If a person (the transferor) transfers an asset to another person (the transferee) for no consideration or for consideration which is below the market value of the asset, tax consequences arise, including the following:
- The transferor may become liable for donations tax.
- If the transferor and the transferee are connected persons in relation to each other, then for capital gains tax purposes, the transferor is deemed to have transferred the asset to the transferee for proceeds equal to the market value.
The Tax Administration Act (28/2011), which took effect on October 1 2012, adds another item to that list. Under Section 182(1) of the act, if the transferee receives an asset from a taxpayer which is a connected person in relation to the transferee without consideration or for consideration which is below the fair market value of the asset, the transferee is liable for the tax debt of the taxpayer. Put simply, a tax debt is an amount of tax due in terms of any law administered by the South African Revenue Service (SARS).
Under Section 182(2) of the act, the liability of the transferee is limited to the lower of:
- the tax debt that existed at the time of receipt of the asset or that would have existed had the transferor complied with its tax obligations; or
- the fair market value of the asset at the time of the transfer, reduced by the fair market value of any consideration paid, at the time of the payment.
The transferee's liability extends only to an asset received by the transferee in the one year before SARS notifies the transferee of liability under Section 182 of the act – that is, if the transferor transferred an asset to the transferee in 2013, SARS could not invoke the provision in 2015.
'Fair market value' is defined in Section 1 of the act as the price that could be obtained on the sale of an asset between a willing buyer and a willing seller dealing at arm's length in an open market. The term 'connected person' is defined in the Income Tax Act (58/1962) and is broadly defined. For instance:
- spouses are connected persons in relation to each other;
- parents are connected persons in relation to their children;
- a beneficiary of a trust is a connected person in relation to the trust (and vice versa); and
- a shareholder holding more than 20% of the shares in a company could be a connected person in relation to the company.
A person that wilfully and without just cause fails or neglects to comply with Section 182 of the Tax Administration Act, if that person was given notice by SARS to pay the amount to SARS, is guilty of a criminal offence.
The provision is no doubt aimed at the case where a taxpayer is indebted to SARS and, in an attempt to shield the asset against attachment in the event that SARS takes steps to enforce the tax debt, donates a valuable asset to a close relative, for example.
However, the provision may conceivably find a much wider application in practice. For instance, if a major shareholder receives a distribution from a company, the recipient – which received the asset for no consideration – may become liable for the tax debts of the company making the distribution.
The provision may also find application in the context of arm's-length commercial transactions. For example, company A buys all the shares in company B from its shareholders. The shareholders of company B were not amenable to company B selling its assets to company A. Company A wishes to wind up company B promptly and procures that company B distribute all its assets to company A in terms of Section 47 of the Income Tax Act to ensure that the transfer is free of immediate tax consequences. As company B is a connected person in relation to company A at the time of the distribution (it is a wholly owned subsidiary), and because company A receives the assets without consideration, company A becomes liable for the tax debt of company B, limited to the value of the asset limited to the lower of the value of the asset and the tax debt.
The legislature appears to have cast its net too wide. These examples show that a person which receives an asset from a taxpayer may become liable for the tax debt of the taxpayer, even though the taxpayer or the recipient may have been unaware of the tax debt, or did not purposefully participate in a scheme to dissipate the assets of the taxpayer with a view to putting the assets beyond the reach of SARS. The provision should be amended to add an element of knowledge, intention or fault on the part of the taxpayer and the recipient to ensure that bona fide third parties are not hit by the provision.
Persons that acquire assets from connected persons free of charge or for a low charge should be aware of the implications of Section 182 of the Tax Administration Act.
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