International tax fugitives can run, but they are finding it increasingly difficult to hide. The author Somerset Maugham famously called Monaco a sunny place for shady people. In its early years as a British colony, Australia had something of the same reputation.
Perhaps this is one of the reasons why several South African tax fugitives of recent years have chosen to take up refuge there.
If so, Australia was a poor choice, for there is ample evidence of close co-operation between the Australian Tax Office (ATO) and SARS in harnessing to the full the provisions of the double tax agreement between the two countries entered into in terms of section 231 of the Income Tax 58 of 1962, read with section 231(2) of South Africa’s Constitution. The double tax agreement and a subsequent Protocol have been approved by the South African Parliament and published in the Government Gazette.
The latest evidence of such international co-operation appears from the decision of the Pretoria High Court in Commissioner for the South African Revenue Service v Krok  ZAGPPHC 8 where judgment was handed down on 31 January 2014.
The background to the litigation between SARS and Krok
The taxpayer at the centre of this litigation was the South African multi-millionaire Mark Krok and his puppet company, Jucool Enterprises Inc, registered in the British Virgin Islands, whose sole shareholder was Nova Trust Ltd, a company incorporated in Jersey, which was a professional trustee that acted as the trustee of several hundred trusts. Nova Trust was also the trustee of the Jucool Trust, a discretionary trust governed by Jersey Law, whose sole assets were shares in and a loan owing by Jucool Enterprises.
The beneficiaries of the Jucool Trust were Krok and his children. Krok in his personal capacity had clearly been at pains not to be a director of Jucool Enterprises Ltd, nor was he a trustee of the Jucool Trust.
In 2002, Krok had ‘re-located‘ from South Africa to Australia, when he gave up his South African tax residence status to become an Australian resident. Then, in 2008, Krok relocated from Australia to the United Kingdom, but not before accruing an Australian tax debt of A$25.36 million (equivalent to some R235 million) plus interest for the period 2004–2009. The Australian Tax Office was naturally keen to collect this tax.
An emigrant from South Africa can lawfully enter into a contract to dispose of his income or assets
There is no legal restriction on an emigrant’s assigning his rights to income from blocked assets to another non-resident, and Krok had entered into just such an agreement with the Jucool company in terms of which that company purchased the right to income from Krok’s assets for R72.5 million. The purchase price was left outstanding as an interest-free loan owed by the company to Krok.
Krok had also sold certain of his South African assets to the Jucool company for R217.5 million, the purchase price of which was also left outstanding as an interest-free loan. As a result of these agreements, the Jucool company was indebted to Krok in the amount of R290 million, and Krok had then ceded this debt to the Trust for no consideration.
However, these agreements explicitly provided that the capital of the assets in question could not be remitted out of South Africa as a result of the restrictions imposed by exchange control regulations. The Australian Tax Office took the view that these were sham agreements linked to an intention by Krok to avoid his tax obligations in Australia, and that this was evidenced by the fact that Krok had continued to remit funds abroad into his overseas personal accounts from the South African accounts that he had professed to assign to the Jucool company.
The assessments issued to Krok by the Australian Tax Office arose from his failure, while he was tax resident in Australia, to declare income from his South African assets, capital gains on disposals of South African assets and capital gains in respect of those assets under the “exit charge” provisions in the Australian tax laws.
A request from Australia to SARS
All of this was the background to a formal request from the ATO to SARS in terms of art. 25A of the agreement between the government of Australia and the government of the Republic of South Africa to assist in the collection of Australian tax and the conservancy of Krok’s assets in South Africa for this purpose.
(1) If SARS has, in accordance with an international tax agreement, received –
(a) A request for conservancy of an amount alleged to be due by a person under the tax laws of the country where there is a risk of dissipation or concealment of assets by the person, a senior SARS Official may apply for a preservation order under section 163 as if the amount were a tax payable by the person under a Tax Act; or
(b) a request for the collection from a person of an amount alleged to be due by the person under the tax laws of the other country, a senior SARS Official may, by notice, call upon the person to state, within the period specified in the notice, whether or not the person admits liability for the amount or for a lesser amount.
(2) A request described in subsection (1) must be in the prescribed form and must include a formal certificate issued by the competent authority of the other country stating –
(a) the amount of the tax due;
(b) whether the liability for the amount is disputed in terms of the laws of the other country;
(c) if a liability for the amount is so disputed, whether such dispute has been entered into solely to delay or frustrate collection of the amount alleged to be due; and
(d) whether there is a risk of dissipation or concealment of assets by the person.
(3) In any proceedings, a certificate referred to in subsection (2) is –
(a) conclusive proof of the existence of the liability alleged; and
(b) prima facie proof of the other statements contained therein.”
The certificate mentioned in (3) above is of critical importance, for it constitutes conclusive proof that the stated amount of tax is due and leaves the taxpayer free only to dispute other aspects of the request for assistance.
The basis of Krok’s opposition to the application for a preservation order. The main arguments put forward by Krok in contesting SARS’s application to the High Court for the preservation order were two-fold.
The second, substantive argument was that the Jucool company, and not Krok, was the beneficial owner of the assets that were the subject of the application for a preservation order and that (since the Jucool company did not owe any taxes to Australia) the order could not apply to the company’s assets.
The judgment notes (at para ) that the purpose of the 1999 agreement between Australia and South Africa was the prevention of double taxation and fiscal evasion, and that the agreement contained no provisions for mutual assistance in relation to fiscal evasion. However, with the coming into force of the Tax Administration Act 28 of 2011 on 1 October 2012, this lacuna was filled, for section 185(1)(a) of the latter Act provides that SARS can apply for the preservation of assets in order to recover tax on behalf of a foreign government.
In the present case, the agreements between Krok and the Jucool company explicitly provided that Krok’s assets were sold to the company subject to the restrictions arising from South Africa’s exchange control regulations and that the transfer of those assets would require permissions and consents. The court said that these provisions in the agreement were inconsistent with any intention to effect an immediate transfer of rights, and all that these provisions created were personal rights of a contractual nature in favour of the Jucool company. The court did not align itself with the view of the Australian Tax Office that these agreements were a sham.
The court confirmed the provisional preservation order
In the result, the court confirmed the provisional preservation order that it had made on 18 February 2013.
Those assets in question included a large portfolio of shares in JSE-listed companies, a plot in Plettenberg Bay, a R40 million property in Clifton, and a motor vehicle.
The effect of the court order is that no-one except the curator bonis, appointed by the court in terms of its earlier provisional order, can deal with those assets without SARS’s permission.