Tax Administration – SARS Preservation orders

sarsA Cape Town based businessman has been the subject of investigation by SARS into alleged VAT fraud, and has been issued with an assessment for R291 million.

An unexplained gift to the daughter of the tax debtor
When his daughter, a swimwear model, received – out of the blue and without explanation – an eye-wateringly large gift of $15.3 million (equivalent to some R143 million) from an unnamed Arab admirer plus two luxury cars worth R2.75 million, SARS suspected that this money and these assets were intended for her father and had been ostensibly channelled to her so as to avoid their being seized by SARS to fund the payment of her father’s tax debt.

Predictably, she asserted that these funds and those assets belonged to her and not to her father and that SARS had no claim on those assets because she had no outstanding tax debts.

These events were the background to the decision of the Cape High Court in CSARS v C-J Van Der Merwe [2014] 76 SATC 138 in respect of the return day of a provisional preservation order that had been granted ex parte by Rogers J in August 2013 in terms of section 163 of the Tax Administration Act No. 28 of 2011 (the TAA) in which the businessman was the first respondent and his daughter the second respondent.

In terms of that provisional order, the daughter was interdicted from dealing with, encumbering or disposing a list of assets, including the aforementioned two luxury cars and the residue of the gift of $15.3 million that she had received in May 2013, and any assets she had acquired with that gift.

The requirements for granting of a preservation order
The interest of the court’s ruling, in which it confirmed the provisional preservation order, lies in its analysis of section 163 of the TAA which reads as follows –

“(1) A senior SARS official may, in order to prevent any realisable assets from being disposed of or removed which may frustrate the collection of the full amount of tax that is due or payable or the official on reasonable grounds is satisfied may be due or payable, authorise an ex parte application to the High Court for an order for the preservation of any assets of a taxpayer or other person prohibiting any person, subject to the conditions and exceptions as may be specified in the preservation order,  from dealing in any manner with the assets to which the order relates.

(3) A preservation order may be made if required to secure the collection of the tax referred to in subsection (1) and in respect of—

(a)      Realisable assets seized by SARS under subsection (2);
(b)      The realisable assets as may be specified in the order and which are held by the person against whom the preservation order is being made;
(c)      All realisable assets held by the person, whether it is specified in the order or not; or
(d)      All assets which, if transferred to the person after the making of the preservation order, would be realisable assets”.

No necessity to prove that the assets would otherwise be dissipated or diminished
In his judgment, Savage AJ noted that, at common law, a preservation interdict required that the applicant prove that the assets sought to be preserved would otherwise be diminished with the specific objective of frustrating his claim.

By contrast, he said, the purpose of a preservation order in terms of section 163(3) of the TAA is ‘to prevent any realisable assets from being disposed of or removed which may frustrate the collection of the full amount of tax that is due or payable or the official on reasonable grounds is satisfied may be due or payable’. In terms of the Act, it is not necessary for the applicant to prove that the assets in question would be dissipated or diminished if the preservation order were not granted, nor can such a requirement be regarded as implicit in the Act.

Savage AJ said in this regard that –

‘Whilst the grant of a preservation order may be considered harsh, there are compelling reasons within the context of our constitutional democracy why steps which assist the fiscus securing the collection of tax are required, which include court orders to preserve assets so as to secure the collection of tax. Had it been intended by the legislature that the court infuse the requirement of necessity to prevent dissipation into a determination as to whether a preservation order should be granted in terms of s163(3), as such would have been apparent from the statute.’

Savage AJ said (at para [43]) that, in terms of the TAA, a court was merely required –

‘To arrive at a conclusion, reasonably formed on the material before it, as to whether a preservation order is required or not to secure the collection of tax’.

Did the evidence establish that a preservation order was required to secure the collection of tax?
Savage AJ held (at para [65]) that, on the evidence, the version put forward by the second respondent,– namely, the extraordinary and unexplained generosity of a donor –  was palpably implausible and so far-fetched and untenable that the court was justified in rejecting it. That version of events, said the court, had to be weighed against the facts laid before the court by SARS, including her father’s tax debts.

Savage AJ said (at para [72] that –

The sudden wealth acquired by the second respondent lies squarely within her knowledge and she was obliged in such circumstances to provide the answer necessary to substantiate her opposition to a final order being granted. The case put up by her in answer to that of the applicant [SARS] is so highly improbable in human experience that it cannot be accepted ’

In the result, Savage AJ confirmed the earlier provisional preservation order.

TAA – Section 163