25 February 2022 by and 2022 Special Edition Budget Speech Alert

Tax compliance status for taxpayers under business rescue to be investigated

South Africa introduced the concept of business rescue in the (new) Companies Act 71 of 2008 with the intention of including a mechanism for the rehabilitation of financially distressed companies.

Once a company is placed under business rescue, temporary supervision and management of the company is handed to a business rescue practitioner. The aim is to rescue the company from its financial distress by, for example, reducing cost overheads and positioning the company to continue offering its products or services. As with all businesses, customers and suppliers expect the businesses that they transact with to be tax compliant.

Section 256 of the Tax Administration Act 28 of 2011 (TAA) deals with the tax compliance status (TCS) of taxpayers. Specifically, section 256(3) states that a taxpayer’s TCS may only be marked as “compliant” if the taxpayer is:

  • registered for tax;
  • does not have any outstanding tax debt (excluding a tax debt that has been suspended or where the taxpayer has entered into an instalment payment arrangement or there has been a debt compromise with the South African Revenue Service (SARS); and
  • does not have any outstanding returns (unless the taxpayer has made an arrangement with SARS regarding the submission of the return).

The requirement that there must be no outstanding tax debt has historically posed a problem for businesses in the early stages of business rescue that need to obtain a TCS. The workaround to this, in terms of the TAA, is that a taxpayer may enter into an instalment or compromise agreement with SARS. However, this is not always possible in the earlier stages of business rescue proceedings. A business cannot hope to continue operating without a “compliant” TCS, thereby defeating attempts at rescuing it.

The Minister of Finance has recognised this unfortunate defect and has proposed investigating the viability of empowering SARS to assist companies in early-stage business rescue, under certain conditions, to obtain a “compliant” TCS.

This is a welcome announcement that will assist taxpayers in this unique situation, thereby having a positive effect on the prospects of success of business rescue efforts.

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