National Treasury may have thrown a lifeline to companies in business rescue in the 2024 Budget when it announced plans to review the circumstances under which SARS may decide to temporarily write off a tax debt under section 195 of the Tax Administration Act 28 of 2011 (TAA).
The proposed amendment comes at a critical point where financially distressed businesses are grappling with tight financial conditions, sluggish economic growth, and mounting tax obligations amid efforts to navigate the complexities of business rescue proceedings.
Challenges with tax compliance in business rescue: section 256
Where taxpayers find themselves in financial distress, often leading to business rescue interventions, tax compliance becomes increasingly challenging. The significance of this becomes apparent when considering the statistics of business rescue in South Africa. According to the Companies and Intellectual Property Commission’s (CIPC) 2022/2023 Annual Report, of the 4 599 companies that commenced business rescue proceedings between 1 May 2011 and the end of the 2022/2023 reporting period, only about 20% reached substantial implementation (with 13% ending up in liquidation, 23% terminated, and 37% still active).
Section 256 of the TAA exacerbates this situation by requiring SARS to revoke a taxpayer’s compliance status if it has outstanding tax debts. Reinstating this compliance status requires addressing outstanding issues, including the settlement of outstanding tax liabilities or, where this is not possible, devising compromise or instalment payment arrangements with SARS.
The intricate nature of business rescue proceedings means rectifying historical non-compliance can often take time and effort, frequently involving extensive reconstruction of financial records due to mismanagement, fraud, or theft. SARS is also understandably dealing with a backlog of compromise and deferral requests, given the significant number of financially distressed businesses being forced to seek relief from SARS for pre-commencement tax debts.
Stable cash flows are imperative to the success of business rescue proceedings, and significant delays in the reinstatement of a taxpayer’s compliance status, therefore, often leads to disastrous results for distressed taxpayers, who typically cannot tender for any new contracts, or enforce payment for work already done (particularly taxpayers that supply services to government entities).
For example, the case of Red Ant Security Relocation and Eviction Services (Pty) Ltd v CSARS 80 SATC 431 involved a taxpayer which derived 96% of its revenue from government contracts, which it could not execute without a tax clearance certificate. The taxpayer could not receive payment for its services nor tender to provide new services, creating severe financial constraints that left its business on the brink of closure. The livelihoods of some 11 000 employees were at risk, and nine municipalities would potentially have been left without essential services if the taxpayer’s business shut its doors.
The liquidation of businesses that could otherwise have traded back into solvency inevitably results in job losses, but SARS also loses out on the ongoing tax revenue these businesses could have generated. As a concurrent creditor, SARS also typically only recovers a very small percentage of the outstanding tax debt of the business in liquidation, compared to what could have been recovered over time, through a compromise and deferral arrangement, particularly if the taxpayer is given the opportunity to trade itself out of business rescue and back into a solvent financial position.
Navigating the challenges of section 195: seeking relief for distressed taxpayers
Section 195, as it is currently worded, confers powers on SARS to temporarily write off an amount of tax debt where a tax debt becomes irrecoverable or uneconomical to pursue, and where a debtor is subject to business rescue proceedings under the Companies Act.
Section 195 could, therefore, facilitate a temporary write-off of a taxpayer’s outstanding tax debt, allowing the taxpayer’s compliance status to be reinstated immediately. This could afford distressed taxpayers a chance to trade out of financial distress without the burden of a ‘non-compliant’ status, without compromising SARS’ mandate to collect revenue, as the tax debt owed to SARS is not permanently waived or compromised (save to the extent this is separately agreed between SARS and the taxpayer), and can be reinstated at an appropriate time.
However, the correct interpretation and application of section 195 is uncertain, and taxpayers have been unable to rely on this provision to secure temporary write-offs thus far, being forced instead to approach the courts for relief, as was the case in Red Ants and various other matters.
Treasury’s commitment in the Budget Speech to reviewing the discretion afforded to SARS by section 195 of the TAA accordingly represents a crucial step towards aligning tax administration practices with the objectives of the business rescue provisions in the Companies Act.
Such an amendment will hopefully prevent scenarios where SARS is compelled (by legislation or policy) to force viable businesses into insolvency due to their inability to secure a tax clearance certificate within a reasonable timeframe. Not only will this safeguard the interests of distressed taxpayers and promote economic resilience and sustainability, but it will also benefit SARS and the fiscus by prioritising extended repayment of tax debts over non-recovery (when distressed taxpayers are liquidated).
Treasury’s commitment in the 2024 Budget to reconsider the ability of SARS to temporarily write off the tax debts of distressed taxpayers in order to reinstate their tax compliance status is a welcome development. If companies in business rescue are able to trade back to health without the noose of tax debts around their necks, this can only contribute towards a conducive environment for business recovery and economic growth in South Africa.
