Can SARS take more than what’s in the cookie jar?
13 June 2014
Posted by: Author: Pieter Faber
Author: Pieter Faber (SAIT Technical)
The Tax Administration Act 28 of 2011 ("hereafter TAA”) provides
extensive powers to SARS for collecting tax debts due to the fiscus.
The collection mechanisms available to SARS where payment is
not forthcoming from the taxpayer are broadly divided into 3 areas, namely
collecting outstanding tax debts through civil court judgement for both local (i.e.
section 172) and foreign assets (i.e. section 186), recovery of outstanding tax
debts through liquidation or sequestration proceedings (i.e. section 177) or
collecting the tax debt from third parties (i.e. section 179-184).
Of particular importance is the last mentioned where SARS
collects debts from third parties. In this respect the question arises whether
SARS is entitled to claim all the money that the taxpayer could have claimed
from the third party?
The general rule applicable to all the collection mechanisms
is set out in section 169(2) which limits the collection of outstanding tax
debts to assets under control of a representative taxpayer belonging to the
taxpayer represented or in all other instances, to the assets of the taxpayer.
While this principle seems clear cut, it becomes more opaque
when dealing with rights to debt, for example where money belonging to the
taxpayer is deposited into a debt facility such as an overdraft or mortgage.
As SARS is limited to collecting tax debts against assets of
the taxpayer the first hurdle would be regarding determining what assets
belonging to the taxpayer. More specifically the question arises as to whether
the assets of the taxpayer, namely money paid into his overdraft ,are assets
belonging to the taxpayer which the bank thereupon uses to settles his debt to
The question regarding the status of money paid into an
overdrawn account was put to the Supreme Court of Appeal in Absa
Bank Ltd. v Standard Bank of SA Ltd where the court held that though the
collecting bank acts on behalf of the account holder in collecting the money
that agency relationship no longer exists once the amounts are credited to the
account holders account and the ownership of the money vests in the bank. The
account holder will only obtain a right as debtor against the bank to the
extent of the credit balance and if it remains overdrawn, the indebtedness to
the bank is merely reduced.
The court rejects the notion that the money received by the
collecting bank remains that of the account holder which ownership is
transferred to the bank thereafter through set-off.
The question of ownership of stolen funds deposited into
credit card facilities and a mortgage loan again came before the same court in Absa
Bank Ltd v Lombard Insurance Company Pty Ltd. Here the court had to deal with whether the plaintiff from whom
the money was stolen could claim return of the money from the bank. The court confirmed
the principle held in the ABSA Bank v Standard Bank and concluded that even stolen
money paid into an overdrawn account becomes the property of the bank in
settlement of the debt to it. The court further holds that the remaining debit
balance merely remains a debt owning to the bank by the account holder.
Therefore it would seem that where amounts are deposited
into an overdrawn account at a bank, SARS would only be able to claim any
credit balance in such an account as that remains the only enforceable claim
that the taxpayer had in relation to the bank.
What then follows is if the bank should pay an amount to
SARS in excess of the debit amount available, is it the taxpayer or SARS who
have been enriched at the cost of the bank? The court in the Lombard
case dealing with enrichment cites the following passage:
‘Generally if a
person has paid what he did not himself owe but another owed, then if indeed he
paid in his own name as though he were himself the debtor, he rightfully
employs this action. But if he paid in the name of the debtor this action falls
away and the debtor will have release from the creditor, who has gotten back
his own; and the debtor will start to be bound to the payor for a refund in the
judicial proceeding on management of affairs or other like proceeding.’
Thus the question is in what capacity does the bank pay SARS?
Section 179(1) TAA states:
"A senior SARS Official may by notice to a
person who holds or owes or will hold or owe any money, including a pension,
salary, wage or other remuneration, for or to the taxpayer, require a person to
pay the money to SARS in satisfaction of the taxpayers outstanding tax debt.”
The payment by the bank to SARS in terms of section 179 does
not stem from the debt owed by the debtor but by the compulsion of the
obligation that this section places on the bank in satisfaction of the debt of
another, namely the taxpayer. Thus the obligation and payment remain that of
the third party and he does not pay the debt in substitution of the taxpayer as
the taxpayer, which would rather seem the case as in section 183 TAA when the
non-taxpayer becomes jointly liable for the debt and thus pays as the taxpayer.
Therefore where a bank has paid an amount to SARS in terms
of section 179 TAA in excess to the amount standing in credit for the benefit
of the taxpayer, it would be SARS that is enriched and not the taxpayer. In
contradiction it would seem that where the bank becomes liable to SARS in terms
section 183 his impoverishment which lead to a debt owing would have to be claimed
from the taxpayer.
Two interesting questions also remain regarding debit
balances. Firstly the principles enunciated in Nissan South Africa (Pty) Ltd
v Marnitz NO & others (Stand 186 Aeroport (Pty) Ltd Intervening), namely
that the bank is not liable to an account holder for stolen money, which does
raise an interesting question. When dealing with PAYE and VAT which are
essentially money withheld as agent of SARS and unlike corporate tax debts, are
not merely tax debts payable from the taxpayer’s money but akin to trust money
it begs the question whether SARS can claim that the bank is liable to SARS
rather the account holder. The court held that the bank does not need to
account to the account holder where the money is stolen instead the bank, by
remaining in possession of the funds without any corresponding liability to
account to its customer, was enriched and liable to make restitution to the
owner. Should the concept be wider than money stolen then the remedy for
recovery by SARS may rather be found in condiction rather than recovery in
terms of the TAA.
The last point to make is whether SARS can compel the bank
to comply with payment terms outside the scope of contract terms of the
account. For example where the account is subject to a term notice. The answer
is seemingly found in the nature of the taxpayer’s rights to the money. In this
regard the court in ABSA Bank Ltd v Standard Bank states the following:
It is true that a collecting bank presents a cheque to the drawee bank
on behalf of the
former's customer, the payee, but once the amount in question is effectively
credited to the payee's account there is no longer any question of an agency
relationship. The collecting bank then holds the proceeds in its own right.
If the account was in credit, the collecting bank becomes the debtor of the
payee to the extent of the increased credit.
Furthermore in the Lombard case the courts states (own
Generally, where a customer deposits money in his account the customer
becomes entitled to repayment but this is so only where the instruction given
to the bank to collect or pay on his account pursuant to the general bank
and customer contract is enforceable.
It would seem from these passages that the taxpayer only
obtains a debt claim against the bank who is now the owner of the money and
such debt claim is subject to the terms of the contract between the parties. When
dealing with a term investment, endowment policy or term note it is also of
interest to note that section 179 TAA only applies to amounts of money owed or
held. Thus if the nature of the relationship between the bank and taxpayer is
that the bank owes the taxpayer money or holds such money (i.e in a strong box
etc.) invariably the bank would have to comply with the payment instruction in section
179(3) TAA. However if the nature of the right is merely a contractual claim
for something other than money or that it only becomes money owed on maturity,
it becomes questionable whether SARS can enforce any rights against the bank or
investing institution until such time as the rights exercisable against the
bank or institution by the taxpayer becomes money owed.
This article first appeared on the May/June edition of Tax Talk.