Preservation Order and the South African/Australian Double Taxation Agreement

On 20 August 2015 the Supreme Court of Appeal delivered its judgment in the case of M Krok & Jucool Enterprises Inc. v The Commissioner for the South African Revenue Services which related to an appeal from the Gauteng Division of the High Court regarding the correctness of the confirmation of a preservation order granted by Fabricius J in the context of the South African and Australian Double Taxation Agreement (“DTA”).

The DTA was concluded by the two countries on 1 July 1999 and subsequently altered by way of a Protocol signed on 31 March 2008 which catered for the states to assist each other in the collection of taxes. During January 2012 and February 2013, the Australian Tax Office (“ATO”) requested the assistance of the Commissioner: South African Revenue Service to assist it in the collection of taxes allegedly due by Mr M Krok to the Australian Commissioner of Taxation in the sum of Australian $25 361 875.79 plus interest for the period 30 June 2004 to 30 June 2009. The ATO therefore required SARS’ assistance in the conservancy of Mr Krok’s assets located in South Africa pending the collection of the tax debt and a formal request was made accompanied by the certificate required under section 185 of the Tax Administration Act, No. 28 of 2011 (“TAA”).

Image courtesy of https://www.ato.gov.au 

Mr Krok emigrated to Australia from South Africa during April 2002 and prior to his emigration a trust of which he was a beneficiary vested the capital assets of that trust in Mr Krok. Thus, Mr Krok held the assets received from the trust in addition to his personal assets.

The distribution was made by the South African trust in order to reduce capital gains tax in the future and also to allow for the remittance of income under the exchange control regulations. Pursuant to Mr Krok’s emigration from South Africa, he contended that he ceded all South African income and assets to a foreign company, Polperro, held by a foundation located in Lichtenstein. Subsequently during December 2008 Mr Krok emigrated from Australia to the United Kingdom. Mr Krok contended that as part of his emigration planning to United Kingdom, Polperro was liquidated and the assets owned by him were transferred to Jucool Enterprises Inc., a company incorporated in the British Virgin Islands and held by a Jersey Trust.

During 2009 the ATO conducted an audit of Mr Krok’s tax affairs covering the period February 2003 to February 2010.

As a result of the ATO’s investigation into Mr Krok’s affairs, the ATO concluded that Mr Krok had failed to declare income derived by him for Australian tax purposes in respect of assets held by him in South Africa while an Australian resident. The various transactions whereby assets were transferred from Mr Krok to the foreign companies were never disclosed to SARS or the ATO. 

The ATO reached the conclusion that Mr Krok retained legal and beneficial interest in the assets and that the alleged assignment of his rights and interest of the capital and income of the assets to the foreign company violated South African exchange control regulations and was a sham. Consequently, the ATO adjusted Mr Krok’s tax returns and issued notices of assessment reflecting tax and penalties. The objections lodged by Mr Krok to those assessments were disallowed by the ATO.

As a result of the ATO’s request for assistance under the DTA, SARS launched an application for a preservation order under section 163 of the TAA. Mr Krok contended that the tax claimed by the ATO fell outside of the scope of the DTA on the basis that the Protocol came into effect on 12 November 2008 and therefore should only apply in respect of income or profits and gains of any year of income beginning after 1 July 2009.

Jucool contended that it had legal title to the assets and that the assets were therefore not owned by Mr Krok. Thus, Mr Krok’s primary argument was that the DTA did not apply on the basis that the tax in issue did not arise on or after 1 July 2009. The court considered the Vienna Convention on the Law of Treaties of 1969 and reached the conclusion that the Protocol concluded by South Africa and Australia applied to all tax debts, whether they arose before or after the date on which the Protocol was agreed to.

The court referred to the fact that the arguments raised by Mr Krok were dismissed in the case of Ben Nevis (Holdings) Ltd and Metlika Trading Ltd v Commissioners for HM Revenue and Customs. That case considered the provisions of the tax treaty between South Africa and the United Kingdom regarding an appeal in which similar issues to those raised in the Krok case were considered in the context of a similar article to a 2002 DTA between those two countries as amended by a 2010 Protocol. 

In the Metlika case the taxpayer argued that the 2010 Protocol precluded mutual assistance in the collection of tax debts which arose before 1 January 2003. The United Kingdom court disagreed with Metlika and accordingly allowed the United Kingdom Revenue to assist SARS in the collection of amounts allegedly due to it. The Supreme Court of Appeal therefore held that there was no merit in the taxpayer’s point on retrospectivity and that the provision of Article 25A allowing for reciprocal assistance in the collection of tax applied regardless as to when the income tax debt arose.

Furthermore, the court rejected Jucool’s contention that it was the beneficial owner of the assets in question and not Mr Krok.

Thus, the Supreme Court of Appeal confirmed the decision of the High Court authorising SARS to assist the ATO in recovering the tax allegedly due by Mr Krok to the ATO, despite the fact that the tax arose prior to the date on which the Protocol took effect.

Taxpayers therefore need to be aware that where they incur a tax debt in one country, that country may seek assistance in the recovery of those amounts from the assets held by a taxpayer in another country with which a DTA has been concluded.

Dr Beric Croome is a Tax Executive  at ENSafrica This article first appeared in Business Day, Business Law and Tax Review, October 2015. 

Western Cape High Court Rules on Purpose of Preservation Orders

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.

Using such an order as a tactic by Sars comes in for criticism by judge

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.

Preservation Order Assists SARS in Tax Action

Prior to the enactment of the Tax Administration Act No. 28 of 2011 (“TAA”), the Commissioner: South African Revenue Service (“Commissioner”) was required to apply for a preservation order under the common law, as the Income Tax Act did not itself contain a mechanism whereby the Commissioner could apply for a preservation order under the fiscal statutes to ensure the preservation of assets where there was a concern that a taxpayer may dissipate assets and frustrate SARS’ attempts to recover the tax due.

Section 163 of the TAA regulates the manner in which SARS may obtain a preservation order from the High Court to prevent the dissipation of assets. The High Court was recently required to adjudicate the application of section 163 of the TAA in the case of The Commissioner for the South African Revenue Service v C van der Merwe in re: In the exparte application of: The Commissioner for the South African Revenue Service and G van der Merwe and various others.

The case has as yet not been reported but judgment was handed down by Savage AJ of the Western Cape Division of the High Court on 28 February 2014 in respect of case number 13048/13.

The judgment indicates that Ms C van der Merwe worked as a model declaring taxable income ranging from R20,023.00 in 2009 to R45,366.00 in the 2012 year of assessment. During May 2013  she acquired an Audi R8 and during June 2013 she acquired a Land Rover SD4 coupe. 

The Act prevents dissipation of assets
which SARS may lay claim to in
a tax recovery operation.

Both vehicles were not financed and the purchase price was paid in cash by unknown persons. During May 2013 Standard Bank received the amount of USD$15.3 million for the benefit of C van der Merwe. The person remitting the funds from abroad was identified as a Mr Rawas and the funds were transferred from a bank in Lebanon. C van der Merwe instructed the bank to sell the foreign currency in her favour and gave as the contact details  those of her father and she indicated that the funds constituted a gift received from Mr Rawas. 

On 30 August 2013 a provisional preservation order was granted ex parte by Rogers J on application by the Commissioner under the provisions of section 163 of the TAA. In accordance with the order granted by Rogers J, the respondents were required to show why a final preservation order should not be granted and Savage AJ had to determine whether the provisional preservation order granted should be confirmed.

The judgment reports that C van der Merwe’s father is engaged in various disputes with the Commissioner over a number of years and that her father and various other entities controlled by him are liable to SARS for payment of approximately R291 million in respect of tax, additional tax penalties and interest. Furthermore, criminal charges have been instituted against C van der Merwe’s father.

SARS contends that Mr van der Merwe, together with the assistance of other parties,  intentionally manipulated the value of certain assets owned by non-registered VAT entities which sold second hand goods, comprising aircraft vessels and spare parts  to vendors in order to enable the registered vendors to claim national input tax under section 16(3) of the VAT Act. 

The judgment indicates that payment in terms of the various agreements was largely made by transferring shares, the values of which have been manipulated according to SARS.  The Commissioner  contended that the various transactions undertaken by Mr van der Merwe constituted a scheme as envisaged by section 73 of the VAT Act  and that C van der Merwe, either in her own right owes SARS taxes or holds assets on behalf of her father, or some of the other respondents against which assets SARS may execute in order to ensure the collection of taxes due.

A curator bonis is envisaged in section 163(7)(b) of the TAA, was appointed in accordance with the provisional preservation order to take charge of the assets of the various respondents and to identify assets which can be executed against for the collection of taxes due to SARS.

The van der Merwe family opposed the confirmation of the preservation order on the basis that C van der Merwe has no interest in the business affairs of her father and that the funds received by her were received for her own benefit.

The Commissioner submitted that C van der Merwe’s opposition to the preservation order lacked merit and that she had not raised any bona fide dispute of the fact that she had not adequately explained who Mr Rawas is, nor the rationale for the alleged gift she received of USD$15.3 million.

The Court reviewed the provisions of section 163 of the TAA and confirmed that the preservation order is granted to prevent realisable assets from being disposed of or removed, which may frustrate the collection of the full amount of tax that is due and payable.

Savage AJ indicated that it is not required that the Court determines whether the tax is as a matter of fact due and payable by a taxpayer or other person contemplated in section 163 of the TAA, as that will be determined by a subsequent inquiry. At the preservation stage it is necessary that the Court is supplied sufficient information to determine whether the preservation order should be granted against the persons it is sought. 

The Commissioner argued that the receipt of the R142 million by Mr van der Merwe’s daughter, over which he had signing powers, indicated that Mr van der Merwe had control over his daughter’s funds. 

SARS  argued that the daughter held the assets on behalf of her father or some of the other respondents  and that the assets should be preserved to secure the collection of tax. Furthermore, SARS submitted that receipt of the amount of R142 million by C van der Merwe probably has tax complications itself which need to be investigated. 

The Court therefore decided that reasonable grounds were shown for the preservation order against C van der Merwe to secure tax in relation to assets while the receipt of the funds is being investigated. Savage AJ reached the following conclusion insofar as the receipt of the alleged gifts is concerned:

“the probabilities that a young model, earning in the region of R20,000 per annum, would following a few short visits to a resort in the Seychelles, enjoy the serial generosity of a donor or benefactor on an unparalleled scale I find to be far-fetched and implausible.”

The Court was therefore not prepared to accept the explanation provided by C van der Merwe as to the nature of the funds she received from Mr Rawas. In addition, no details were provided in respect of the donor who purchased the two vehicles which were made available and registered in the name of C van der Merwe.

C van der Merwe asked the Court to dismiss the preservation order, or alternatively to postpone  the matter pending the determination of constitutional and other relevant issues which may be raised by her or the other respondents. 

The Court reached the conclusion that there was no basis on which to grant either order requested by C van der Merwe.

At the end of the day the Court therefore reached the conclusion that the provisional preservation order granted in terms of section 163(3) of the TAA should be confirmed.

In reviewing the judgment it is clear that SARS has the power to apply to the High Court for a preservation order to protect assets where there is a concern that a taxpayer may dissipate  assets which would otherwise be available to SARS to settle tax debts due. 

The Court will also not likely refuse to confirm a preservation order where a taxpayer does not adequately explain the nature of amounts received by them.

Dr Beric Croome, Tax Executive, ENSAfrica Inc. This article first appeared in Business Day, Business Law and Tax Review June 2014. Image purchased from www.iStock.com