SARS DEBT IS WRITTEN OFF WHEN YOU LIQUIDATE
The only SARS debt that is not written off in a liquidation is any taxes that are owing under the Customs and Excise Act, because, in terms of this Act, the manager of the premises of the business is personally liable to pay these taxes. All other taxes, which include VAT, PAYE and Income Tax are written off in a liquidation. SARS cannot collect these taxes from the directors of a Company or members of a Close Corporation unless the directors or the members signed an Acknowledgment of Debt document in which they assumed personal liability to pay the taxes on behalf of the Company or Close Corporation.
SARS is not that special
Many people fear SARS and think that they have magical powers, but SARS debt is written off in a liquidation. SARS does not have many special powers. There are a few things that make SARS different, but in general terms SARS is just a creditor like any other. Here is a description of why I say that SARS is not that special a creditor:
- In a liquidation, SARS is only a preferential creditor. The SARS debt is written off in a liquidation. There are three types of creditors namely secured creditors, preferential creditors and concurrent creditors. Secured creditors are bond holders, retention rights and pledges. These creditors will get paid first in any liquidation if there is money to be paid out to creditors. The second lot of creditors that will get paid if there is any monies left after the secured creditors were paid, are the preferential creditors. These creditors are the liquidator’s fees, legal fees, and then only SARS. SARS does not stand first in line to be paid as many people think.
- SARS also has to prove a claim against the insolvent estate like any other creditor and any monies not debt means that the SARS debt is written off in a liquidation. It does not mean because SARS is SARS that it automatically is regarded as a creditor of the Close Corporation or Company. No, SARS also has to prove a claim to be acknowledged as a creditor. In a liquidation all the creditors come together and then they share in the proceeds of any assets or cash that are available to the liquidator to be distributed among creditors. There is then a pecking order and SARS stands behind all the other creditors as described in paragraph 1 above. If SARS does not prove a claim against the insolvent estate like the other creditors, it will not get paid even if there is a surplus to pay all creditors. To prove a claim means that SARS must arrive at one of the meetings held for creditors by the liquidator. At the meeting, a creditor must give a contract or legal ground why it avers that the liquidated business owes it money and a certificate of balance. If they don’t arrive at the meeting and prove a claim, then they will not be paid.
What makes SARS different
There are two things that make SARS different, namely:
- SARS can attach monies owing to your business which forces your debtor to pay the money directly over to SARS and not to your business account;
- When a normal creditor issues a summons against a creditor, it must wait 10 days before it can take default judgment. The creditor must wait 10 days because the debtor must be given the opportunity to defend the summons if the debtor feels that it does not owe the money to the creditor who has issued the summons. If SARS issues a summons, it does not have to wait the 10 days to pass before it takes default judgment. SARS issues summons and gets a judgment immediately with the summons, which means that once summons is issued SARS can immediately attach any assets of the business (if there are assets).
SARS debt is not necessarily a criminal offense
SARS likes to make you think that if your business owes VAT or Income Tax or PAYE that you are committing a crime and that you can be sent to jail. This is not true. It was found by the Court that owing SARS VAT is not a crime. The threats that SARS issues are just to intimidate you because they know that the public does not know better. If you committed fraud that is another story, then indeed you can be found guilty of a criminal offense, but then it will not be because you owe the taxes, but because you committed fraud.
Like all other creditors, SARS’ debt is written off in a liquidation and SARS can not claim the debt from the directors or shareholders of a Company or members of a Close Corporation in their personal capacity, unless the directors/shareholders or member signed an Acknowledgment of Debt assuming personal liability for the debt of the entity. Moral of the story is don’t ever sign any document with any creditor, and especially not with SARS, for the debt of the entity if you can avoid it. Sometimes one is obliged to sign surety when it comes to some suppliers or the banks, but that is understandable, but never sign any document with SARS where you assume personal liability for the debt of the business. There is no obligation on you to do so because you are not personally liable for the debt of the business under any if our Tax Laws just because you are the owner or director of a Company or Close Corporation.
SARS can not claim the monies owing by the business from you. If SARS issued summons against you in your personal capacity based on reckless trading before you liquidated the entity, that is a different matter altogether. The summons will not fall away after liquidation if it was issued before liquidation. You should, however, defend such a summons as SARS must prove that you have traded recklessly and that is not such an easy thing to do.
Please read our other articles on our website about liquidation for more information.