One of the fundamental consequences of incorporating a company is that it is a legal entity separate from its directors and shareholders, and therefore the persons who manage and own the company will generally not be liable for the debts of the company. This principle would also apply to tax debts; however, there are provisions in the Tax Administration Act, 2011 where personal liability may arise.
Every company has a representative taxpayer, that is, the person who is responsible for paying tax as an agent on behalf of the company. The representative taxpayer of a company is the “public officer” who is designated in the IT77C form by the company when it registers as a taxpayer and is most likely to be a director of the company. A representative taxpayer becomes personally liable for the company’s tax debt, if while the tax remains unpaid, the representative taxpayer:
- alienates, charges or disposes of amounts in respect of which the tax is chargeable; or
- parts with funds in his possession which could have been used to pay the tax.
Another instance of personal liability arises where a person, which may include a director or shareholder, knowingly assists in dissipating the assets of the company in order to obstruct the collection of a tax debt due by the company. In such circumstances that person becomes liable, along with the company, for the tax debt to the extent that that person’s assistance reduced the assets available to pay the tax debt.
A person who controls, or is regularly involved in, the management of the overall financial affairs of a taxpayer is personally liable if that person was negligent or fraudulent in the payment of the tax debts of the taxpayer.
If a company is placed in voluntary liquidation circumstances may arise where the shareholders become liable for an outstanding tax debt. If, within one year of the winding-up of a company, the shareholders received assets of the company in their capacity as shareholders, and the tax debt existed at the time they received such assets, they may be liable to pay the tax debt.
These are just some examples where personal liability may arise. If a director or shareholder is being held personally liable for the tax debts of a company they should always seek professional advice, as the legal principles of personal liability are complex.
This article has been written by Graeme Palmer, a Director in the Commercial Department of Garlicke & Bousfield Inc
For more information contact Graeme on telephone : +27 31 570 5496, cell : +27 83 637 1868, email : firstname.lastname@example.org
NOTE: This information should not be regarded as legal advice and is merely provided for information purposes on various aspects of tax law.