The liability of shareholders for the tax debts of a company

taxation 1Dr Beric Croome and Warren Radloff of ENSafrica

It has a long been a principle of company law that the debts of a company are not the debts of its shareholders.  It may be a surprise to some that this principle does not apply to certain tax debts thanks to section 181 of the Tax Administration Act No.28 of 2011 (“section 181”). This section allows shareholders to be held jointly or individually liable for the tax debts of their company. At first glance it seems unfair to punish those who do not manage the day-to-day running of a company. The Fiscus has indicated that its intention is not to punish shareholders, but to discourage them from asset or dividend stripping the company. This article will consider the application of section 181, namely in what circumstances will a shareholder be held liable for the debts of a company?

This section only applies when a company is wound up, other than by means of an involuntary liquidation

Section 181 is triggered by a voluntary winding-up and not a compulsory winding-up of a company. The 2008 Companies Act deals with the voluntary winding-up of solvent companies while the voluntary winding-up of insolvent companies continues to be regulated under the 1973 Companies Act. Both acts provide that the voluntary winding-up of a company begins when a (special) resolution of the company is filed with the Companies and Intellectual Property Commission.

This section only applies to a company that has not satisfied an outstanding tax debt

The company must have been wound-up without having satisfied its outstanding tax debt. A tax debt is defined as an amount of tax due or payable in terms of a tax act. This would include tax due under any tax Act, with the exception of the Customs and Excise Act, 91 of 1964 which is specifically excluded. In Davis v C:SARS 72 SATC 253 it was successfully argued by SARS that a refund of employees’ tax paid to the applicant in error was also tax debt. In terms of the “pay-now-argue-later” rule a disputed tax debt is payable even though it will only be ‘due’ when a court finally determines the dispute in favour of SARS. A tax debt may also be due, but not payable, in circumstances where an understatement penalty is applied to a shortfall in tax. This penalty must be paid in addition to the tax payable for the relevant tax period. The tax debt must also have existed at the time of the receipt of the assets or would have existed had the company complied with its obligations under a tax act. The term ‘outstanding tax debt’ is used in those sections of the Tax Administration Act that assign recovery powers to SARS. It is therefore also a prerequisite for this section that the tax debt must not have been paid within the prescribed period, as notified by SARS, or as specified in a tax Act.

The section only applies to persons who receive the assets of the company within one year prior to its winding-up.

The term ‘asset’ includes: movable or immovable, corporeal or incorporeal property and a right or interest of whatever nature to or in that property. The ‘company’ must be a company as defined in the Income Tax Act, No. 58 of 1962. This definition includes: South African companies, South African public entities, foreign companies, co-operatives, South African charities, foreign collective investment schemes in securities, collective investment schemes in property and close corporations.

Persons must have received the assets in their capacity as shareholders

Shareholders are persons who hold a beneficial interest in a company. Trollip J considering what a ‘beneficial interest’ was in Income Tax Case  1192 [1965] 35 SATC 213(T) noted at 217 that, “therights of full ownership of any property are split into those of enjoying its use, fruits, or income (usually referred to as ‘the beneficial interest’) and that of its bare dominium…” This suggests that  preference shareholders would be regarded as a shareholder as they would enjoy the use, fruits or income from the share, but registered shareholders who acts in a nominee capacity would not be a shareholder for the purposes of this section, because they do not receive an asset in their capacity as, but on behalf of shareholders.

The definition of ‘shareholder’ has been widened in later amendments to the section to ensure that it does not exclude shareholders who hold beneficial interests in a company otherwise than through shares. The liability of shareholders is, however, secondary to the liability of the company, which means that SARS must first try to recover the tax debt against the company and only if this is unsuccessful can it proceed against the shareholders. The shareholders who are liable for the tax debts of a company under section 181 may avail themselves of any rights against SARS as would have been available to the company.

Section 181 does not apply to a listed company within the meaning of the Income Tax Act or to a shareholder of a listed company.

This section would not apply to a company or a shareholder of a company whose shares or depository receipts are listed on the JSE or on a stock exchange outside of South Africa that has been recognised by Minister of Finance, for example the Mauritius Stock Exchange, LSE and New York Stock Exchange.

Section 181 therefore requires a voluntary liquidation of an unlisted company with an outstanding tax debt and applies to shareholders who have received any company assets within one year prior to its winding up. It is clear that there are numerous restrictions that narrow the application of this section to a ‘targeted group’ of shareholders. Taxpayers must still be aware of circumstances that may be perceived as asset or dividend stripping by SARS, for example a ‘friendly’ liquidation of an unlisted company and consider, before the special resolution is filed, whether the company has any outstanding tax debts.