Section 163 of the Tax Administration Act 28 of 2011 (“TAA”) provides that a senior SARS official may authorise an ex parte application to the High Court for an order for the preservation of any assets of a taxpayer, or other person prohibiting any person, subject to the conditions and exceptions as specified in the preservation order, from dealing in any manner with the assets to which the order relates.
The TAA provides that a preservation order may be granted if required to secure the collection of tax. The preservation order will apply in respect of realisable assets seized by SARS in terms of section 163(2), which allows SARS to attach assets in anticipation of being granted a preservation order by the court.
Furthermore, the preservation order would typically be granted in respect of realisable assets as may be specified in the order, and which may be held by the person against whom the preservation order is being made. In terms of section 163(4) of the TAA, the court to which an application is made may grant a provisional preservation order having immediate effect. In addition, the court may grant a rule nisi calling on the taxpayer or any other person, on a business day mentioned in the rule, to appear and satisfy the court as to why the preservation order should not be made final.
The TAA requires that the preservation order must provide for notice to be given to the affected taxpayer and the person from whom the assets are seized.
Where a preservation order is granted in terms of section 163 of the TAA, the court may make any ancillary orders regarding how the assets must be dealt with, including:
· authorising the seizure of all movable assets
· appointing a curator bonis in whom the assets of that taxpayer or another person liable for tax vests
· realising the assets in satisfaction of the tax debt
· making provision as the court may think fit for reasonable living expenses of a person against whom the preservation order is made, or
· any other order which the court considers appropriate for the proper, fair and effective execution of the order.
The court which grants the preservation order may vary or rescind that order if the circumstances set out in section 163(9) of the TAA are complied with.
Once a preservation order has been granted, it remains in force pending the setting aside thereof on appeal, or until the assets subject to the preservation order are no longer required for purposes of the satisfaction of the tax debt.
The TAA provides that assets seized under section 163 of the TAA must be dealt with in accordance with the directions issued by the High Court which granted the relevant preservation order.
Rogers J in Commissioner for the South African Revenue Service v Tradex (Pty) Ltd (case number 12949/2013) as yet unreported, was required to decide whether to confirm the provisional preservation order granted in terms of section 163(4) of the TAA. In the Tradex case the affected taxpayers had been delinquent in that tax returns had not been submitted timeously to SARS, and it was accepted that amounts were due to SARS for various tax debts payable to SARS.
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In the case before the court, the taxpayers repeated an offer of security made in negotiations with SARS by way of continued operation of caveats in respect of various immovable property which the taxpayer contended had a value of approximately R7.5 million. In addition, Tradex offered SARS a cession in securitatem debiti of the company’s book debts to the value of R10.5 million.
SARS, in its papers filed with the court, continued to be dismissive of the value of the book debts offered as security by the taxpayer.
SARS approached the court for confirmation of the preservation order and that the taxpayers be prohibited from disposing, dissipating of any assets and that SARS be authorised to cause caveats to be registered over the taxpayer’s immovable properties. In addition, SARS sought that a Mr Nel be appointed as the taxpayer’s curator bonis with all of the taxpayer’s assets vesting in him. Rogers J expressed the view that he did not think that the legislature intended that a preservation order would routinely be available to SARS in every case of an actual or anticipated tax liability. The court was of the view that there must be a material risk that assets will be dissipated in order to justify the granting of a final preservation order.
In the case at hand, SARS did not satisfy the court that there was an appreciable risk of the assets owned by the taxpayer being diminished. SARS did not in its replying and supplementary replying papers allege that the taxpayer was causing the company to dissipate its assets by distributing dividends or paying unreasonable salaries or engaging in other suspicious transactions.
At paragraph 54 Rogers J stated as follows:
“One gains the distinct impression that SARS launched the application not so much because a preservation of the respondents’ assets was required but in order to bring the matters to a head by placing legal pressure on the respondents.”
The court expressed the view that the granting of a final preservation order would have the effect of forcing the company to shut down and the granting of a preservation order in such circumstances would not be just. The court made the point that the taxpayers had offered SARS caveats over the immovable property and had those been accepted by SARS, the litigation would have been resolved far earlier than what was the case.
In the result the court ordered that the caveats registered against the immovable properties remain in place unless the taxpayer and SARS agree thereto in writing or the court otherwise directs.
The court was critical of the appointment of the curator bonis by way of the provisional preservation order on the basis that that appointment increases the costs of the taxpayer and was not strictly necessary to preserve the assets in question. The court also made the point that section 163 of the TAA is a procedure for preserving assets and is not a means of execution on the basis that once tax has been assessed or is otherwise due and payable, the “pay now, argue later” rule applies. In terms of the provisions of the TAA, SARS has various provisions in terms of which it can institute proceedings to recover assessed tax from a delinquent taxpayer.
The court ordered SARS to pay a large portion of the taxpayer’s costs and dismissed SARS’ application to confirm the provisional preservation order.
The grant of a preservation order is an intrusion into the life of a taxpayer and confirmation of an interim preservation order will not be granted lightly by the courts, based on the Tradex decision.
Dr Beric Croome is a Tax executive: Edward Nathan Sonnenbergs Inc. This article first appeared in Business Day, Business Law & Tax Review (November 2014). Please contact me if there are copyright issues relating to use of image.