The Tax Administration Act, No 28 of 2011 (TAA) took effect on 1 October 2012.
Among other things, the TAA makes third parties liable for the tax debts of taxpayers, under certain circumstances. In terms of s181 of the TAA, shareholders of a company can be liable for the tax debts of a company on winding up.
In terms of s181(1) of the TAA the provision applies “where a company is wound up other than by means of an involuntary liquidation without having satisfied its tax debt….” Put simply, a tax debt is an amount of tax due in terms of any law administered by the South African Revenue Service (Sars).
Section 181(2) of the TAA states that persons who are shareholders of the company within one year prior to its winding up are jointly and severally liable to pay the unpaid tax debt to the extent that:
· they receive assets of the company in their capacity as shareholders within one year prior to its winding up; and
· the tax debt existed at the time of the receipt of the assets or would have existed had the company complied with its tax obligations.
The term ‘asset’ is defined very widely in s1 of the TAA. As an example, the shareholders of a company (company A) resolve to voluntarily wind up company A. In the process of winding up, company A distributes cash or shares that it owns to its shareholders. The shareholders will be liable (jointly and severally between them) for the unpaid tax debts of company A.
In terms of s181(3) of the TAA, the liability of the shareholders is secondary to the liability of the company. That is Sars must first try and recover the unpaid tax from the company and may only thereafter recover the unpaid tax from the shareholders. The people who are liable for tax of a company may avail themselves of any rights against Sars, which would have been available to the company as per s181(4) of the TAA.
In terms of s181(5) of the TAA, the provisions of s181 of the TAA do not apply in respect of:
· a company where its shares are listed on a recognised securities exchange (for instance, the Johannesburg Stock Exchange (JSE); or
· a shareholder of a company whose shares are so listed.
In my view, the provision is inequitable. Shareholders do not manage the day to day affairs of companies, this is the role of the directors of the company. In closely held companies the shareholders and directors are often the same people. But in many cases, shareholders are passive investors and do not necessarily have knowledge about the affairs of the company, particularly the tax affairs of the company. It is unfair to saddle those shareholders with the tax debts of the company simply by virtue of their shareholding.
This consideration is even more relevant in the case where a person acquires shares from a third party. For example, a person (B) buys shares in a company (company C) from the shareholder (D). B decides to wind up company C and to procure that company C distributes all its assets to B. In that case, B will be jointly and severally liable with D for the tax debts of company C, despite the fact that B was not a shareholder of company C when the tax debts arose.
The term ‘shareholder’ in s1 of the TAA is essentially a person who holds a beneficial interest in a company. A person holding a preference share in a company would accordingly also be caught in the net under s181 of the TAA if the company is voluntarily wound up while they are a shareholder. It is perhaps even more unfair for a preference shareholder who typically may only have a limited right to the profits and assets of a company to be liable jointly and severally with ordinary shareholders for the tax debts of the company.
Section 181 of the TAA only appears to apply in the case of a voluntary winding up of a company; it does not appear to apply in the deregistration of the company. Winding up and deregistration are not the same thing. The distinction is recognised for instance in s45 and s64B of the Income Tax Act, No 58 of 1962. Presumably, the legislature purposefully omitted the application of the provision in the event of deregistration because the liability of directors and shareholders do not cease in the event of deregistration – compare s83(2) of the Companies Act, No 71 of 2008.
Section 181(5) of the TAA is not clear. Presumably, the intention is that s181 of the TAA will not apply in the case where a company whose shares are listed on an exchange is wound up, and will not apply to the shareholders of such a company being wound up. However, if it is read literally, the provision appears to suggest that if a person holds shares in any listed company, the shareholder will never be liable under s181 of the TAA, even in relation to the receipt of assets on winding up of another company. The legislature should consider clarifying the provision.
Shareholders of companies should be aware of their potential liabilities under s181 of the TAA. People who acquire shares from third parties should ensure that they obtain the appropriate security from the third parties in the event that they should become liable for the debts of the company on winding up after acquiring the shares.