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Can shareholders/directors be held liable for a company’s tax debts?

19 March 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Q: My client has a debt running into millions at SARS and is in the process of liquidating his company. Can he be held as a shareholder/director personally responsible for this tax debt?

A: Chapter 10 and 11 of the Tax Administration Act (No. 28 of 2011) (hereinafter referred to as ‘the TAA’) provides all the rights, duties and procedures relevant to tax liability and payment and recovery of tax respectively. It should be noted that SARS has a whole arsenal of weapons when it comes to the collection of tax and a public officer, director or senior manager may be held liable in its capacity as such, as a shareholder or as a person owing money to the company etc. For clarity purposes the liabilities will be discussed under the following headings (1) liability in the event of a ‘representative taxpayer’ and (2) liability in the event of a ‘responsible third party’.

1.      Liability in the event of a ‘representative taxpayer’

 Sec 155 of the TAA determines when a ‘representative taxpayer’ will be personally held liable and states the following:

‘... A representative taxpayer is personally liable for tax payable in the representative taxpayer’s representative capacity, if, while it remains unpaid—

(a) the representative taxpayer alienates, charges or disposes of amounts in respect of which the tax is chargeable; or

(b) the representative taxpayer disposes of or parts with funds or moneys, which are in the representative taxpayer’s possession or come to the representative taxpayer after the tax is payable, if the tax could legally have been paid from or out of the funds or moneys.’ (own emphasis added).

Sec 155 therefore gives personal liability for a tax debt to a representative taxpayer if it performs the actions listed in par (a) or (b) while the tax remains unpaid. A ‘representative taxpayer’ is defined as follows in sec 153 of the TAA:

‘a representative taxpayer means a person who is responsible for paying the tax liability of another person as an agent, other than as a withholding agent, and includes a person who—

(a) is a representative taxpayer in terms of the Income Tax Act;

(b) is a representative employer in terms of the Fourth Schedule to the Income Tax Act; or

(c) is a representative vendor in terms of section 46 of the Value-Added Tax Act.’

A ‘representative taxpayer’ is defined in sec 1 of the Income Tax Act (No. 58 of 1962) (hereinafter referred to as ‘the Act’) as follow:

‘... means a natural person who resides in the Republic and—

(a)   in respect of the income of a company, the public officer thereof...’

 A ‘representative vendor’ as defined in sec 46(a) of the Value-Added Tax Act (No. 89 of 1991) (hereinafter referred to as ‘the VAT Act’) and par (a) of the definition of ‘representative employer’ as defined in par 1 of the Fourth Schedule to the Act states that the public officer would be the representative vendor/employer in the case of a company.

However, sec 169(2)(a) of the TAA states that a tax debt must be recovered as follow:

‘... A tax debt is recoverable by SARS under this Chapter, and is recoverable from—

(a)   in the case of a representative taxpayer who is not personally liable under section 155, any assets belonging to the person represented which are in the representative taxpayer’s possession or under his or her management or control ...’ (own emphasis added).

Therefore, in the case of the public officer, if the circumstances prescribed in either par (a) of (b) of sec 155 are not met, then the public officer, in his capacity as ‘representative taxpayer’, may not personally be held liable for the company’s tax debt and SARS may only recover the tax debt from the company’s assets in the possession, management or control of the public officer. The determining factor here which would make the public officer liable for the company’s tax debt would therefore be that one of the requirements of sec 155 must be met. If not, then the public officer cannot be held personally liable.

It should be noted that, in terms of sec 153(3) of the TAA, the company ‘... is not relieved from any liability, responsibility or duty imposed under a tax Act by reason of the fact that the taxpayer’s representative ... failed to perform such responsibilities or duties; or ... is liable for the tax payable by the taxpayer’.

2.      Liability in the event of a ‘responsible third party’

Sec 159 of the TAA states the following:

‘... A responsible third party is personally liable to the extent described in Part D of Chapter 11.’

A ‘responsible third party’ is defined in sec 158 of the TAA as ‘...means a person who becomes otherwise liable for the tax liability of another person, other than as a representative taxpayer or as a withholding agent, whether in a personal or representative capacity.’ (own emphasis added).

A responsible third party would therefore include a third party appointment to satisfy a tax debt under sec 179 of the TAA, financial management under sec 180 of the TAA, shareholders under sec 181 of the TAA, a transferee under sec 182 of the TAA, a person assisting in dissipation of assets under sec 183 of the TAA.

Please consult the various sections to determine if SARS would be able to invoke them. Sec 179, 182 and 183 may be invoked on directors subject to the respective requirements of the said sections. Specific focus will be given to sec 180 and 181

Sec 180 of the TAA may hold financial management personally liable for the company’s tax debt and states the following:

‘... A person is personally liable for any outstanding tax debt of the taxpayer to the extent that the person’s negligence or fraud resulted in the failure to pay the tax debt if—

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

(b) 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.’ (own emphasis added).

The word ‘negligence’ is not defined but in a legal sense, in short, it refers to a deviation of actions from what would have been expected from a ‘reasonable man’. It can be argued that it is expected from financial management to ensure that a company is tax compliant. A director may therefore in terms of this provision be held liable for the company’s tax debt.

Sec 181(1) of the TAA determines when shareholders may be held liable and states the following:

‘... (1)  This section applies where a company is wound up other than by means of an involuntary liquidation without having satisfied its outstanding tax debt, including its liability as a responsible third party, withholding agent, or a representative taxpayer, employer or vendor.’

Given the fact that SARS has applied for the liquidation of the company in terms of sec 177(1) of the TAA, the liquidation was not done on a voluntary basis and SARS would not be able to invoke the provisions of sec 181 of the TAA and the shareholders would consequently not be held liable.

Conclusion

The public officer of the company may be held personally liable for the company’s tax debt if one of the requirements of sec 155 of the TAA is met. If it is not met then he/she may not be held liable and SARS may only recover the tax debt from the company’s assets in the possession, management or control of the public officer.

SARS may, under sec 180 of the TAA hold the financial management personally liable for the company’s tax debt to the extent that their negligence gave rise to the company failing to settle its tax debt. From the facts provided it would seem as if there were a fair share of negligence involved.

The shareholders would not be held liable for the company’s tax debt in terms of sec 181, due to the fact that the sequestration was involuntary.

In any event, should SARS aim to invoke the provisions of sec 180 – 183 of the TAA, sec 184(2) provides for the following:

‘... SARS must provide a responsible third party with an opportunity to make representations—

(a) before the responsible third party is held liable for the tax debt of the taxpayer in terms of section 180, 181, 182 or 183, if this will not place the collection of tax in jeopardy; or

(b) as soon as practical after the responsible third party is held liable for the tax debt of the taxpayer in terms of section 180, 181, 182 or 183.’ (own emphasis added).

Disclaimer: Nothing in this query and answer should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answer, SAIT do not accept any responsibility for consequences of decisions taken based on this query and answer. It remains your own responsibility to consult the relevant primary resources when taking a decision.


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