Preservation orders

Judgment was recently handed down in the High Court (Western Cape Division) in the matter of Commissioner for the South African Revenue Service v Tradex (Pty) Ltd and others (9 September 2014, case no 12949/2013, as yet unreported).

The taxpayers in this matter were Louise Wiggett (Wiggett), Tradex (Pty) Ltd (Tradex) and Business Wize Accounting and Management Services CC (BWA).

Wiggett controlled Tradex and BWA. Wiggett owned an immovable property as well as an undivided share in another immovable property.

Tradex supplied technology solutions and consulting services in respect of international trade. It had no immovable property.

BWA had an agreement in place with Tradex for the supply of furniture, equipment, office accommodation and operational support service. BWA owned two immovable properties.

Wiggett, Tradex and WBA had failed to submit various returns and it was expected that they would have tax liabilities once determined and assessed. Tradex had an established tax liability of about R4 million besides any undetermined liabilities.

The taxpayers had a history of interactions with the South African Revenue Service (SARS) in respect of regularising their tax affairs: Tradex previously applied under the small business tax amnesty in 2007 as well as filed voluntary disclosure programme applications in October 2011. Wiggett met with SARS in September 2012 and in December 2012 presented SARS with an action plan. In January 2013 SARS referred Wiggett and Tradex for investigation. Meetings were held and correspondence exchanged between Wiggett and SARS between January and May 2013. Wiggett submitted a payment plan to SARS and appointed auditors to investigate the records of Tradex and BWA.

However, in August 2013 SARS, on an ex parte basis, applied for and was granted, a provisional preservation order in terms of s163(4) of the Tax Administration Act, No 28 of 2011 (TAA) against the taxpayers. A curator bonis was also appointed.

A rule nisi was ordered and the taxpayers were called upon to show cause, on a specified return date, why the preservation order should not be made final.

The return date was postponed by agreement several times as the taxpayers wanted to get their tax affairs in order. The taxpayers’ records had to be reconstructed and auditing only commenced in October 2013. The process was delayed and Wiggett appointed a tax practitioner and new auditors in March/April 2014. Several amounts had also been paid to SARS by April 2014. Subsequently SARS also conducted a field audit in May 2014 on the taxpayers. By June 2014 the taxpayers had submitted their outstanding returns.

However, it appears that SARS became dissatisfied with the progress and wanted the provisional order confirmed. The parties filed various affidavits and the matter came to be heard before Rogers J in August 2014.

The taxpayers argued that their returns were up to date (by the time of the hearing) and repeated a previous offer of security in the form of caveats in respect of dealing with the various immovable properties as well as a cession in securitatem debiti of Tradex’s book debts. The taxpayers argued that their expected remaining tax liability was only about R7 million, and that the security offered exceeded such liability. For these reasons the taxpayers submitted that a final preservation order would be unnecessary.

SARS argued that, in terms of the audit that it was conducting (which was at an advanced stage) the taxpayers’ actual tax liability far exceeded R7 million. Also, the value of the security offered was less than the taxpayers claimed.

The preservation order that SARS sought the court to confirm included that:

• the taxpayers not dissipate their assets;
• caveats be registered against the immovable properties;
• a curator bonis be appointed and the taxpayers’ assets vest in the curator;
• the curator be empowered to take control of the assets and realise them to settle taxes;
• the taxpayers deliver all record to the curator, act according to his instructions, and subject themselves to interviews; and
• a senior counsel be appointed as mediator to resolve any disputes.

Section 163 of the TAA was amended in 2014 with retrospective effect from 1 October 2012. However, the court held that the matter should be dealt with on the wording of s163 prior to amendment, despite the restrospectivity of the amendment, because the initial ex parte application was granted before the amendment.

The court made the following comments in respect of preservation orders in terms of s163 of the TAA:

• tax does not have to be due and payable at the time the order is made; it is sufficient for any tax to be unquantified but is likely to become due and payable;
• the preservation order must be “required to secure the collection of tax” and this would be the case if the preservation order would provide a “substantial advantage” in the collection of tax;
• the main focus of a preservation order is to prevent the dissipation of assets;
• SARS must show that there is a “material risk that a taxpayer will dissipate its assets";
• it is not relevant whether the taxpayer bona fide believes that no tax is owed;
• preservation orders are not as a matter of course available to SARS – there must be a material risk that assets will be diminished, because in such circumstances a substantial advantage would be conferred should the order be granted;
• one must have regard to the terms of the order sought, and not to whether a preservation order is required in the abstract; and
• a court must decide, on the papers, whether on a balance of probability the relevant jurisdictional facts are present, and to exercise its discretion.

SARS argued that the taxpayers’ previous non-compliance in respect of not submitting their returns, as well as the disarray in which their records were, were grounds for the court to grant a final preservation order. However, the court noted that “[a] person may be disorganised and late in regard to its tax administration without there being any appreciable danger that its assets will be diminished by the time tax comes to be collected”.

SARS also argued that the fact that Wiggett caused Tradex to reinvest all its cash back into its business rather than using it to pay tax is an indication of dissipation. The court however dismissed this argument and noted that such reinvestment actually caused the business to become even more valuable. The facts, on the papers, showed that Tradex was doing well from an operational point of view.

The court could also not find, on the papers, that Tradex was better off or more valuable since the curator bonis was provisionally appointed. SARS also did not allege that Wiggett was causing Tradex to dissipate its assets and there was no evidence that Wiggett or BWA had attempted to dissipate their immovable properties.

SARS had known for some years that the taxpayers had not rendered their required returns and there had been many communications and meeting between SARS and the taxpayers before SARS brought the application. The papers did not mention that anything had happened in the meantime giving reason for SARS to believe that the taxpayers’ assets would be dissipated unless a preservation order was granted. The court specifically noted that it appeared that SARS was only pursuing a preservation order to put pressure on the taxpayers, and that that was not the purpose of s163 of the TAA.

The court also made the following observations:

• It appeared that Wiggett and BWA would not have substantial tax liabilities;
• The order that SARS sought did not distinguish between the taxpayers.
• Interdicting Tradex from dealing with their assets in a manner that would cause a decrease in the value of its assets could shut the company down if it meant that it could not use its cash to pay for business expenditure. That would only be required if the sale of the business assets would be better for SARS than continued operation, and there was no basis for such a view. Such a blanket order would in any event be too vague. There were no facts showing that Tradex was dealing with its assets in such a manner that decreased their value.
• Tradex would not be in a worse position if the a curator was not appointed and there would be no substantial advantage to SARS – a curator only assists in discovering and preserving assets and does not investigate potential tax liabilities.
• An interdict against disposal or encumbrance of Wiggett’s and BWA’s properties would be sufficient if there were indeed a material risk of dissipation and the appointment of a curator would be superfluous. SARS should have just asked the taxpayers to give undertakings and to register caveats in respect of their properties, as it seemed likely that they would have agreed. In fact, the taxpayers had made several open tenders to SARS in respect of providing security in respect of the properties, and Wiggett offered a suretyship in respect of Tradex’s tax liabilities. BWA also tendered that the proceeds in respect of any sale of its property be placed in trust for purposes of paying any tax owed by Wiggett, Tradex or BWA.

A preservations order was thus not required to secure the collection of tax, and the court could therefore not confirm the provisional order as sought. In conclusion, the court made the following general comments:

• The court commented that an application for a preservation order in terms of s163 of the TAA could only be brought on an ex parte basis, without notice to the taxpayer, if there are sufficient reasons for justifying that notice not be given to the taxpayer.
• The provisional order does not have to contain all the orders that SARS wishes to include in the final order. For example, the appointment of a curator in the provisional order is often not reasonably required in the interim period pending the return date, and it should be kept in mind that that the appointment of a curator is an intrusion into the rights of a taxpayer. The present case a curator was provisionally appointed without notice to the taxpayers. There was no justification for such an appointment in the interim. Pending the return date when the taxpayer will be heard, a provisional order must only contain what is reasonably required to secure SARS’s position.
• The orders sought must be tailored to the circumstances of each case.
• Section 163 of the TAA is not a collection mechanism. There are other specific collection mechanisms available to SARS in the TAA. It is not appropriate to grant an order giving a curator the power to sell assets in order to pay tax liabilities that are not yet ascertained or are disputed. The order should rather require a curator to approach a court at a later stage for the grating of authority to sell assets to satisfy tax debts.