Navigating the risks: Who can be held personally liability for tax debts?

In recent developments, the South African Revenue Service (SARS) has taken a firmer stance on enforcing personal liability in relation to tax debts, as evidenced by the recent court case of Pather v Commissioner for the South African Revenue Service 2024 JDR 0414 (the Pather case). This case sheds light on the significant implications for accountants and financial advisors who may unwittingly find themselves in crosshairs due to the financial dealings of their clients.

Case Background and Ruling

In the case, Ms. Pather was held jointly and severally liable for the tax debt of Impulse International (Pty) Ltd, a company associated with her ex-husband. The case stemmed from the transfer of R21.5 million to Ms. Pather by her ex-husband, which was allegedly sourced from his loan account with Impulse. This transfer occurred shortly after audits on Impulse had begun, amidst negative media publicity regarding the company. SARS contended that Ms. Pather knowingly assisted in dissipating Impulse’s assets, thus evading tax obligations, by using the transferred funds to purchase a property.

Introduction to Section 183 of the Tax Administration Act

Section 183 of the Tax Administration Act addresses the personal liability of third parties who are involved in the financial affairs of taxpayers. This section holds third parties liable if they knowingly assist a taxpayer in dissipating assets to obstruct the collection of tax debts.

Here's a breakdown of the key elements and requirements of Section 183:

1. A third party can be held jointly and severally liable for a tax debt if they assist in any way that helps the taxpayer to dissipate assets to obstruct the collection of tax debts.

2. For liability to be imposed under Section 183, it must be shown that the third party “knowingly” assisted in the asset dissipation. Asset dissipation generally refers to the act of deliberately reducing the value of an entity's assets, especially through misuse or transfer, in a way that avoids legal obligations such as tax liabilities or creditor claims. This often involves hiding, selling, or transferring assets to prevent them from being accessible to creditors, tax authorities, or other claimants.

3. The Act defines a "tax debt" broadly, covering any tax due and payable under various tax laws. It includes not just assessed taxes but also amounts declared due by virtue of a return filed by the taxpayer or an assessment made by SARS.

4. The importance of procedural fairness is crucial when enforcing tax laws. This involves providing the third party with due process, including adequate notice and the opportunity to challenge SARS’ claims before any liability is determined.

Key Lessons from the Pather Case

Overall, the Pather case highlights the importance of being proactive, knowledgeable, and ethical in the financial field to protect yourself and your clients from legal troubles related to tax liabilities.

• Be Vigilant and Thorough

  The Pather case highlights the importance of maintaining a high level of vigilance and diligence when managing and advising on financial transactions. Accountants should scrutinise all transactions meticulously, especially when there's a possibility of asset dissipation. Ensuring all financial activities are transparent and well-documented is key to preventing legal issues.

• Know the Law

  It's crucial for accountants to have a strong understanding of the tax laws and regulations that affect their practice. This includes being aware of the specifics around personal liability and third-party rights. Keeping up-to-date with changes in tax legislation and relevant court decisions is essential to provide accurate and lawful advice to clients.

• Proactively Work with Tax Authorities

  Proactively engaging with the South African Revenue Service (SARS) and understanding its procedures is vital. This proactive approach not only helps in effectively managing audits and disputes but also in advising clients on how to remain compliant and avoid personal liability for tax issues.

• Maintain Ethical Standards

  Upholding the highest ethical standards is non-negotiable. Accountants must guide their clients to act honestly and transparently, especially in their tax dealings. Any actions that might appear obstructive or deceptive could have serious legal consequences. The integrity of an accountant is critical in fostering lawful and fair financial practices.

In conclusion

These principles are crucial for accountants to protect themselves and their clients from potential legal troubles and to foster a trustworthy professional environment. The consequences of Section 183 are broad and can affect more than just the people directly involved in a tax issue. It can impact financial professionals who might not even be aware they’re getting involved in something illegal. The Pather case is a perfect example of how financial decisions made without complete understanding of their implications can lead to serious legal and financial consequences.