Shareholder Liability For Tax Debts Of A Company

Section 181 of the Tax Administration Act Number 28 of 2011 is applicable in this instance.
This section allows shareholders to be held jointly or individually liable for the tax debts of their company and the intention is not to punish shareholders, but to discourage them from asset or dividend stripping the company.

Examples of the application of Section 181:

  1. When a company is wound up (other than by means of an involuntary liquidation) Section 181 is triggered by a voluntary winding-up of a company.
    If the company is solvent the Companies Act will apply too. If the company is insolvent the prior 1973 version of the Companies Act will apply.
    To kick start the process for voluntary winding-up of a company a special resolution of the company is filed with the Companies and Intellectual Property Commission.
  2. A company has not cleared an outstanding tax debt and is to be wound up.
    A tax debt is defined as an amount of tax due or payable in terms of a tax act. This would include tax due under any tax Act, with the exception of the Customs and Excise Act, 91 of 1964 which is specifically excluded.
    The tax debt must also have existed at the time of the receipt of the assets or would have existed had the company complied with its obligations under a tax act.
    The term ‘outstanding tax debt’ is used in those sections of the Tax Administration Act that assign recovery powers to SARS. It is therefore also a prerequisite for this section that the tax debt must not have been paid within the prescribed period, as notified by SARS, or as specified in a tax Act.
  3. The section only applies to persons who receive the assets of the company within one year prior to its winding-up.
    The term ‘asset’ includes: movable or immovable, corporeal or incorporeal property and a right or interest of whatever nature to or in that property. The ‘company’ must be a company as defined in the Income Tax Act, No. 58 of 1962. This definition includes: South African companies, South African public entities, foreign companies, co-operatives, South African charities, foreign collective investment schemes in securities, collective investment schemes in property and close corporations.
  4. Persons must have received the assets in their capacity as shareholders.
    Shareholders are persons who hold a beneficial interest in a company.
    Preference shareholders would be regarded as a shareholder as they would enjoy the use, fruits or income from the share, but registered shareholders who acts in a nominee capacity would not be a shareholder for the purposes of this section, because they do not receive an asset in their capacity as, but on behalf of shareholders.
    The definition of ‘shareholder’ has been widened in later amendments to the section to ensure that it does not exclude shareholders who hold beneficial interests in a company otherwise than through shares.
    The liability of shareholders is, however, secondary to the liability of the company.
    SARS will first recover the tax debt against the company and only if this is unsuccessful will it proceed against the shareholders.

Section 181 does not apply to a listed company within the meaning of the Income Tax Act or to a shareholder of a listed company.
This section would not apply to a company or a shareholder of a company whose shares or depository receipts are listed on the JSE or on a stock exchange outside of South Africa that has been recognised by Minister of Finance.

Section 181 requires a voluntary liquidation of an unlisted company with an outstanding tax debt and applies to shareholders who have received any company assets within one year prior to its winding up.

Are directors personally liable for company debts?
A director is not personally liable for company debts. If the company is being sued by creditors for outstanding debt and the company cannot afford to pay the outstanding amount of debt the company assets are at risk not the personal assets of the director(s).
Any asset bought under the name of the company (car, house, laptop etc.) is classified as company’s assets and not the personal assets of the director and will also be at risk.

Author Craig Tonkin

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