SARS — Stand in Line! How Tax Debts Rank in Business Rescue

• Published date: 01 December 2020
• Pages: 16-22
• DOI: 10.10520/ejc-btclq-v11-n4-a4
• Author: Joon Chong Chong
• Date: 01 December 2020

16 © Siber ink

SARS — Stand in Line!

HOW TAX DEBTS RANK IN BUSINESS RESCUE

JOON CHONG*

ABSTRACT

There is continued uncertainty as regards the treatment of tax debts in a

business rescue. This article considers this conundrum in the context of

several important court pronouncements relating to the treatment of debts in

general under business rescue. The ranking of debts as postulated in Merchant

West Capital Solutions (Pty) Ltd v Advance Technologies & Engineering Company

(Pty) Ltd & Another is used as a basis for determining where tax debts should

rank. The relevant rankings in the context of tax debts are 4 (i e unsecured

lenders or other creditors for any loan or supply made after business-rescue

proceedings began, i e post-commencement f‌inance (section 135(3)(a)(ii) of

the Companies Act) and 7 (unsecured lenders or other creditors for any loan

or supply made before business-rescue proceedings began (i e the concurrent

creditors) (section 135(3) of the Companies Act).

The article concludes that, as income tax liabilities arise only when the

assessments are issued, income tax liabilities which are due and payable

prior to commencement of business rescue, would rank as unsecured credi-

tors before business-rescue proceedings began (rank 7). Income tax liabilities

(including late payment and underestimation penalties and interest) ref‌lected

in assessments issued after commencement of business rescue which relate

to years pre-commencement would be unsecured claims that arise after

commencement of business rescue (rank 4).

The article further concludes that VAT and PAYE liabilities, including late

payment penalties and interest, would then need to be listed as part of the list

of creditors in the business-rescue plan, and be dealt with as pre-commence-

ment unsecured claims (rank 7).

Where a VAT vendor has claimed input tax in relation to a supply made to

it and has not paid the full consideration for the supply within a 12-month

period, the vendor is deemed to have made a taxable supply to the extent

of such non-payment (section 22(3) of the Value-Added Tax Act). Where

the vendor in business rescue has not accounted for VAT in respect of such

deemed supply at the time of commencement of business rescue, or the

liability under section 22(3) only arises after commencement of business

rescue, the issue arises as to how such VAT debt must be dealt with.

The article concludes that if the 12-month period in which the input tax

was claimed expires before commencement of business rescue, then any

deemed output tax liability which is not paid or declared at that time would

be an unsecured claim (rank 7).

By contrast, the article argues that if the 12 months expire after the

commencement of business rescue, then the deemed output tax in respect of

the outstanding invoices are unsecured claims rank at number 4.

* Partner, Webber Wentzel Attorneys.