South Africa and Australia: Mutual Assistance in Collection of Tax
04 April 2014
Posted by: Author: Beric Croome
Author: Beric Croome (Edward Nathan Sonnenbergs Inc.)
South Africa and Australia concluded a convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains on 1 July 1999. The agreement was subsequently amended by way of a Protocol signed on 31 March 2008. The agreement and the Protocol were entered into by the South African government in terms of section 108(2) of the Income Tax Act, No 58 of 1962, as amended ("the Act”) read with section 231(4) of the Constitution of the Republic of South Africa. The Protocol was duly published in the Government Gazette on 23 December 2008. Article 25A which deals with the mutual assistance in the collection of taxes took effect from 1 July 2010.
South Africa and Australia concluded a convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains on 1 July 1999.
The amendments to the treaty concluded by South Africa and Australia by way of the Protocol referred to above deal with, inter alia, the exchange of information regulated by article 25 and with mutual assistance in the collection of taxes which is catered for in article 25A.
Article 25A of the treaty provides that the South African Revenue Service ("SARS”) and the Australian Tax Office ("ATO”) shall assist each other in the collection of taxes. Article 25A provides that the competent authorities of South Africa and Australia, may, by mutual agreement settle the mode of application of article 25A.
Article 25A refers to any amounts owed in respect of taxes of every kind and description imposed on behalf of South Africa and Australia or of their political subdivisions or local authorities, so long as the taxation in question is not contrary to the tax treaty or any other instrument to which the two countries are parties, as well as interest, administrative penalties and the cost of collection or conservancy relating to such tax.
The tax treaty provides that, where a tax debt is enforceable under the laws of South Africa, and is owed by a person who cannot under the laws of South Africa prevent its collection, that tax debt shall at the request of the Commissioner: SARS be accepted for purposes of collection by the competent authority of Australia.
Similarly, the ATO is empowered to request that the Commissioner: SARS assists the ATO in collecting tax due to Australia.
Article 25A(3) has the result that the tax debt shall be collected by SARS in accordance with the provisions of South African law applicable to the enforcement in collection of taxes as if the debt were an amount due to SARS. The treaty also requires Australia to assist South Africa in collecting tax due by South African taxpayers from assets they may have in Australia. Prior to the insertion of article 25A into the tax treaty, SARS was unable to assist the ATO in the collection of taxes due to it from assets of Australian taxpayers located in South Africa and similarly, the ATO was unable to assist SARS in recovering taxes due to SARS from assets located in Australia belonging to South African taxpayers.
The application of an article regulating mutual assistance in the collection of taxes under a tax treaty was considered in the United Kingdom’s Court of Appeal in the case of Ben Nevis (Holdings) Ltd & Anor v Commissioner for HM Revenue and Customs  EWCA Civ 578. In that case the United Kingdom court held that article 25A of the tax treaty concluded between South Africa and United Kingdom was valid and applied to the tax debts in issue in that case.
More recently, the North Gauteng High Court was required to finalise a provisional preservation order in terms of the provisions of section 163 of the Tax Administration Act, No 28 of 2011 ("TAA”) which related to a request made by the ATO to SARS to assist in the collection of tax due by an Australian taxpayer out of assets located in South Africa.
During January 2012, that is, before the Tax Administration Act took effect, SARS received a request from the ATO for assistance with tax collection and conservancy of the assets of Mr Krok pending collection of the amount which was alleged to be due by him under the tax laws of Australia. Subsequently, this request was renewed by the ATO during February 2013, which is after the Tax Administration Act took effect. The request made by the ATO was accompanied by a formal certificate issued by the Australian Commissioner indicating that Mr Krok was liable to the ATO in the amount of R235,705,169.19. SARS agreed to assist the ATO in accordance with the Protocol to the tax treaty concluded between South Africa and Australia and particularly article 25A.
Section 185 of the TAA sets out the process which SARS must adhere to where a request has been received from a foreign government, in terms of a tax treaty, to assist in the recovery of tax payable to that government. As a result of SARS being requested by the ATO to assist in the collection of tax allegedly due by Mr Krok, SARS applied for an order for the preservation of Mr Krok’s assets in accordance with section 163 of the TAA.
Fabricius J delivering judgment in the Krok case referred to a Memorandum of Understanding between the two competent authorities of South Africa and Australia concerning assistance in the collection of taxes under article 25A of the treaty in place between the two countries. It does not appear that SARS has published this Memorandum of Understanding for use by taxpayers and it is interesting to note that in the Ben Nevis case the English Court expressed reservations about that the fact that there appeared to be documents in existence setting out the practical application of the tax treaty concluded by South Africa and United Kingdom which had not been made available to taxpayers in either country.
Mr Krok’s counsel contended that on a proper interpretation of the double tax agreement between South Africa and Australia and indeed the Protocol that SARS and the ATO could only rely on the mutual assistance provisions in respect of taxes owing which arose during the income years commencing from 1 July 2009. It was therefore argued that the taxes claimed by the ATO from Mr Krok fell outside of the scope of article 25A of the treaty.
Similar arguments were raised in the Ben Nevis case and that was dismissed by the English Court. Similarly, in South Africa the High Court reached the conclusion that article 25A could be invoked from the date on which it took effect in respect of taxes which might have arisen since inception of the underlying tax treaty, that is during 1999.
The Court also examined the structure created by Mr Krok and related entities pursuant to his emigration from South Africa and the manner in which those structures were implemented. The Court was satisfied that the assets in issue remained under the control of Mr Krok and therefore confirmed the provisional preservation order sought by SARS in order assist the ATO in the collection of taxes due my Mr Krok.
Thus, taxpayers who have assets located in multiple jurisdictions need to be aware that should they not settle their tax liabilities payable to the tax authority where they reside, that tax authority may seek assistance from other revenue authorities around the world to assist in the collection of tax under double taxation agreements.
In addition, many countries have assented to the Multilateral Convention on Mutual Administrative Assistance on Tax Matters, as amended by the Protocol ("the Convention”). On 21 February 2014, Government Gazette 37332, indicated that all constitutional formalities required to give effect to the Convention had been finalised and that the Convention would take effect in South Africa from 1 March 2014.
Currently there are 64 countries which have adopted the Convention and are in the process of finalising assent thereto in terms of domestic constitutional requirements. This means that South Africa can request assistance from numerous countries in collecting taxes payable by South African residents with assets located in countries which have assented to the Convention. Similarly, various other countries can call on South Africa to assist in the collection of taxes due to those other countries.
Historically, it was possible for a taxpayer to argue that it was not legally competent for one government to assist another government in the collection of taxes due to that other government as it undermined the principle which recognised the sovereignty of nations.
Those principles have changed by virtue of the inclusion of mutual assistance articles in numerous double taxation agreements and indeed in the Convention referred to above.
This article first appeared on bericcroome.com.