In a judgment delivered in the High Court of the Western Cape on 9 September 2014, Rogers J rejected SARS’s application for a preservation order and appointment of a curator bonis on the grounds that there was no evidence of a danger that the assets of the taxpayers were likely to be dissipated. The court analysed the preservation section of the Tax Administration Act, 2011 (TAA) and made it clear that its use was limited to situations where there was a clear need for an order.
In CSARS v Tradex (Pty) Ltd and Others Case No 12949/2013 the taxpayers were years in arrears with their tax returns and their financial records were in a mess, partly because of the administrative weakness of the main shareholder but mainly because she had been let down by successive financial managers. There was evidence of extensive efforts on the part of herself, her staff, two audit firms and an experienced tax consultant to bring order to nearly a decade of neglect of records and tax returns. Despite these efforts and much correspondence and numerous meetings with SARS, as well as several interim tax payments and undertakings to dispose of assets to raise funds with which to pay the outstanding taxes, SARS sought and obtained a provisional preservation order in August 2013. In the present matter SARS was seeking confirmation of that order. The court noted that at all times the taxpayers’ representatives had kept SARS apprised of progress.
In analysing section 163 of TAA, the court began by noting that a preservation order may be made if it is “required to secure the collection of tax”. The section does not say what circumstances would point to an order being required. The test was not one of necessity but that the order would provide a “substantial advantage in the collection of tax”, including guarding against the risk of dissipation. SARS was required to show that there was a material risk that assets that would otherwise be available to satisfy a tax liability would, without a preservation order, no longer be available.
Delinquency in a taxpayer’s conduct of its tax affairs might be part of the material from which one could infer the existence of a risk of dissipation, but there was no automatic connection between the two. The basis of SARS’ application was just this – the delinquency of the taxpayers in dealing with their tax affairs. SARS contended that delinquency could be inferred from the fact that, instead of using cash flow to pay its tax liabilities, Tradex had ploughed it back into the business. The court’s response was the obvious one that this conduct amounted to the opposite of dissipation. SARS had provided no evidence of dissipation by the taxpayers.
The court gained the impression that SARS had launched the application not so much because a preservation order was necessary but in order to bring matters to a head by placing legal pressure on the taxpayers after years of negotiation and effort. Whilst SARS’ evident frustration was understandable, this was not what the preservation provision was intended for. SARS had at its disposal other mechanisms to deal with delinquent taxpayers, such as the information-gathering provisions, the power to issue estimated and jeopardy assessments, the tax-recovery provisions, the administrative non-compliance penalties and the criminal offences created in the TAA.
A preservation order would, in the case of Tradex, an active trading entity, result in its closing down, and this would be unjust. The taxpayers had offered to register caveats against their immovable properties and, in the case of a property they were intending to sell, to procure that the proceeds be paid into their attorney’s trust account pending final assessments of taxes due.
Before concluding by refusing to confirm the provisional preservation order, the court made several observations about the application of the preservation provision.
Firstly, although SARS may apply for an order ex parte, to do so would be contrary to the principles of fairness and constitutional values in the absence of circumstances justifying a departure from ordinary procedures.
Secondly, even where an order is warranted, it doesn’t follow that all SARS’ requested terms should be included. For example, it isn’t always necessary to appoint a curator bonis, even though section 163 provides for an appointment. In the current matter there was evidence that the curator had contributed nothing and was a hindrance rather than a help.
Third, and this is perhaps the most telling comment, SARS should not frame preservation orders on a one-size-fits-all basis. The court noted that the current order was on the same terms as a similar application it had heard recently and accorded with several in the Gauteng area in recent months. Each order applied for should be tailored to the circumstances of the case.
Fourth, section 163 is a preservation procedure, not an execution mechanism. The section finds its primary application where the amount of tax has not yet been ascertained. Once the tax has been determined, several other sections of TAA assist SARS in collecting the tax. A preservation order should not, as was the case in the present matter, include a power on the part of the curator to realise assets in order to settle the taxpayer’s tax liability.
The TAA is still in its infancy and this judgment is the latest indication of how the courts are going to interpret and apply its sometimes draconian provisions.
