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Financial management can be held liable for a company’s tax debts

13 June 2014   (0 Comments)
Posted by: Author: Erich Bell
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Author: Erich Bell (SAIT Technical)

From interaction with various business persons albeit majority shareholders or chief executives, it came to my attention that some owners believe that their company is totally separate from them (which in a legal sense is correct) and that it may even protect them against the wrath of SARS.

Normally a natural person may choose to run his business in the form of a company or close corporation for various commercial and other reasons, a couple of them being to obtain funding from public, to ensure the continuity of the business should a key person pass on or to prevent personal liability in the event that business activities turn south.  From interaction with various business persons albeit majority shareholders or chief executives, it came to my attention that some owners believe that their company is totally separate from them (which in a legal sense is correct) and that it may even protect them against the wrath of SARS. Consequently, when the time comes to pay taxes, these business persons simply turn their heads the other way, smiling with a sense of superiority as they are ‘untouchable’ like some of them might believe.

However, the person, or entity rather, that is in fact smiling is SARS, for what the evader might not be aware of is that SARS has numerous powers in terms of the Tax Administration Act to enforce the collection of the tax debt against a person other than the company. The persons that may be held liable for the tax debt of a company may include the public officer in his representative capacity, shareholders in certain circumstances, a connected person to a company if an asset is disposed of to him/her for a consideration below market value, a person who knowingly assists the company in dissipating its assets in order to obstruct the collection of its tax debt, and lastly, financial management in certain circumstances. This article will only focus on the instance in which the financial management of a company may be held liable as a third party for the tax debt of company.

Section 159 of the Tax Administration Act (hereinafter referred to as ‘the TAA’) basically states that a responsible third party is personally liable for the tax debt of another to the extent set out in Part D of Chapter 11 of the TAA. One should remember that in this instance, the reference to ‘extent’ indicates that a person will be held liable to the degree determined in Part D of Chapter 11 of the TAA. A responsible third party is defined as any person who becomes otherwise liable for the tax liability of another person other than as a representative taxpayer or withholding agent, whether in a personal or representative capacity.  A representative taxpayer will in the case of the company be the public officer, whilst a withholding agent may be a resident of South Africa who needs to withhold withholding taxes from certain payments (for example royalties or service fees) made to non-residents. In this instance, financial management may be seen as a ‘responsible third party’ if they are liable for a company’s tax debts as set out in section 180 of the TAA, which forms part of Part D of Chapter 11.Section 180 of the TAA determines that a person is personally liable for the outstanding tax debt of a taxpayer (in this instance a company) to the extent that the person’s negligence or fraud resulted in the failure to pay the tax debt to SARS if both of the below requirements are met:

·         The person controls or is regularly involved in the management of the overall financial affairs of the taxpayer (company); and

·         A senior SARS official is satisfied that the person is or was negligent or fraudulent in respect of the payment of the tax debts of the taxpayer.

The SARS Short Guide to the Tax Administration Act, 2011, states that the potential personal liability of parties involved in the management of the financial affairs of a company should serve as encouragement to comply with the tax laws by ensuring correct and timely payment of tax.

A senior SARS official must be satisfied that the person was negligent or committed fraud. It should be noted that SARS has not yet published the list of who is regarded as a ‘senior SARS official’ which may cause some difficulties when determining if this specific provision may be invoked or whether it was lawfully invoked. From the outset it would seem as if SARS may hold a person responsible in his or her personal capacity as being negligent or committing fraud if such a person deliberately fails to pay the company’s tax debt to SARS and then subsequently diverts the funds for some other purpose. It should however be noted that the person will only be held liable to the extent that his fraud or negligence resulted in the non-payment of the tax debt.

In terms of section 184(1) of the TAA, SARS has the same powers of recovery against the financial manager appointed as third party as SARS has against the company and the financial manager has the same rights and remedies as the company has against such powers of recovery. SARS must also in terms of section 184(2) of the TAA, provide the financial manager with the opportunity to make representations before the he/she may be held liable for the company’s tax debt if it will not place the collection of the tax in jeopardy, or alternatively, as soon as practical after the financial manager is held liable for the company’s tax debt in terms of section 180.

Should a person forming part of a company’s financial management be held liable, the person is, in terms of section 160 of the TAA, entitled to recover the amount paid from the company or to retain out of money or assets in the person’s possession or that will come into the person’s possession an amount equal to the amount of taxes paid.

It is held that this powers afforded to SARS would greatly assist tax compliance in South Africa and financial management are urged to ensure that their companies' tax affairs are in order to prevent the imposition of this extreme measure.

This article first appeared on the May/June 2014 edition of Tax Talk.


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