People who knowingly help taxpayers to get rid of assets in order to frustrate the collection of tax should take note of a recent case that gave clarity on the way the revenue service can apply the Tax Administration Act (TAA).
They can be held jointly and severally liable when there is a tax debt owed to the fiscus.
This follows a declaratory order by the Western Cape High Court in a case between well-known businessman Christo Wiese and three others, including a former employee of the advisory firm ENSafrica, and the South African Revenue Service (Sars).
The decision relates to the dissipation of a R217 million loan owed by a company associated with Wiese, Titan Share Dealers, to another company associated with him, Energy Africa, and declaring a dividend in specie to the same amount to its shareholders’ companies and on to the ultimate shareholder.
Sars held that at the time of the dissipation, Energy Africa had a tax debt of around R940 million dating back to transactions in 2007.
The tax debt issue
“This judgment is particularly important from a legal perspective because it [has] sharpened Sars’s teeth in terms of its tax recovery and enforcement tactics,” says Elle-Sarah Rossato, head of tax controversy and dispute resolution at PwC.
The matter revolved around the concept of a “tax debt” and when it is “due and payable”.
The nub of the decision is that if someone is aware of a potential tax owed to the fiscus and still dissipates assets in order to frustrate the collection of the debt, they enter the realm of personal liability.
Rossato says it is important to note that providing any such assistance – whether the changing of a loan claim into a dividend in specie, the dissipation of an asset, the transfer of an asset from one entity to another, or the donation of an asset – well knowing that there is a tax debt payable to the fiscus, can potentially lead to personal liability.
Sars asked the court for clarity on the question when of a tax debt is due for purposes of Section 183 for the TAA. This section allows Sars to hold a person who knowingly assists in dissipating a taxpayer’s assets in order to obstruct the collection of a tax debt jointly and severally liable for the taxpayer’s debt.
The second question Sars wanted clarity on was whether, in the high court proceedings, it could use information it obtained during an inquiry in 2015 and 2016 from Wiese and former directors Isak Visagie and Gert Viljoen to hold them liable in terms of Section 183.
It asked these questions because Wiese and the former directors claimed there was no tax debt for which they could be held liable and that using the information they gave Sars during the inquiry could not be used in another proceeding against them.
The court found against Wiese et al on both issues.
Where it began
It all began in 2007 with the restructuring of the Tullow Oil company, when Energy Africa (part of its African operations) sold its shares in subsidiary companies to Tullow Overseas Holdings.
ENSafrica was involved in the structuring of the highly complex restructuring transaction. Wiese subsequently bought Energy Africa in a transaction that involved an ENSafrica trust, but things went “sour” when Sars came knocking after it did an audit on the 2007 transaction, including the sale of the business to Wiese.
Sars alleged that Energy Africa was liable for secondary tax on companies (dividend-withholding tax) and capital gains tax of around R940 million. It told the company in 2012 of its intention to adjust the 2007 assessment based on the audit findings.
The company asked for an extension to reply to Sars and then in 2013 the alleged “dissipation” of assets in Energy Africa happened, before Sars raised the assessment for tax.
The legal team for Wiese and the two directors argued that the dividend distribution took place in April 2013 but that the tax assessment was only issued in August of that year.
At that point the assessed tax, penalties and interest amounted to R3.2 billion.
Their argument was that there could not be a tax debt in the absence of a tax assessment. It is only after there is an assessment that Sars can invoke the provisions of Section 183, they argued.
The court noted that the legislature had a particular objective and purpose in mind with the section, and that is to hold persons liable if they “knowingly” assist in the dissipation of assets to obstruct the collection of tax debt.
The court said the defendants’ argument would negate the purpose of the section and could lead to “absurd consequences” which could allow a third party to knowingly assist the taxpayer to dissipate assets even when the taxpayer and the third party anticipate a tax liability but dissipate the taxpayer’s assets before the tax is assessed.
Kyle Fyfe, tax director at Werksmans Attorneys, agrees on the significance of the Western Cape high court decision. “It is a good decision for Sars, since it gives clarity on the interpretation of the term ‘tax debt’ in the context of Sars’s powers to recover debt,” he says.
“This does give Sars more teeth to go after people in egregious circumstances where they are blatantly evading tax by moving money out of a company to avoid paying tax.”
In this case the court found that there was a tax debt and that Sars can hold the defendants liable under Section 183.
However, the court did not make a finding that the defendants “knowingly” assisted Energy Africa in dissipating assets through the declaration of the dividend.
This will be determined during a further trial, if there is one.
The second aspect relating to the admissibility of the evidence gathered by Sars during the 2015 inquiry may become important should it go to trial. Sars may use it to prove the allegation that the defendants knowingly dissipated the assets, says Fyfe.
The judgment has been taken on appeal.
Fyfe is of the view that it may be hard to overturn the judgment. He agrees with the court’s finding that once the assessment becomes final or a court upholds an assessment by Sars, the tax debt is considered to have been “due” when it should have been paid in the first place.