The rights and obligations of the South African Revenue Service in a business rescue process

Abstract

Business rescue is a new and very relevant concept in South Africa and therefore there are still a few things which may need clarity and understanding. In this study, the uncertainty of the South African Revenue Service’s (SARS) ability to collect tax debt due to them by companies in financial need was investigated, as well as the limitations associated with its status as a concurrent creditor. A conclusion to this uncertainty will make it easier for stakeholders of a company undergoing business rescue to understand what the powers of SARS are with regard to collecting outstanding tax debt. The findings of this study clarified what the rights and obligations of SARS are when a company is filing for business rescue. Therefore, the first component of this mini-dissertation's primary objective explored why SARS ranks differently in business rescue as opposed to in liquidation. The most important reason behind the ranking of SARS as a concurrent creditor is summarised in Section 7(k) of the Companies Act (71 of 2008), which states that the purpose of business rescue is to efficiently rescue and recover companies experiencing financial distress, “in a manner that balances the rights and interests of all relevant stakeholders”. Judge Fourie ruled in the case of Commissioner of South African Revenue Services v Beginsel NO and Others (2012) that SARS will not share the same creditor status as in liquidation. If SARS had the opportunity of enjoying preferent status, it would leave the rest of the company with very little to distribute to concurrent creditors. The second component of the primary objective is whether business rescue is used as a collection mechanism by SARS. Although SARS is given the lowest position to raise claims, the Tax Administration Act (28 of 2011) clearly states all the powers and rights to collect tax debt due, although it must be carefully read together with the Companies Act (71 of 2008). Business rescue limits the ability of SARS to collect tax, owing to the business rescue plan binding them. Therefore, SARS cannot perform all the procedures to collect tax as it would normally be done. SARS’ status as a concurrent creditor limits the dividend that would be received by them. A comparison between South Africa's business rescue process and Australia's voluntary administration process was performed in order to determine whether there are any shortcomings in the way SARS is entitled to claim taxes due to them. The most important discovery was the fact that the Australian Taxation Office (ATO) is also experiencing a low priority ranking in the voluntary administration process. The main objectives and the aim of business rescue and voluntary administration processes are very much the same, although the ATO have the power to terminate the process if not treated fairly. SARS’ position is not protected in the same manner.