Sars’s pet hate

Nothing raises the ire of the South African Revenue Servive (Sars) as much as an employer who collects PAYE from employees, and then fails to pay it over to the fiscus. With justification, Sars views such conduct as fraud, if not theft. The funds belong to the employee, and are payable to Sars on their behalf. The South African courts share Sars's view on the gravity of such misconduct.

Thus, in Estate Agency Affairs Board v McLaggan 2005 (4) SA 531 the Supreme Court of Appeal held that such conduct was "intrinsically dishonest", that it "entails deception of employees", that "it is dishonest as far as the fiscus is concerned" and that it is conduct "that would be regarded by the public in general as lacking in probity".

The court's ruling that this breach of the Estate Agency Affairs Act 112 of 1976 was an offence involving dishonesty had serious consequences for this taxpayer, as it resulted in the lapsing of his fidelity fund certificate, without which he could not practice as an estate agent.

Comparison with the attitude of the Australian courts

It is interesting to compare this decision with that in Deputy Commissioner of Taxation v Dick, where a similar scenario played itself out in the courts of New South Wales.

A striking difference between the two judgements is the detached view that the Australian courts seemed to take of the failure to remit PAYE to the fiscus, as though it were a mere technical statutory offence, in comparison with the stern, moralistic rhetoric of our Supreme Court of Appeal.

Amateur psychologists may read into this disparity a sub-text of the Calvinist influence in the shaping of South Africa, versus the less than spotless pedigree of the first European inhabitants of Australia and the enduring legacy of antagonism toward oppressive governmental authority, particularly where, as in Dick's case, a working man's football club was involved.

In Dick, a director of the Northern Spirit Football Club Pty Ltd had failed to remit to the fiscus the monthly PAYE that had been deducted from the wages of the company's employees.

The Australian Tax Office gave the director three penalty notices, but still the director did not comply with his statutory duty under Australia's Income Tax Assessment Act to remit the funds.

The upshot was that the revenue authorities levied the director with a penalty of some A$150 000, which was an amount equal to the PAYE collection that the company had failed to remit to the fiscus during his period in office.

The director disputed his liability for the penalty, and - with ingenuity, not to say chutzpah - argued in the New South Wales Supreme Court that the court should exercise its discretion in terms of the Corporations Act 2001 (the Australian counterpart to our Companies Act) to excuse him for his negligence or default.

The relevant provision (section 1318) of Australia's Corporations Act reads as follows -

"If, in any civil proceedings against a person to whom this section applies for negligence, default, breach of trust or breach of duty, ... it appears to the court ... that the person ... has acted honestly and that, having regard to all the circumstances of the case ... the person ought fairly to be excused for the negligence, default or breach, the court may relieve the person either wholly or partly from such liability on such terms as the court thinks fit".

This wording is very similar to the provisions of section 248 of the South African Companies Act of 1973. Hence, the taxpayer's contention and the court's response to it are relevant in the context of South Africa's tax law.

A surprising decision by the Supreme Court was reversed on appeal

Astonishingly, the New South Wales Supreme Court was persuaded by the taxpayer's argument that the court could and should, under this provision of the Corporations Act, "excuse" his misconduct, and made an order accordingly.

Not surprisingly, the tax authorities took the judgment on appeal to the New South Wales Court of Appeal, arguing that the discretionary powers of the court in terms of section 1318 of the Corporations Act to excuse negligence, breach of duty or breach of trust do not extend to obligations incurred outside of that Act.

However, the victory was short-lived. On appeal (see Deputy Commissioner of Taxation v Dick (2008) 242 ALR 152) the New South Wales Court of Appeal reversed the decision of the Supreme Court and ruled in favour of the tax authorities.

*This article first appeared in the July issue of PWC's Synopsis