The impact of business rescue on tax claims : does SARS enjoy a preference under s 135 of the Companies Act against a company in business-rescue proceedings?

• Jurisdiction: South Africa
• Author: Milton Seligson
• DOI: 10.10520/EJC173381
• Published date: 01 September 2014
• Date: 01 September 2014
• Pages: 1-20
• Published By: Siber Ink

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© SIBER INK

The Impact of Business

Rescue on Tax Claims:

DOES SARS ENJOY A PREFERENCE UNDER S135

OF THE COMPANIES ACT AGAINST A COMPANY

IN BUSINESS-RESCUE PROCEEDINGS?

MILTON SELIGSON SC

ABSTRACT

Business rescue is an important innovation introduced in South Africa by

Chapter 6 (sections 128 to 154) of the Companies Act 71 of 2008 (‘the Act’),

with the aim of rehabilitating financially distressed companies and restoring

them to financial health by placing them under the temporary supervision of

a business-rescue practitioner (‘BRP’). The BRP is tasked with developing and

implementing a business-rescue plan approved by creditors for the recovery

of the company, while the Act affords a temporary moratorium in respect of

creditors’ claims against it. Business rescue has replaced the judicial manage-

ment procedure, which had proved unsuccessful in saving companies from

liquidation under the previous companies legislation.

The article discusses, in particular, the impact of business-rescue proceed-

ings on SARS’s claims for tax liabilities owed by the affected company, both

prior and subsequent to the commencement of business-rescue proceedings,

in the light of a clash of views between SARS and business-rescue practitioners

as to the correct treatment of SARS’s claims for tax against a company under

business rescue.

The particular issue which is proving controversial arises when the

company placed under business rescue not only has outstanding tax liabilities

to SARS, but has failed to render the required returns for the tax periods prior

to the commencement of business rescue in respect of income tax, VAT and

other employee taxes such as PAYE, UIF and skills-development levies. The

question is whether, as SARS apparently contends, taxes that arise from the

belated submissions of outstanding tax returns must in all cases be treated as

post-commencement financing as contemplated in section 135 of the Act; or

whether, as contended by the business-rescue practitioners’ profession, such

claims constitute pre-commencement claims, which do not enjoy any prefer-

ence over other unsecured creditors.

The article discusses the purpose of business rescue as stipulated in the Act

and the status of SARS as a creditor in business-rescue proceedings according

to the recent decision in Commissioner, South African Revenue Service v Beginsel

NO and Others 2013 (1) SA 307 (C) at 314E–G, paragraphs [24]–[25].

It is then suggested that, to resolve the controversy, three pivotal issues

must be considered: (i) whether, irrespective of the tax period for which the

tax is due, liability for tax arises only on the date of assessment, with the result

that in the case of a post-commencement assessment, the liability must be

2VOLUME 5 • ISSUE 3 • SEPTEMBER 2014

Business Tax & Company Law Quarterly

© SIBER INK

treated as a post-commencement claim. This raises the further question as

to whether the differences relating to the assessment of income tax and of

VAT (and other self-assessment taxes), require a different conclusion as to

when the tax liability arises; (ii) whether, if any tax liability arises only after an

assessment post-business rescue, SARS’s claims in respect thereof constitutes

post-commencement finance as contemplated in sections 135(2) and (3),

thereby conferring on SARS the preference accorded to such claims; and (iii)

whether the liability for income tax in relation to pre-commencement tax

periods as a result of a post-commencement assessment, in any event, consti-

tutes a preferent claim by SARS ‘arising out of the costs of the business-rescue

proceedings’ as contemplated in section 135(3) of the Act.

The analysis concludes, with reference to case law and the provisions of

the Tax Administration Act 28 of 2011, that the tax liability for VAT does

not depend on an assessment being made, but that it arises continuously

and periodically on the dates specified as the required self-assessment and

payment dates for each tax period, in terms of sections 27 and 28, read with

section 38, of the Value-Added Tax Act 89 of 1991. On the other hand, in

relation to income tax, it is submitted that the correct conclusion is that, given

the special statutory rules for arriving at taxable income and the requirement

that the tax assessment is made by SARS on the basis of the taxpayer’s return

for the relevant tax year, the income-tax liability arises only on assessment by

SARS, and if this is done after business rescue has commenced, the liability

will arise during the post-commencement period.

The question that then still remains is whether this tax liability will consti-

tute ‘post-commencement finance’ for the purposes of section 135. The

article concludes that in light of the purpose of business rescue and in the

context of section 135 as a whole, SARS’s claim for income tax in these

circumstances does not qualify as post-commencement finance.

The article further concludes that, on a proper interpretation of section

135(3), neither VAT (and the other self-assessment taxes) relating to pre -

business-rescue tax periods, nor income tax relating to such periods (but only

assessed after business rescue has commenced), can constitute claims arising

‘out of the costs of business-rescue proceedings’.

The article distinguishes, in this regard, however, VAT (or similar self-as-

sessment employee taxes) and income-tax liabilities arising in relation to the

conduct and operation, post-commencement, of the company’s business by

the business-rescue practitioner. Such tax liabilities would probably fall into

the category of claims arising out of the costs of the business-rescue proceed-

ings, on the analogy of Van Zyl NO v Commissioner for Inland Revenue 1997

(1) SA 883 (C) at 892I–893B, which deals with tax due on post-liquidation

interest earned by the company in liquidation.

It is further submitted that where the company has outstanding pre-com-

mencement tax returns, any late assessment and resulting liability is coinci-

dental and fortuitous, and that there is not a sufficiently real and close

connection between cause and effect, which has been held by the Courts

must be present in applying the phrase ‘arise out of’ in a statute.

Finally, the article discusses the application of section 22(3) of the VAT Act,

which gives SARS a ‘clawback’ claim for input tax deducted by the company

where there are unpaid creditors who have not been paid for supplies made

to the company within twelve months after the expiry of the tax period

within which the relevant deductions were made. In such event, the tax

fraction on the unpaid consideration is deemed to be tax charged in respect