CSARS v Raphela and Others (2091-2021) [2021] ZAGPPHC 191 (29 March 2021)

Facts

PSR Solutions (Pty) Ltd (“PSR”), the first respondent in this case, has a sole director, Mrs Raphela. PSR won a tender for the supply of masks to the South African Police Services (“SAPS”) to the value of R45 million, which would have been subject to Value-Added Tax (“VAT”) under the Value-added Tax Act No. 89 of 1991. Mrs Raphela and PSR did not have the funds to purchase the goods for the tender, and came into contact with Mrs Mdlulwa, the third respondent in this case.

Mrs Mdlulwa paid the suppliers of the facemasks approximately R20 million, and subsequent to the completion of the tender, PSR paid Mrs Mdlulwa approximately R33 million, which resulted in Mrs Mdlulwa making a profit of more than R13 million.

Although PSR invoiced SAPS for the supply of the masks, it did not at any point disclose any VAT payable to SARS. When SARS undertook an investigation it found that Mrs Raphela and PSR did not have sufficient funds to settle the VAT liability, which amounted to more than R14 million, and that penalties and interest were still accruing.

The Commissioner of SARS brought an ex parte application to the High Court for an order for the preservation of PSR’s assets in terms of section 163(1) of the Tax Administration Act (“TAA”), whereby Mrs Mdlulwa’s assets at Investec bank, amounting to R24 million, were frozen.

Mrs Mdlulwa opposed the continued existence of the preservation order based on the following arguments:

• the requirements of section 183 of the TAA have not been met (i.e. she did not knowingly assist PSR in dissipating assets) and therefore her assets should not have been frozen;
• the Commissioner had failed to disclose that she did have the necessary approval in terms of Exchange Control Regulations when she expatriated funds to Spain; and
• there was a disproportionality between the funds frozen in terms of the preservation order, and the extent of the tax liability of PSR.

Issues

The Court had to decide whether the jurisdictional requirements of the preservation order have been met in order to justify the freezing of Mrs Mdlulwa’s assets.

Finding

The Court held that:

• The funds from which PSR would have been able to satisfy its tax liability have already been dissipated to Mrs Mdlulwa and a portion of it was already expatriated out of South Africa.   Therefore there is no relevance that Exchange Control approval was received in respect of those funds, as those funds were no longer recoverable. Furthermore, the funds dissipated by PSR to Mrs Mdlulwa, which were presently in South Africa, constitute sufficient grounds to indicate the “practical utility” of a preservation order.
• Mrs Mdlulwa’s argument that Section 163 should not apply to her as an alleged “innocent" party was not upheld. The Commissioner of SARS did not need to prove that Mrs Mdlulwa was a co-perpetrator and only needed to prove that there was a material risk that if preservation was not granted, the assets would be dissipated or no longer available which may result in tax not being recovered.
• Regarding the excess amount that was being held by the preservation order, the Court held that the amount was still accruing interest and penalties and that the income tax liability of PSR had not been calculated as yet, which may also incur penalties. Furthermore, Mrs Mdlulwa did not provide further disclosure requirements relating to the living expenses in order to claim hardship in terms of section 163(7)(d) to enable the court to make ancillary orders as to how the assets must be dealt with.
• Therefore, the Court confirmed that the jurisdictional requirements of the preservation order have been met, confirmed the provisional order against Mrs Mdlulwa and ordered Mrs Mdlulwa to pay the costs of the application against her.

A copy of the judgment can be accessed here.

14/01/2022