Supreme Court of Appeals rules on mutual assistance in the collection of taxes
05 October 2015
Posted by: Author: Esther van Schalkwyk
Author: Esther van Schalkwyk (BDO South Africa)
The Supreme Court of Appeal (SCA) recently handed down judgment in Krok v CSARS confirming a preservation order granted against one Mr Krok. The matter arose after the Australian Tax Office (ATO) sought assistance from SARS to collect a large amount of income tax allegedly due by Mr Krok. The ATO sought the conservancy of Mr Krok's South African assets, pending the collection of the tax debt.
Mr Krok emigrated from South Africa to Australia in 2002. Just before Mr Krok ceased to be resident in South Africa, the Mark Krok 1994 Trust distributed its capital assets to Mr Krok. These assets were accordingly 'blocked' for exchange control purposes. Mr Krok claimed to have vested the beneficial interests in the assets and the income in a company incorporated in the British Virgin Islands (BVI) known as Polperro Enterprises. Mr Krok alleged that he retained only the bare dominium of the assets. In 2008, Mr Krok emigrated from Australia to the United Kingdom. In his relocation planning, Polperro was liquidated and Jucool Enterprises Inc. was incorporated, also a BVI company. Jucool purportedly had the beneficial ownership of the assets. The SCA noted that the agreements that were concluded to vest Jucool with the beneficial ownership were not dissimilar to the agreements concluded with Polperro, which were terminated at Mr Krok's instance, leaving him in control of the assets.
Before the SCA, Jucool claimed that its interests would be prejudiced by the preservation order because of its beneficial ownership and, as a result, it was granted leave to intervene in the application proceedings.
An audit of Mr Krok's tax affairs led the ATO to believe that Mr Krok continued to regard the assets and the income derived as his personal property. The ATO concluded that Mr Krok concealed foreign income and avoided income tax in Australia and accordingly requested SARS' assistance in the collection of taxes.
The High Court granted SARS a preservation order in terms of the Tax Administration Act (the TAA) and the Protocol amending the Double Taxation Agreement between South Africa and Australia (the DTA). The TAA empowers SARS to lodge an ex parte application to the High Court for a preservation order of assets of a taxpayer prohibiting any person from dealing in any manner with those assets. The TAA presupposes an amount of 'tax' due or payable under a 'tax Act', which does not extend to foreign legislation. However, where SARS has, in accordance with an international tax agreement, received a request for conservancy of an amount alleged to be due by a person under the tax laws of the other country where there is a risk of dissipation or concealment of assets by the person, SARS may apply for a preservation order.
On appeal before the SCA, the only argument that Mr Krok pursued was that on a proper interpretation of the DTA and the Protocol, the TAA can only be invoked if the taxes claimed by the ATO arose on or after 1 July 2009. The SCA disagreed. The DTA and Protocol form part of South African domestic law and have been approved by Parliament and published in the Government Gazette. The Protocol amended the DTA by, inter alia, providing for mutual assistance in collecting taxes and securing preservation orders to recover taxes. The SCA held that the Protocol covered tax claims that arose in the past in respect of which assistance was sought. The SCA held that the parties to the Protocol intended that it should apply to the provision of assistance in the collection of taxes to revenue claims arising before the Convention entered into force.
The SCA rejected Mr Krok's argument and also Jucool's claim that the preservation order disregarded its beneficial interest in the assets as they were situated in South Africa, and Jucool's was unable to show, in terms of South African law, that beneficial ownership had indeed passed.
The appeal was therefore dismissed in full and the preservation order confirmed as correct.
This article first appeared on bdo.co.za.