SARS emerges bruised in the Tradex judgment
09 December 2014
Posted by: Author: PwC South Africa
Author: PwC South Africa
The judgment of the Western
Cape High Court in CSARS v Tradex (Pty) Ltd  ZAWCHC 142 was handed down
on 9 September 2014 but was released only in mid-October.
those proceedings, SARS was seeking confirmation of a provisional preservation
order granted in terms of section 163 of the Tax Administration Act 28 of 2001
on 14 August 2013.
first respondent, Tradex, and the third respondent, Business Wize Accounting
and Management Services CC (‘BWA’), were entities owned by one Louise Wiggett,
the second respondent.
The judgment reveals that, after the granting of the
provisional order, the respondent taxpayers had been trying to put their tax
affairs in order and to pay the outstanding taxes owed by them, but that SARS
was dissatisfied with progress and applied to the High Court for a final
taxpayers’ business background
three years of research and development by Wiggett, Tradex commenced business
in 2002, supplying technology solutions for automating and streamlining export
and import processes, and it had recently expanded into consulting services in
the field of international trade. Tradex had 38 full-time employees but did not
own any immovable property.
BWA had started business in 2006-2007 and
Wiggett had caused it to purchase a property in Montague Gardens for R2.149
million and one in Caledon for R1.95
million. Both properties were mortgaged.
had agreed to supply Tradex with furniture, equipment, office accommodation and
operational support services at market-related charges, and BWA had appointed
Tradex its agent in terms of section 54 of the Value-Added Tax Act 89 of 1991.
owned a property in Langebaan that she had bought in 2000 for R33 060 and also
owned a share of a property in Hout Bay.
tax debts and fiscal non-compliance
When the application for a preservation order was made
in August 2013, Tradex owed at least R4,1 million in various taxes. Its
liability for income tax for 2010 and 2011 was unknown because it had failed to
render tax returns for those years. Its liability for VAT was also unknown
because it had failed to render returns over the period January 2010 to March
2013. BWA had rendered no tax returns since starting business in 2006. Wiggett
had rendered no returns since registering as a provisional taxpayer during
blamed the fiscal non-compliance on two successive financial managers.
auditor appointed by Wiggett found Tradex’s and BWA’s records to be in serious
disarray and in need of reconstruction. The tax affairs of Tradex and
BWA were not in order when the provisional preservation order, that had been
applied for ex parte (that is to say, without notice to the taxpayer), was
issued on 12 August 2013, and at that juncture their
tax liability was likely to exceed R4,1 million.
tax liability was not yet
his judgment, Rogers J said (at para ) that it was impossible to say with
any precision what amount of tax Tradex and BWA would in due course be liable
for. The two entities had paid about R4.7 million in respect of their known tax
email correspondence between Wiggett and SARS showed that Wiggett was making a
substantial effort to co-operate with SARS in its investigations.
Tradex and BWA alleged that their financial statements
and tax returns were now up to date, that BWA had made losses and did not owe
any tax, that Wiggett also had no outstanding tax liability, and that a
preservation order was unnecessary. They repeated an earlier offer to provide
SARS with security, allegedly worth more than R18 million, which was substantially
in excess of any tax that might still be owing.
preservation order may be granted even if tax is not presently due and payable
In his judgment, Rogers J said (at para )
that a preservation order may be made in terms of section 163(3) of the Tax
if such an order is ‘required to secure the collection of tax’, but he
expressed the view that the tax in question need not be currently due and
payable and it sufficed that tax in an unquantified amount was likely to become
due and payable.
preservation order must be
‘required to secure the collection of tax’
he went on to say (at para ) that a preservation order cannot be granted
unless it is ‘required to secure the collection of tax’.
raised the question of what is meant by ‘required’.
J quoted from the judgment in Commissioner for the South African
Revenue Service v CJ van der Merwe  ZAWCHC 59 where Savage AJ
said (at para ) that the requirement of necessity could not be read into
the statute, nor need it be shown that a preservation order was required to
prevent the dissipation of assets; however, the facts must show ‘an appropriate
connection between the evidence available and the nature and purpose of the order
sought’. The court was not required to determine whether, in fact, tax was due
and payable by the person in question.
The test for a preservation order was not one of
‘necessity’, and he quoted from judgments which suggested that ‘required’ meant
‘reasonably required’ in the sense of connoting ‘a substantial advantage in the
collection of the tax’.
J went on to say (at para ) that there were indications that the focus of a
preservation order was the dissipation of assets, and
that an ex parte application in terms of section 163(1) of the Tax
Administration Act would generally be justified only out of concern regarding
such dissipation. He pointed out that, if more urgent action was needed for the
preservation of assets, section 163(2)(a) authorised SARS to seize assets in
order to prevent any realisable assets from being disposed of or removed which
might frustrate the collection of tax.
determining whether a preservation order should be varied or rescinded in terms
of section 163(9) –
An intention by the tax-payer to dissipate assets to defeat a
SARS claim need not be established
court is required to balance hardship to the taxpayer on the one hand and "the
risk that the assets concerned may be destroyed, lost, damaged, concealed or
transferred” on the other.
Rogers J said (at para ) that he did not think
that the word ‘required’ in section 163(3) entailed proof of an intention on
the part of the taxpayer to dissipate his assets in order to defeat SARS’s
claim. However, he said –
Rogers J went on
to say (at para ) that –
is required to show, I think, that there is a material risk that assets which
would otherwise be available in satisfaction of tax will, in the absence of a
preservation order, no longer be available. The fact that the taxpayer bona
fide considers that it does not owe the tax would not stand in the way of a
preservation order if there is the material risk that realisable assets will
not be available when it comes to ordinary execution. An obvious case is that
of a company which, believing it owes no tax, proposes to make a distribution to its shareholders.
J (at para ) then critically scrutinised the specific terms of the
preservation order sought by SARS in this case, for he said that the question
whether such an order was ‘required’ cannot be answered in the abstract and the
practical utility of its terms has to be assessed.
every case where a taxpayer is liable or likely to become liable for tax, there
is a theoretical possibility that the value of its assets may for some or other
reason be diminished by the time SARS is able to execute. I do not think the
lawmaker intended that a preservation order would routinely be available to
SARS in every case of an actual or anticipated tax liability. There must be
something by way of ‘requirement’ which places the particular case outside the
ordinary run of cases. The existence of material risk that assets will be
diminished is, as I have said, the obvious example. It is in such circumstances
that the court could conclude that preservation would confer a ‘substantial
advantage’ (i.e. over the position that would prevail without the order) and
that there was thus ‘an element of need’ …
J made the important point (at para ) that –
the founding papers in which it applied for a preservation order, SARS had made
‘generalised statements’ to the effect that a preservation order would enable
SARS to collect all the tax owed by the respondents, that the appointment of a curator
bonis would ensure that SARS recovered all taxes owed and that in the
absence of a preservation order SARS ‘will in all likelihood sustain severe
prejudice’ because the prospect of recovering the outstanding tax ‘seems bleak’
– but he pointed out that no facts had been alleged by SARS to establish a prima
facie case that there was an appreciable risk of assets being diminished.
Delinquency in the conduct of a taxpayer’s tax
affairs may in appropriate circumstances be part of the material from which one
could infer that there is an appreciable risk that assets available for
collection of tax will be diminished. There is, however, no automatic
connection between the two. A person may be disorganised and late in regard to
its tax administration without there being any appreciable danger that its
assets will be diminished by the time tax comes to be collected.
said Rogers J, SARS’s case was that the respondents’ delinquency in completing
their financial statements and making their returns and the initial disarray in
their records were a basis for confirming the preservation order, but (see para
) he pointed out that SARS had not alleged that Wiggett was causing Tradex
to dissipate its assets by distributing dividends or paying excessive salaries
or engaging in other suspicious activities. Rogers J noted (at para ) that
did not seek to make the case that Tradex’s business was being run into the
ground or becoming less valuable.
Rogers J said (at
para ) that –
there were a prima facie case that Tradex would be run better under the care of
a curator bonis, one might be able to say that a preservation order was
‘required’, because then one could conclude that there was a reasonable
prospect that, without a preservation order, the business would be less
valuable by the time tax came to be collected. But as I have said, no facts to
support such a conclusion were advanced in the founding papers or subsequently.
Rogers J commented
(at para  – ) that –
gains the distinct impression that SARS launched the application not so much
because a preservation of the respondents’ assets was required but in order to
bring matters to a head by placing legal pressure on the respondents . . .
While I can understand SARS’ frustration, that is not the purpose of the
preservation application. There are other statutory mechanisms available to
SARS to deal with taxpayers who fail to provide information, to render returns
or to make payment of tax . . .
J accepted (see para ) that the delinquency of Tradex and BWA in rendering
returns, whilst unacceptable, appeared to have been attributable in a
substantial measure to the fact that their financial managers had let them
He was critical (see para ) of the terms of the
provisional preservation order, sought by and granted to SARS, which
interdicted the respondents from alienating or dealing with their assets in a
way that would cause a decrease in their value, and he pointed out that if this
meant that the company could not use its cash flow to meet ordinary business
expenses, the order would have the effect of forcing the company to close down.
Rogers J said (at
para ) that a preservation order
also not be "required” unless there were reason to believe that a forced sale
of the company’s assets or its business would achieve a better outcome for SARS
than if the business were to continue in operation. There is no basis for such
J said (at para ) that the function of a curator bonis is not to
assist SARS to investigate the taxpayer’s tax liabilities, but to focus on the
discovery and preservation of assets from which tax liabilities, whatever they
might turn out to be, could be met.
He went on to say (at para ) that if SARS, without
resorting to litigation, had requested Wiggett and BWA to give an undertaking
and permit caveats to be registered against their properties, pending the final
determination of their tax liabilities, it is likely that they would have
the result, Rogers J concluded that, in this case, a preservation order was not
‘required’ to secure the collection of tax within the meaning of section
163(3). He dismissed SARS’s application for the provisional preservation order
to be confirmed and, instead, made an order – whose terms reflected a tender
that had already been made by the respondents – for caveats to be registered
against specified immovable properties.
preservation order is a procedure for preserving assets, not for putting pressure on taxpayers
Rogers J pointed
out (at para ) that section 163
is a procedure for preserving assets and is not an execution mechanism –
that is to say its purpose is not to force payment of a tax debt.
then spelled out the ordinary mechanisms available to SARS to compel payment of
an assessed tax debt, namely, by taking a civil judgment against the taxpayer
for the tax reflected in an assessment and then executing that judgment in the
ordinary way against the taxpayer’s assets and, if necessary, instituting
sequestration or liquidation proceedings.
J makes the valuable observation (at para ) that –
163 finds its primary application where the amount of tax has not yet been
ascertained (i.e. where SARS cannot execute in the ordinary way).
Implicitly, therefore, the judgment makes clear to
SARS that where an assessment has been issued (and can therefore be enforced by
the ordinary means), a preservation order is not
appropriate unless there is reason to believe that the taxpayer’s assets are
there is a demonstrated risk of dissipation, but the taxpayer’s tax liability
has not been ascertained, Rogers J makes clear (at para ) that it is not
appropriate for the preservation order to give the curator bonis the
power to realise the taxpayer’s assets to satisfy an unascertained tax
This judgment reflects very poorly on
was Rogers J’s observation that he gained the impression that the real reason
why SARS had applied for a preservation order was not to preserve the
respondents’ assets, but to put pressure on them to get their tax affairs in
Also significant was
Rogers J’s warning (at para ) that SARS should not ‘frame preservation
orders on a one size fits all basis’– as SARS has apparently been doing, for
the judge cited another matter where SARS had sought an order in similar terms,
and he said that similar orders had been ‘sought and granted to SARS in several
matters in Gauteng’.
Overall, the judgment
exposes SARS’s conduct in this case as heavy-handed and bullying, in
unnecessarily resorting to a preservation order when there were no grounds for
suspecting that the respondent taxpayers were dissipating assets, and in
rejecting their reasonable tender to provide security for their tax
Instead, SARS had
crafted a preservation order so draconian that it could have brought the
taxpayers’ business to an end, for in terms of the preservation order sought by
SARS, all the respondents’ assets were to vest in the curator bonis, who was
to take control of their assets and have the power to realise the assets.
Moreover, the order was capable of being interpreted as empowering the
curator bonis not to permit payment of ordinary business expenses
out of the cash flow.
More serious still is
that the judgment implicitly casts doubt on SARS’s ethics in seeking a
preservation order for an improper purpose and on its commitment to the fair
use of its draconian statutory powers.
This article first appeared on pwc.co.za.