Withholding of employees’ tax during liquidation proceedings

Decisions of South Africa’s courts are an essential source of law. The courts uphold and enforce the Constitution and develop common law that is consistent with the values of the Constitution, and the spirit and purpose of the Bill of Rights. In a taxation context, court decisions assist in how legislation must be interpreted or confirm the rights and obligations of taxpayers and the South African Revenue Service alike. One, therefore, cannot appreciate the tax landscape, without having regard for the decisions of our courts.In CSARS v Pieters and others, the Supreme Court of Appeal (SCA) was tasked with deciding whether liquidators were required to withhold employees’ tax from payments made to employees under section 98A of the Insolvency Act. The company in question was an insolvent transport company which had employed approximately 700 people. Forty-five days after the appointment of the liquidators, the employment contracts for these employees were terminated under section 38(9) of the Insolvency Act.

During the liquidation process, the employees accrued salary entitlements, leave pay and severance pay. The liquidators determined the quantumhereof and paid amounts owing to them in terms of the provisions of the Insolvency Act.

SARS objected to the liquidation and distribution (L&D) account lodged by the liquidators, on the basis that no provision had been made for the payment of employees’ tax (PAYE) in respect of the payments made by the liquidators. The Master of the High Court accepted SARS’ objection and ordered the liquidators to amend the L&D Account to reflect the employees’ tax as administration costs and deduct the actual employees’ tax payable from their liquidators’ fee.

As stated above, the key issue that the SCA had to decide was whether the liquidators were obliged to withhold employees’ tax on payments made in terms of section 98A of the Insolvency Act.

SARS argued that the liquidators fell within the definition of “employer” where they made these payments. The Master of the High Court agreed and ordered the liquidator to amend the liquidation and distribution account.

The SCA held that the provisions in the Insolvency Act were clearly social justice provisions aimed at alleviating the plight of being unpaid as an employee as a result of the financial woes of an employer. The court held that the provisions in the Fourth Schedule to the Income Tax Act do therefore not apply to payments made under section 98A of the Insolvency Act. To categorise PAYE as costs of administration would have the effect that income tax, attributable to the company’s trade before liquidation and which thus becomes payable before the liquidation, would also be a cost of administration. That is plainly untenable. On this basis, SARS’ appeal was dismissed.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)





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IC Marais

Professional experience:

IC Marais is a certified CA (SA) with public sector and private sector technical knowledge based on 5 years’ Public Sector accounting, auditing and financial management experience and 5 years audit, tax and accounting experience. Detailed knowledge of private and public sector accounting and auditing standards (GRAP, IPSAS, IFRS, IAS, ISA) and public sector financial legislation (MFMA, etc.)

He enjoys the outdoors, hunting and fishing.



Professional experience:

In 1995, Schalk started as a trainee at Warner and Newton (which became Moores Rowland in 1997 and then Mazars Moores Rowland in 2007) in Bloemfontein. In 1998, Schalk was appointed as manager at Moores Rowland, where he became a partner in 2003. Schalk received his Postgraduate Certificate in Advanced Taxation in 2006 and in 2009 he received his Certificate in the Administration of Estates.



Professional experience:

Cedric started as a trainee at Warner and Newton (which became Moores Rowland in 1997 and Mazars Moores Rowland in 2007), Bloemfontein, in 1986. After completion of his articles, he joined the Special Investigations Division of the Department of Finance (SA Revenue Services) as a senior inspector from 1990 to 1991.



Professional experience:

Lucha started her career as a tax inspector at the Inland Revenue Department of New Zealand. After this she worked in commerce in Canada, Mexico and the United States.

On her return to South Africa, she completed her CA training contract with us and has been with Newtons ever since. She became a Partner in 2012.

Apart from her CA(SA) qualification she also holds a postgraduate certificate in Advanced Taxation (2005) and has the overall responsibility for training as our Training Officer.