When disputing a tax debt, especially one involving the complex issue of unlawful tax avoidance, taxpayers should always exercise caution. This sentiment was echoed in the recent judgment in Dale v Aeronastic Properties Ltd.(1) Although the court in this case was concerned with whether to place Aeronastic, the respondent taxpayer, under business rescue, its precarious financial situation was caused largely by an expensive tax debt. In the course of its judgment, the court referenced the taxpayer's dispute with the South African Revenue Service (SARS), which is the subject of this update.
In November 2009 SARS issued an assessment against Aeronastic regarding its claim for input tax under the Value Added Tax (VAT) Act (89/1991). The assessment disallowed Aeronastic's claim for R14 million, which resulted in it being liable to SARS for R28 million. After SARS issued a judgment against Aeronastic for an outstanding tax debt of approximately R48 million in March 2011, pursuant to Section 40(2)(a) of the VAT Act, it applied for the liquidation of Aeronastic on May 24 2013 on the basis that it was factually and commercially insolvent. On August 28 2013 Aeronastic appealed the assessment before the Tax Court, which dismissed the appeal on the strength of an agreement entered into between Aeronastic and SARS. In November 2013 a close corporation of which the applicant, Dale, was the sole member, applied to place Aeronastic under business rescue, which was dismissed in February 2014. In August 2014 Aeronastic was placed under final liquidation and its subsequent appeals against the liquidation order were rejected by the Supreme Court of Appeal and the Constitutional Court. The applicant then brought the present business rescue application on May 31 2016.
The judgment setting out the reasons for granting the liquidation order in August 2014 was handed down in October 2014 and provides some insight into the circumstances that caused the dispute between Aeronastic and SARS. In February 2009 Aeronastic had purchased helicopters and helicopter components (including spares) from Summer Days Trading 709 (Pty) Ltd and claimed input tax of R14 million. However, SARS had rejected Aeronastic's claim and concluded that the transaction between Summer Days and Aeronastic had been a scheme to obtain an undue tax benefit under Section 73 of the VAT Act. In the matter involving the granting of the liquidation order, Aeronastic argued that while the debt relied on by SARS was presently owed, it would disappear once the Tax Court's order was rescinded. The appeal was reheard and it was found that SARS had incorrectly applied Section 73 of the VAT Act. In developing its case, Aeronastic largely relied on a tax opinion that it had received, in which it was advised that SARS had misapplied Section 73 of the VAT Act. In granting the liquidation order, the court held that SARS was correct in contending that the objection to its assessment had been finalised, and that there was no application to review the Tax Court's order, which had been granted by agreement after Aeronastic had been represented by counsel.
The court remarked in the present matter that the tax opinion on which Aeronastic had relied did not properly appreciate the implications and consequences of Section 73 of the VAT Act. Further, it stated that Section 73 creates a reverse onus, which constituted a "significant hurdle" that Aeronastic had had to overcome. The court concluded that the tax dispute was not an issue that it could adjudicate on, as it was clear that it had been settled.
Section 73 of the VAT Act is an anti-avoidance provision, similar to the general anti-avoidance rules in Section 80A of the Income Tax Act (58/1962). In Mpande Foodliner CC v Commissioner for the SARS,(2) the court stated that, before SARS can invoke Section 73, a scheme must have been entered into or carried out solely or mainly for the purpose of obtaining a tax benefit, which must:
- have the effect of granting a tax benefit to a person by means or in a manner not normally employed for bona fide business purposes, other than the obtainment of a tax benefit; or
- create rights or obligations that would not normally be created between persons dealing at arm's length.
Section 73(3) of the VAT Act states that a decision by SARS under Section 73 is subject to objection and appeal. The section further states that if it is proven in proceedings concerning a scheme that it does or would result in a tax benefit, there is a rebuttable presumption that it was entered into solely or mainly for the purpose of obtaining a tax benefit.
Section 73 of the VAT Act is a complex provision and a powerful weapon at SARS's disposal. Although the remark was only said in passing, it is noteworthy that the court described the reverse onus of Section 73(3) as a significant hurdle which had to be overcome in the circumstances. However, such a finding hopefully does not give SARS licence to apply Section 73 as and when it pleases. From the taxpayer's perspective, the judgment should serve as a caution to take an assessment based on Section 73 seriously and obtain expert advice in responding thereto.
Taxpayers must always keep in mind the time periods within which objections and appeals must be lodged, which are set out in the Tax Administration Act (28/2011) and the dispute resolution rules. A taxpayer confronted by an assessment in terms of Section 73 of the VAT Act should also consider that, under certain circumstances, it can make use of Section 164 of the Tax Administration Act and apply to SARS to suspend payment of the tax debt in terms of the assessment. Under Section 164, SARS cannot undertake any recovery proceedings within 10 business days of notifying the taxpayer of its decision to grant or reject the application, unless it has a reasonable belief that the person may dissipate its assets.
For further information on this topic please contact Louis Botha at Cliffe Dekker Hofmeyr by telephone (+27 115 621 000) or email (email@example.com). The Cliffe Dekker Hofmeyr website can be accessed at www.cliffedekkerhofmeyr.com.