By: Willem Oberholzer
Are you aware of a section within the Tax Administration Act titled "Personal Liability of a Representative Taxpayer"? This provision pertains to individuals who hold the position of public officer within a company and are registered with the South African Revenue Service (Sars). If your company happens to owe money to Sars in the form of Income Tax Pay as You Earn, Value Added Tax, and Dividend Tax, and the company fails to settle these debts, you, as a representative taxpayer, could potentially be held liable for the company's outstanding debts.
Under which circumstances might you be held liable, you may wonder? Section 155 of the Act specifies that Sars can deem you, as the representative taxpayer, personally responsible if, in their judgment, you make changes or dispose of any assets that could have been used to pay off the tax debts.
Furthermore, in accordance with inter alia Section 179, Sars has the authority to engage a third party to settle outstanding tax debts. This means that a senior Sars official may issue a notice to anyone who possesses funds, such as salaries, pensions, or any other income and banks (your bank account(s)), instructing them to transfer these funds to Sars in partial or full settlement of the tax debt of the company for which you were the public officer.
Section 180 of the Income Tax Act addresses the financial management liability for tax debts. The essence is that financial managers, CFOs, and even CEOs of a company can be held personally accountable for the company's tax debt if they exercise control or have regular involvement in its financial management and oversight. A senior Sars official can take action if they believe the person has been negligent or has failed to fulfil their tax obligations properly.
These crucial decisions, however, are left entirely at the discretion of a senior Sars official. They determine whether your actions were negligent or fraudulent. While there may be hints of negligence or even fraud, it is ultimately up to a court to make a definitive judgment. It is essential to note that Section 180 of the Income Tax Act does not refer to gross negligence, only negligence as determined by the Sars official.
And to be clear, guidance would suggest that negligence is an unintentional mistake. Gross negligence, on the other hand, is an intentional mistake that results in legal action. Let's consider that the legal test for negligence is objective. Allowing Sars (creditor) to make an objective decision regarding negligence places the shareholders, financial management of companies, and, more specifically, private companies in a highly precarious position. You have to ask yourself, how will you prove that you were not negligent to limit your personal liability?
It's essential to recognize that these liabilities also extend to company shareholders other than those of a listed company. If you hold a senior position and are involved in the company's financial management, or if you are a shareholder in a private company, you could be personally liable for the company's tax debts if Sars officials believe you were negligent!
If such a finding is made, your position is precarious. If Sars officials decide you were negligent or acted improperly, they can invoke Section 179 to appoint someone to collect their tax debts (agency appointment). If you are held personally liable for the company's tax debts, Sars can seize funds from your bank account. Unfortunately, if no assessment was raised against you, no objection or appeal process is available. You will have to follow a route of taking the decision of Sars on review. Their decision is, in fact, an administrative action that was taken.
So, what is your recourse in such a situation? A possibility is that you, via your legal counsel, initiate a process through Rule 42 of the Tax Court to request the Tax Court's intervention in the matter. This is a significant and costly legal process to undertake.
While some may take issue with the level of discretion given to Sars officials to determine negligence, it's essential to understand that these decisions are subject to review by a committee. These meetings are closed and not open to the public, so how do you access the minutes of these committee meetings? As far as we know, the only way is through an application in terms of the Promotion of Access to Information Act (PAIA). Once again, an application has to be served on Sars.
Please be aware that in the event of liquidation or voluntary liquidation, Sars actively pursues individuals involved in the financial management and shareholders of private companies for the company's tax debts as a mechanism to reduce the losses to the fiscus.
You may be thinking that if you received a letter such as the above from Sars, you could claim the funds from the company. Well, sure you can. However, the company does not have funds and is in trouble. Your chances of getting refunded for the taxes are slim, especially when Sars is a preferential creditor, ranking before other unsecured creditors and shareholders on any final or liquidation distributions.
In conclusion, it's imperative to ensure that your tax affairs are meticulously in order, especially if you hold a senior position or are a shareholder in a private company (how do you prove you were not negligent in managing your tax affairs).
Sars officials have the legal power to make determinations of negligence, and these determinations can have significant financial implications on you as an individual. If you are in this predicament or considering liquidation, please seek appropriate legal advice first. We have seen first-hand how Sars treats voluntary liquidations and the emotional distress this causes to the shareholders of private companies on receipt of a notification by Sars of a negligence finding against them – and consequential demand for payment personally by them of the outstanding tax debt of the liquidated private company of which they were a shareholder.
Are you sure that you and the company have everything in place to prove that you, as a shareholder and or a person with oversight in the company's finances, cannot be seen to be negligent? If the answer is no, then surely a wise decision would be to take the appropriate steps and implement the proper controls that will prove that you cannot be held personally liable for the tax debts of your company or, for that matter, your employer.
Willem Oberholzer is a chartered tax advisor at KISCH.