsequent assessment establishes a liability for the payment of tax, that assessment has the effect of rendering the tax due and payable from the date on which the incorrect return was rendered or, where no return is rendered at all, when it ought to have been rendered. In the present instance, of the STC which is payable on the deemed dividend, as assessed on August 2013, it was due and payable by the end of the relevant dividend period, namely 28 February 2007. In the case of CGT (which forms a component of income tax) it was payable at the end of the 2007 income tax year for the taxpayer, which was 30 September 2007.”

In conclusion, the Court held that the Defendants who arranged the declaration of the dividend in specie can be held liable in terms of section 183 of the TAA in the absence of an assessment at the time of the dissipation.

The takeaway

A tax debt may exist even in the absence of an assessment for purposes of section 183 of the TAA.

The precedent relied upon by the Court indicates that, in the case of an annual tax, the right to the correct amount of tax accrues to the tax authority at the close of the year of assessment. In essence, the tax becomes payable on that date, notwithstanding that an amount may not yet be due for payment.

In the case of a transaction tax, such as VAT or dividends tax (or its predecessor, STC), the relevant statute directs when the correct amount of tax is due and payable, notwithstanding that an additional assessment may be made at a subsequent date if the amount due and payable is understated in the return.

Taxpayers and tax advisors should be astute to take into account that the general definitions in section 1 of a statute are prefaced with a caveat that the definitions should be assigned to the relevant terms when they appear in the statute “unless the context indicates otherwise.”

That interpretation played a significant role in this decision and context, as an aid to interpreting language used in a statute, is well illustrated in this judgment.

Source: PWC

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