Author: Erich Bell (SAIT Technical Advisor)
Generally an individual may choose to run his business in the form of a company or close corporation for various commercial and other reasons. On the one hand it may be to ensure the continuity of the business should a key person pass on, or on the other hand to prevent personal liability in the event that business liquidate.
There is a general perception that business owners think that their business (company) is totally separate from them – which in a legal sense is correct – and that it may even protect them against the wrath of SARS. Consequently, when the time comes to pay taxes, these business owner persons simply shrug and turn their heads the other way believing that they cannot be held liable for the tax debts or other areas of non-compliance with tax laws.
SARS has far reaching powers under the law (Tax Administration Act) to enforce the collection of the company’s tax debt against another person, such as-
– the owner (shareholder),
– the public officer (as representative of the company),
– a connected person (if an asset is disposed of to him/her for a consideration below market value),
– a person who knowingly assists the company in dissipating its assets in order to obstruct the collection of its tax debt, and
– financial management in certain circumstances.
This article will focus on the instance in which the financial management of a company may be held liable as a third party for the tax debt of a company. It should be noted that this specific provision also applies to taxpayers other than companies.
The risk of liability for tax debt: Financial management
The Tax Administration Act (‘the TAA’)¹ basically provides that a ‘responsible third party’ is personally liable for the tax debt of another under certain conditions. In this instance, the reference to ‘extent’ indicates that a person will be held liable to the degree determined under the TAA.²
Who is a ‘responsible third party’?
A responsible third party is defined in the TAA as any person who becomes otherwise liable for the tax liability of another person other than as a representative taxpayer or withholding agent, whether in a personal or representative capacity. A representative taxpayer will in the case of the company be the public officer, whilst a withholding agent may be a resident of South Africa who needs to withhold withholding taxes from certain payments made to non-residents. In this instance, financial management may be seen as a ‘responsible third party’ if they are liable for a company’s tax debts.³
A person is personally liable for the outstanding tax debt of a taxpayer (in this instance a company) to the extent that the person’s negligence (or fraud) resulted in the failure to pay the tax debt to SARS.⁴
However, the following requirements must be met before a person may be personally held responsible:
- The person must be in a position of control, or must be regularly involved in the management of the overall financial affairs of the business; and
- A senior SARS official must be satisfied that the person is or was negligent (or fraudulent) in respect of the payment of the tax debts of the business.
According toSARS guidance,⁵ SARS will use this power against a person who controls or is regularly involved in the management of the overall financial affairs of a business and who was negligent or fraudulent in respect of the payment of the tax debts of the taxpayer. SARS further states that the potential personal liability of parties involved in the management of the financial affairs of a company should serve as encouragement to comply with the tax laws by ensuring correct and timely payment of tax.
It is important to note that a senior SARS official must be satisfied that the person was negligent or committed fraud. This is a subjective discretionary position.
From the outset it would therefore seems as if SARS may hold a person responsible in his or her personal capacity as being negligent or committing fraud if such a person deliberately fails to pay the company’s tax debt to SARS and then subsequently uses the funds for some other purpose. It should however be noted that the person will only be held liable to the extent that his fraud or negligence resulted in the non-payment of the tax debt.
SARS has the same powers of recovery against the financial manager appointed as third party as SARS has against the company and the financial manager has the same rights and remedies as the company has against SARS’ powers of recovery.⁶ SARS is also required⁷ to provide the financial manager with the opportunity to make representations before the financial manager is held liable for the company’s tax debt, provided that the representations will not place the collection of the tax in jeopardy or alternatively, as soon as practical after the financial manager is held liable for the company’s tax debt.
The good news is that should a person of financial management be held liable for tax debt, the person is entitled to recover the amount paid to SARS from the company, alternatively entitled to retain an amount equal to the amount of taxes paid from assets (including money) in the person’s possession, or that will come into the person’s possession at any stage.⁸
These powers afforded to SARS to collect taxes due will greatly assist tax compliance in South Africa. Financial management officers are urged to ensure that the tax affairs of the business are in order. The alternative available to the business in financial distress is to consider application for a ‘suspension of payment’ or a ‘permanent write-off’ of a tax debt provided for under tax law.⁹
¹ Section 159 of the TAA.
² Part D of Chapter 11 of the TAA.
³ As set out in section 180 of the TAA, which forms part of Part D of Chapter 11 of the TAA.
⁴ Section 180 of the TAA.
⁵ SARS Short Guide to the Tax Administration Act.
⁶ In terms of section 184(1) of the TAA.
⁷ In terms of section 184(2) of the TAA.
⁸ In terms of section 160 of the TAA.
⁹ Provided for in ss 167 and 197 of the TAA respectively.