Preservation orders and the Tax Administration Act

court 101Prior to the enactment of the Tax Administration Act No. 28 of 2011 (“TAA”), the Commissioner: South African Revenue Service (“Commissioner”) was required to apply for a preservation order under the common law, as the Income Tax Act did not itself contain a mechanism whereby the Commissioner could apply for a preservation order under the fiscal statutes to ensure the preservation of assets where there was a concern that a taxpayer may dissipate assets and frustrate SARS’ attempts to recover the tax due.

Section 163 of the TAA regulates the manner in which SARS may obtain a preservation order from the High Court to prevent the dissipation of assets. The High Court was recently required to adjudicate the application of section 163 of the TAA in the case of The Commissioner for the South African Revenue Service v C van der Merwe in re: In the exparte application of: The Commissioner for the South African Revenue Service and G van der Merwe and various others.

The case has as yet not been reported but judgment was handed down by Savage AJ of the Western Cape Division of the High Court on 28 February 2014 in respect of case number 13048/13.

The judgment indicates that Ms C van der Merwe worked as a model declaring taxable income ranging from R20,023.00 in 2009 to R45,366.00 in the 2012 year of assessment. During May 2013 she acquired an Audi R8 and during June 2013 she acquired a Land Rover SD4 coupe. Both vehicles were not financed and the purchase price was paid in cash by unknown persons. During May 2013 Standard Bank received the amount of USD$15.3 million for the benefit of C van der Merwe. The person remitting the funds from abroad was identified as a Mr Rawas and the funds were transferred from a bank in Lebanon. C van der Merwe instructed the bank to sell the foreign currency in her favour and gave as the contact details those of her father and she indicated that the funds constituted a gift received from Mr Rawas. On 30 August 2013 a provisional preservation order was granted ex parte by Rogers J on application by the Commissioner under the provisions of section 163 of the TAA. In accordance with the order granted by Rogers J, the respondents were required to show why a final preservation order should not be granted and Savage AJ had to determine whether the provisional preservation order granted should be confirmed.

The judgment reports that C van der Merwe’s father is engaged in various disputes with the Commissioner over a number of years and that her father and various other entities controlled by him are liable to SARS for payment of approximately R291 million in respect of tax, additional tax penalties and interest. Furthermore, criminal charges have been instituted against C van der Merwe’s father.

SARS contends that Mr van der Merwe, together with the assistance of other parties, intentionally manipulated the value of certain assets owned by non-registered VAT entities which sold second hand goods, comprising aircraft vessels and spare parts to vendors in order to enable the registered vendors to claim national input tax under section 16(3) of the VAT Act. The judgment indicates that payment in terms of the various agreements was largely made by transferring shares, the values of which have been manipulated according to SARS.  The Commissioner contended that the various transactions undertaken by Mr van der Merwe constituted a scheme as envisaged by section 73 of the VAT Act and that C van der Merwe, either in her own right owes SARS taxes or holds assets on behalf of her father, or some of the other respondents against which assets SARS may execute in order to ensure the collection of taxes due.

A curator bonis is envisaged in section 163(7)(b) of the TAA, was appointed in accordance with the provisional preservation order to take charge of the assets of the various respondents and to identify assets which can be executed against for the collection of taxes due to SARS.

The van der Merwe family opposed the confirmation of the preservation order on the basis that C van der Merwe has no interest in the business affairs of her father and that the funds received by her were received for her own benefit.

The Commissioner submitted that C van der Merwe’s opposition to the preservation order lacked merit and that she had not raised any bona fide dispute of the fact that she had not adequately explained who Mr Rawas is, nor the rationale for the alleged gift she received of USD$15.3 million.

The Court reviewed the provisions of section 163 of the TAA and confirmed that the preservation order is granted to prevent realisable assets from being disposed of or removed, which may frustrate the collection of the full amount of tax that is due and payable.

Savage AJ indicated that it is not required that the Court determines whether the tax is as a matter of fact due and payable by a taxpayer or other person contemplated in section 163 of the TAA, as that will be determined by a subsequent inquiry. At the preservation stage it is necessary that the Court is supplied sufficient information to determine whether the preservation order should be granted against the persons it is sought. The Commissioner argued that the receipt of the R142 million by Mr van der Merwe’s daughter, over which he had signing powers, indicated that Mr van der Merwe had control over his daughter’s funds. SARS argued that the daughter held the assets on behalf of her father or some of the other respondents and that the assets should be preserved to secure the collection of tax. Furthermore, SARS submitted that receipt of the amount of R142 million by C van der Merwe probably has tax complications itself which need to be investigated. The Court therefore decided that reasonable grounds were shown for the preservation order against C van der Merwe to secure tax in relation to assets while the receipt of the funds is being investigated. Savage AJ reached the following conclusion insofar as the receipt of the alleged gifts is concerned:

“the probabilities that a young model, earning in the region of R20,000 per annum, would following a few short visits to a resort in the Seychelles, enjoy the serial generosity of a donor or benefactor on an unparalleled scale I find to be far-fetched and implausible.”

The Court was therefore not prepared to accept the explanation provided by C van der Merwe as to the nature of the funds she received from Mr Rawas. In addition, no details were provided in respect of the donor who purchased the two vehicles which were made available and registered in the name of C van der Merwe.

C van der Merwe asked the Court to dismiss the preservation order, or alternatively to postpone  the matter pending the determination of constitutional and other relevant issues which may be raised by her or the other respondents. The Court reached the conclusion that there was no basis on which to grant either order requested by C van der Merwe.

At the end of the day the Court therefore reached the conclusion that the provisional preservation order granted in terms of section 163(3) of the TAA should be confirmed.

In reviewing the judgment it is clear that SARS has the power to apply to the High Court for a preservation order to protect assets where there is a concern that a taxpayer may dissipate assets which would otherwise be available to SARS to settle tax debts due. The Court will also not likely refuse to confirm a preservation order where a taxpayer does not adequately explain the nature of amounts received by them.