SARS and Business Rescue – Part 1

Tax is central to any rescue or restructuring process. There are two main areas for consideration by the Business Rescue Practitioner (BRP):

1. The taxing statutes (value added tax (VAT), pay as you earn (PAYE), income tax and capital gains tax); and
2. The administration of taxation now regulated under the Tax Administration Act no 28 of 2011.SARS also issue guidance notes on both tax and the administration of tax and members are directed to the SARS website for useful information regarding these matters: http://www.SARS.gov.za.

In business rescue all taxes come into play, including VAT, capital gains tax, PAYE, income tax, provisional tax, transfer duty, skills development levies, workman’s compensation and unemployment contributions.

A fundamental principle underlying business rescue is that it must offer a better outcome than liquidation. The current prevailing opinion accepts that the outcome must be better for the business as a whole.

Business rescue is often used to realise the assets of a business and to distribute the proceeds to the affected parties in line with the provisions of chapter 6 of the Companies Act 2008.

Our courts upheld the interpretation in 2012 that SARS is not a preferential creditor in business rescue. In determining classes of creditors, SARS should be treated as a separate category. For the purposes of determining their vote, they should be treated as an unsecured creditor and have the same vote as any other unsecured creditor.

In liquidation, SARS will, after due process, submit a claim for payment of arrear taxes, penalties and interest as calculated as assessed by themselves. In business rescue however, the BRP is required to estimate the claim based on the internal accounting records of the company, the returns to SARS and the assessments issued by SARS. Particular attention should be paid by the BRP to e-filing returns and taxes outstanding at the commencement of business rescue.

Extract from TMA Practice note.