At what point in time does a tax debt arise?
In Henque 3935 CC t/a PQ Clothing Outlet (In Business Rescue) v C:SARS (High Court, Gauteng Division, Case No. 2020/35790), the court was required to consider this question. The taxpayer commenced business rescue on 31 January 2018 and the court was required to consider whether the taxpayer’s income tax liability for the 2017 year of assessment constituted a “pre-commencement debt” or a “post commencement debt”.
The importance of such consideration stems from the impact which business rescue proceedings has on the debts owing by the person or entity that is under business rescue. In essence, business rescue proceedings place a temporary moratorium on the rights of claimants – i.e., it ring-fences the debts of the entity that have accrued prior to the commencement of business rescue. The business rescue plan then focusses on these debts to “rehabilitate” or “rescue” the entity.
No creditor, including SARS, if owed unpaid taxes due and payable before the commencement of business rescue proceedings, can enforce such debt except in terms of the business rescue plan adopted. In contrast, debts arising after the commencement of the business rescue proceedings are unaffected by the business rescue plan and not compromised by such plan.
The taxpayer argued that its liability for income tax in respect of its 2017 year of assessment arose on the last day of such year of assessment – i.e., on 28 February 2017 and therefore constituted a pre-commencement debt subject to the business rescue proceedings. The taxpayer argued that the fact that an additional assessment in respect of the 2017 year of assessment was only issued to the taxpayer on 1 May 2018, did not detract from its income tax liability having arisen on 28 February 2017. SARS disagreed with the taxpayer, averring that the income tax liability of the taxpayer only became due and payable on 31 May 2018 – the payment date of the additional assessment issued in respect of the 2017 year of assessment. SARS was therefore of the view that the tax debt in question constituted a post-commencement debt unaffected by the business rescue proceedings.
The High Court sided with SARS. It held that, although the Income Tax Act establishes “generally the liability” for tax on an annual basis, in terms of the Tax Administration Act, the income tax only became due and payable when the additional assessment was made. Accordingly, the court held that only when an income tax liability is quantified and becomes due and payable, will it become a “debt”. As the income tax liability only became due and payable on 31 May 2018, until then it was not a debt. The court therefore held that the tax debt in question was a post-commencement debt – therefore unaffected by the business rescue proceedings.