Johannesburg, South Aftrica -- (SBWIRE) -- 11/02/2012 -- Webber Wentzel is one of the leading corporate law firms in South Africa. Tax experts Nina Keyser and Toinette Beckert understand the complexities of tax legislation and provide insight into the effects of the South African Tax Administration Act, No. 28 of 2011 on third parties.
The Tax Administration Act, No. 28 of 2011 (the Tax Administration Act), which came into force on
1 October 2012 introduced new provisions exposing third parties, such as shareholders and directors, to personal liability for taxpayers' debts.
This is not a new concept in South Africa as the Income Tax Act, No. 58 of 1962 (Income Tax Act) also contains provisions providing for personal liability. In terms of the Income Tax Act, under certain circumstances, the representative taxpayer and third parties who hold money on behalf of a taxpayer may be held personally liable for debts.
In the context of employees' tax and VAT, there are currently also provisions placing personal liability on the shareholders or directors of a company if they control or are regularly involved in the management of the company’s overall financial affairs.
However, new categories of third parties that may be held liable for the tax debts of a taxpayer have been introduced.
Categories of potentially liable persons in the Tax Administration Act
The Tax Administration Act has identified categories of potentially liable persons as:
- the primary taxpayer;
- the representative taxpayer - any person who is responsible for the tax liability of another person as an agent (other than a withholding agent), and includes a person who is a representative taxpayer under tax legislation;
- withholding agents - any person who must withhold an amount of tax and pay it to SARS under a tax act; and
- responsible third parties - any person who holds money on behalf of another person. There are various sub-categories of responsible third parties, including appointed third parties, financial management, shareholders and connected person transferees.
Liability of the representative taxpayer
A representative taxpayer may be held personally liable for tax payable in his or her representative capacity if he or she, while the tax debt is outstanding, disposes of:
- amounts in respect of which the tax is chargeable; or
- moneys that are in his or her possession or come into his or her possession after the tax is payable.
And, the tax could legally have been paid from these amounts.
Liability of the withholding agent
A withholding agent may be held personally liable for the amount of tax if he or she:
- withheld it, but did not pay it to SARS; or
- did not withhold an amount of tax when it should in fact have been withheld.
This is of particular importance for the withholding of tax in respect of dividends and royalties paid to non-residents and also in respect of withholding tax on interest from 1 January 2013.
The exemptions from and reduction in rates of these withholding taxes will usually be determined by the declarations and undertakings provided by the recipient of the dividend, interest or royalties. If these declarations are incorrect or fraudulent, and the paying company fails to withhold an amount that should have been withheld, the paying company could be held liable for it.
Liability of an appointed third party
A senior SARS official may issue a notice requiring an appointed third party to pay a taxpayer's tax debts.
Examples of where this could happen include a taxpayer's bank, employer or even an attorney holding money in a trust account. If the appointed third party parts with the money contrary to the SARS notice, that party could be held liable for the tax debt.
Liability of financial management
If a person who controls or is regularly involved in the management of the overall financial affairs of the taxpayer, negligently or fraudulently causes the tax debt not to be paid, he or she could be held personally liable for it.
This provision will impact all levels of financial personnel, and not only the directors. It could possibly even extend to the provision of advisory services to the extent that it can be said that the advisor is regularly involved in the management of the overall financial affairs of the taxpayer. The requirement of negligence or fraud is a new one that is not in existence under the current legislation.
Liability of shareholders
The shareholders of an unlisted company that is wound up (other than by an involuntary liquidation) may be held personally liable for its outstanding tax debts.
This is true for shareholders that held shares up to one year prior to the winding up of the company and who received assets (such as dividends or share buybacks) from the company during that year. The liability of the shareholders is limited to the value of the assets they received. He or she may be held jointly and severally liable for the outstanding tax if the tax debt existed at the time that he or she received a distribution.
The shareholders' liability remains secondary to that of the company. This means that SARS should attempt to recover the tax debts from the company before taking recourse against its shareholders.
Liability of connected person transferees
If an asset is transferred between a taxpayer and a connected person without consideration, or for consideration below the fair market value, the connected person may be held liable for the tax debt of the taxpayer.
This is if he or she received assets during the course of one year preceding any notice from SARS imposing the liability. The liability will be limited to the lesser of the tax debt that existed at the time of the receipt and the fair market value of the asset at the time of the transfer, less any consideration paid.
It is not certain how SARS will procedurally impose these liabilities and whether it will be necessary to undertake an assessment first, or whether simply obtaining judgment against the third party will be sufficient.
There remains a degree of uncertainty regarding South African Revenue Services' enforcement powers against third parties and the rights and options that third parties will have in defending these claims of liability.
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