2 February 2010

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For most taxpayers, the periodic intrusion into their lives of an obligation to pay tax to SARS is unwelcome.

Even less welcome is the receipt of a notice in terms of section 99 of the Income Tax Act requiring the recipient to remit to SARS an amount due in respect of the tax liability of another person out of funds held on behalf of that person.

The nature of a section 99 notice came under scrutiny by the High Court in Hindry v Nedcor Bank Ltd, where Wunsh J held section 99 to be “a legitimate limitation of a taxpayer's rights in terms of s 36 of the Constitution”.

The recent decision in Goldblatt v Liebenberg throws further light on the nature of a notice issued by SARS in terms of section 99, and the role of such a notice in the general scheme of the Income Tax Act.

In this case, Liebenberg was a shareholder and director of Clade Investments (Pty) Ltd and he was also employed by the company as its chief executive officer for several years, after which he left its employ.

After leaving the employ of Clade Investments, Liebenberg entered into an agreement with the company, which was later made an order of court, in terms of which Clade Investments was to pay him R1.6 million in respect of his shareholding in the company plus a further R1.3 million in respect of his loan account in the company.

Clade Investments duly paid the R1.6 million, but did not pay the remaining R1.3 million. Liebenberg then applied for and was granted a writ of execution.

In the present proceedings, Clade Investments applied to the High Court for an order setting aside the writ.

Clade Investment argued that the writ ought to be set aside on the ground that the company had discharged its debt to Liebenberg by paying several third party creditors of Liebenberg, including payment to SARS of an amount of R1.1 million in respect of Liebenberg’s normal tax on remuneration received by him whilst employed by the company.

The background to these events was that Clade Investments had become aware that, as a result of Liebenberg’s failure to carry out his duties as CEO of the company, PAYE (in an amount of some R800 000) had not been withheld by the company on remuneration due to him whilst he was in the employ of the company.

Clade Investment’s auditors had then written to SARS, disclosing this fact, and requesting SARS to issue a section 99 notice declaring the company to be an agent of Liebenberg so that the company could pay this tax liability to SARS before it paid Liebenberg the amount that the company owed to him in terms of the court order.

SARS thereafter raised assessments to PAYE and declared Clade Investments to be an agent of Liebenberg and directed the company to remit to SARS any amount of assessed taxes due by Liebenberg from moneys held by the company on his behalf.

Clade Investments argued that its subsequent payment to SARS of the amount of R1.1 million had pro tanto discharged the company’s liability to Liebenberg in terms of the court order.

In dismissing this argument, the judgement throws useful light on the nature of a notice in terms of section 99 and its place in the structure of the Income Tax Act.

The court pointed out that, until Liebenberg received an assessment to normal tax for the relevant period, there was no tax due by him.

Hence, no payment made by Clade Investments to SARS could be construed as a discharge of Liebenberg’s liability to SARS.

The section 99 notice received by his ex-employer, Clade Investments, did not have the effect of converting Liebenberg’s unassessed income tax liability to an assessed liability, and the notice did not create a debt due by Liebenberg to SARS. Unlike value-added tax, where liability arises without an assessment, there is no income tax liability until an assessment is issued.

Clade Investments, as an employer, was under an obligation in its own right to deduct or withhold employees’ tax from Liebenberg’s remuneration and pay it over to SARS by way of PAYE.

Thus, when Clade Investments received a letter of assessment from SARS in respect of PAYE on Liebenberg’s remuneration, and paid this amount over to SARS, Clade Investments was discharging its own obligation toward SARS.

Consequently, this payment by Clade Investments to SARS did not affect Liebenberg’s right to demand that Clade Investment pay the judgement debt in his favour that arose from the settlement agreement.



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