High net worth individuals and their associated trusts have in the past been identified by the South African Revenue Service (SARS) as posing a risk of non-compliance to tax legislation. The recent confirmation of a preservation order by the North Gauteng High Court in C: SARS v Krok and Jucool Enterprises Inc. (Case No. 1319/13) now renews the focus of SARS in this regard.
The Krok judgment is significant for a number of reasons – including on the basis that it considers:
- section 185 of the Tax Administration Act No. 28 of 2011 (the TAA) which empowers SARS to recover tax on behalf of foreign governments in certain circumstances;
- whether one can transfer beneficial ownership of “blocked” assets – i.e. assets placed under the physical control of an authorised dealer subsequent to the emigration of a South African resident;and
- the day-to-day actions of involved parties in establishing beneficial ownership.
In terms of the background facts to this case, during 2002, Mr. Krok relocated to Australia from South Africa and accordingly ceased to be a resident of South Africa for tax and exchange control purposes. On this basis, certain of Mr. Krok’s assets were placed under the control of an authorised dealer in foreign exchange. During 2008, Mr. Krok decided to relocate to the United Kingdom and as part of his planning in this regard entered into two separate agreements (“the Sale Agreements”) with Jucool Enterprises Inc. (“Jucool”).
The sole shareholder of Jucool is Jucool Trust, a discretionary trust of which Nova Trust Ltd is a trustee. The discretionary beneficiaries of the trust are, inter alia, Mr. Krok and his children.
In terms of the Sale Agreements, Mr. Krok sold to Jucool the rights and interests to his blocked South African assets at a total purchase price of R290 million, which purchase price, would remain outstanding on interest-free loan account. The Sale Agreements recognised that the capital of the assets themselves could not be remitted from South Africa and that the transfer of such assets would be subject to the consent of the South African Reserve Bank (SARB) and accordingly such agreements provided that, as and when the blocked assets became transferable, Mr. Krok would be required to transfer registered title to such assets into Jucool’s name.
Immediately after the conclusion of the Sale Agreements, Mr. Krok entered into a Deed of Assignment in terms of which he assigned all his rights, title and interest in and to the debt of R290 million owing to him by Jucool to Nova Trust Ltd, as trustee of the Jucool Trust (“the Assignment Arrangement”).
Against the above-mentioned background, the Australian Tax Office (ATO) assessed Mr. Krok on the basis that he was resident in Australia during the period from 2002 to 2008 and on the basis that he retained legal and beneficial interests in respect of the assets held in South Africa. The position of the ATO was that Mr. Krok was liable to Australian income tax in respect of income derived from the South African assets during the time that Mr. Krok was resident in Australia as well as Australian capital gains tax when he ceased to be tax resident in Australia.
SARS accordingly received a request from the ATO in terms of article 25A of the Double Tax Agreement concluded between South Africa and Australia (the DTA) in terms of which they were asked to assist with the tax collection and conservancy of assets of Mr. Krok, pending the collection of the amount alleged to be due by Mr. Krok in terms of Australian tax laws.
On this basis, SARS submitted an application to the High Court for the confirmation of a provisional preservation order in terms of which a curator bonis was to be appointed and in whom the rights, title and interest in all the assets of Mr. Krok would vest for as long as SARS was collecting taxes for the ATO from Mr. Krok or until SARS was satisfied that a suitable arrangement for the collection of such taxes had been made.
The evidence before the court was that Mr. Krok acted contrary to his assertion that Jucool was the beneficial owner of the South African assets. In this regard, the court noted inter alia the following:
- Correspondence between Mr. Krok and his authorised dealer (including applications for the release of blocked funds), indicated that Mr. Krok was legally and beneficially the holder of the rights and interest to the South African assets and that he remitted income in respect of such assets in accordance with formalised emigration facilities.
- The SARB had not granted approval in respect of the Assignment Arrangement and at all times regarded the rights and interest of the South African assets as belonging to Mr. Krok.
- Subsequent to the conclusion of the agreements, Mr. Krok had remitted amounts from his South African accounts to his personal accounts offshore.
- During 2013, Mr. Krok requested permission to invest blocked funds in order to purchase a property in Clifton as well as to furnish such property and purchase a car to use while in South Africa. It was stated in such request that “his” (i.e. Mr. Krok’s) cash balance at Investec Bank Ltd would be used to fund such transactions.
- The Sale Agreements indicated that the parties had the overriding intention that Mr. Krok was not to transfer any rights or assets in contravention of exchange control rules.
- No effective transfer of rights could take place under circumstances where the authorised dealer was not consulted.
- In an affidavit of Jucool’s deponent it was stated that it was expressly a term of the Sale Agreements that the assets are sold subject to the restrictions arising from the exchange control regulations and that delivery of the assets would require specific permission. In this regard, the court agreed with the view of SARS that these admissions destroyed any notion of an immediate transfer of rights upon the conclusion of the Sale Agreements.
The court considered the above-mentioned as well as the purpose of article 25A of the DTA and the TAA.
In terms of article 25A, in order for SARS to be obligated to assist the ATO with the collection of taxes, at the time of the request for such assistance, there must be an amount owed in respect of taxes of any kind or description and the court held that this would apply in respect of all taxes since the inception of the DTA (1999) as opposed to the date upon which the Protocol to the DTA containing article 25A entered into force (2009).
On the basis of the above, the court held that it was justified to confirm the preservation order in terms of the TAA.
It appears that the judgment in the Krok case is in line with the expanding global focus on cross border tax evasion. In this regard, the Organisation for Economic Cooperation and Development recently released a single global standard for the automatic exchange of information between tax authorities worldwide intended to address cross-border tax evasion.
Taxpayers, in particular high net worth individuals and their associated trusts, are therefore to take note that:
- inter-governmental tax collection is possible in certain circumstances; and
- it is clear that SARS and the courts do not tolerate purported transactions in circumstances where the actions of the parties involved contradict the ostensible terms upon which such transactions are concluded.
TAA: Section 185
The South African and Australian double tax agreement article 25A