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A taxing assessment: Evaluating South African mechanisms that curtail tax fraud
in cases of impeachable transactions
Paul Nkoane,
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Paul Nkoane, (2019) "A taxing assessment: Evaluating South African mechanisms that curtail tax
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fraud in cases of impeachable transactions", Journal of Financial Crime, Vol. 26 Issue: 1, pp.293-312,
https://doi.org/10.1108/JFC-09-2017-0085
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Taxing
A taxing assessment assessment
Evaluating South African mechanisms that curtail
tax fraud in cases of impeachable transactions
Paul Nkoane 293
University of South Africa College of Law, Pretoria, South Africa
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Abstract
Purpose – The purpose of this paper is to enlighten the reader about the development in tax law.
Moreover, the author intends to show that other measures could be implemented to supplement the
existing machinery.
Design/methodology/approach – The paper explores the duty vested in the courts to probe the merits
of transactions meant to evade or avoid the burden of tax. So much of the text is based on case law. The
methodology is based on literature research rather interpersonal research.
Findings – The paper highlights that the current tax machinery has solved a number of tax issues.
However, the machinery has not addressed the problem of fraud committed in the banking sector. The paper
therefore recommends solutions to this problem.
Research limitations/implications – The paper was formulated before the current tax laws where
implemented. The current law contains the solution this study advanced. In a sense, this study
examines the impact of the current law and the duty of the court to probe the merits of impeachable
transactions.
Practical implications – The study would give the legislature food for thought and would also guide the
courts with matters of tax fraud.
Originality/value – Though the original recommendations form part of the current statute, this study is
still immensely original in delivery and thought. It provide not only an original influence on the court but also
the legislature with original solution to the existing problem.
Keywords Banking law, Tax fraud, Tax evasion, Tax avoidance, Forfeiture, Tax laws
Paper type Research paper
1. Introduction
It is trite law that tax evasion must be punished[1], whereas the law is lenient towards
tax avoidance if arranged within a legal framework[2]. The term tax avoidance even
when used to imply a moral act can be easily conflated with impermissible tax
avoidance, to eschew possible confusion, I shall refer to lawful minimising and
postponement of tax as “tax planning”. It is, accordingly possible to make
arrangements which are lawfully allowed to defer or diminish certain tax liabilities.
However, where a tax debt is due and cannot be left unsettled[3], it will be unlawful to
make plans to avoid the honouring of tax[4], particularly without the consent of the
Commissioner for South African Revenue Services (hereinafter SARS). This is so,
because such conduct may amount to tax immorality[5]. It happens at times in financial
audits that tax payments are deferred, for one reason or the other, chiefly to balance
accounts. The deferred amount may be kept for SARS or used for all sorts of benefit for Journal of Financial Crime
Vol. 26 No. 1, 2019
pp. 293-312
The author would like to extend my heart felt gratitude to Prof Puseletso Letete of the University of © Emerald Publishing Limited
1359-0790
South Africa for her comments on an earlier draft. However omissions and errors are all mine. DOI 10.1108/JFC-09-2017-0085
JFC the entity before SARS collects[6]. Where a deferment has been unreasonably long[7],
26,1 then the Receiver of Revenue may resort to other measures to secure compliance. In
such cases, SARS can take measures to collect tax itself or assign any person (to be an
agent) to collect tax[8]. Although a person may be designated to collect tax, it could
happen that the funds are transferred before they become preserved for SARS.
The court in Nedbank v. Pestana case ruled that where a transfer is made prior to the
294 preservation of the funds, the bank cannot unilaterally reverse the transfer[9]. In this case,
circumstances suggested that the taxpayer deliberately disposed of the property which
formed part of the taxpayer’s tax debt. The court’s ruling has received stern critique from
the academic circle. Schulze argues that such a ruling while advances banking law of
mandate, it also carries the impetus to fuel fraudulent transactions[10]. Schulze further
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argues that the feasible remedy to the problem of transactions meant to defraud or elude the
payment of tax is the reversal thereof.
Where crime (e.g. fraud) is involved, banks could or should not turn a blind eye to proceedings. In
the case of fraud, public policy dictates that a bank should do everything in its power to prevent
or expose such criminal conduct. This is an acknowledged principle in other spheres of banking
law too. For example, in the case of documentary letters of credit it is well established that where
the beneficiary in terms of the credit has submitted forged or falsified documents, the bank will be
allowed to refuse payment on the credit, notwithstanding the trite principle that the letter of credit
is independent from any underlying transaction[11].
It appears that the dichotomy in jurisprudence generated unsatisfactory corollaries in this
case. This article, therefore, investigates whether the law has implemented or ought to
implement machinery to ameliorate tax problems exhibited in the Pestana case. It is
essential that would-be tax cheats become cognisant of the fact that their acts cannot be left
un-castigated if they were to engage in tax immorality. History teaches us that tax law
amendments are passed to remedy a persistent past ill[12]. Thus, the implementation of
supplementary machinery to remedy an existing ill would be in line with tradition and for
that matter no more than necessary.
In an effort to understand the courts’ competence to pronounce on cases of tax
immorality, the article will assess tax laws to define what sort of comportment should
arouse the courts’ scrutiny. The article will further probe the courts’ position with regard to
cases of poor tax assessment and the right to possess property. In that light, the article
provides a synopsis of the Deutschmann NO v. Commissioner for South African Revenue
Services case [13], where the court had to determine whether a right to property is
guaranteed where there is failure to comply with tax laws. In addition, the article will
attempt to offer solutions for cases of analogous circumstances to that of Pestana. The
article will assess whether other legal machinery could be assimilated into tax laws or the
Criminal Procedure Act (CPA) to facilitate the improvement of cases similar to Pestana.
Moreover, the article aims to evaluate how the promulgation of the Tax Administration Act
has solved the problems encountered in Pestana.
authors aver, the category into which specific conduct falls may be known only in retrospect
(de Koker and Williams, 2013). It is clear that intent is not always a prerequisite; hence, it is
possible that tax evasion may be committed by pure negligence[18]. In my opinion, this may
perchance occur in two ways; firstly, where a taxpayer is simply ignorant (i.e. unaware) of
the prevailing tax laws, and secondly, where a taxpayer is under the bona fide but mistaken
belief that the transaction amounts to lawful planning, but as a matter of fact the taxpayer
engaged in tax evasion[19]. Having said that, it could be submitted that in some instances a
taxpayer may suspect that his or her conduct amounts to tax evasion or impermissible
avoidance but negligently continued to make arrangements to postpone or avoid tax
liability. In other cases, it could happen that a taxpayer may deliberately falsify a document
or disguise a transaction to seem like something diverse, with the intent to escape tax
liability[20]. In this regard, the intention of the taxpayer would epitomise the unlawful
evasion or avoidance of tax. It is, therefore, the duty of the court to determine the merits of
the transaction[21].
Accordingly, it is clear that impermissible tax avoidance is regarded as a perfidious act,
which similar to tax evasion is outlawed[22]. Impermissible tax avoidance involves
transactions which their sole or main purpose is to derive a tax benefit, marked largely by
the conclusion of sham transactions[23]. In terms of the common law, impermissible tax
avoidance entails transactions which are tainted with abnormality or stratagem intended to
simulate a legitimate transaction, whereas in truth the transaction amounts to a charade[24].
With regard to statutory law, transactions that appear to be abnormal, that lack commercial
substance, and those that are intended to misuse and abuse tax laws will fall under the scope
of General anti-Avoidance Rules (GAAR) [25]. The transaction will be regarded as abnormal
if it would not have been concluded in the ordinary course of business, and as such appears
to be effected mainly for a tax benefit. In terms of statutory, a transaction that lacks
business substance is a transaction similar to a transaction which could be classed as an
“abnormality”. Such a transaction will not be executed with the prime purpose of generating
profits, nor to eliminate business risk, but to concoct a superfluous transaction which is
essentially aimed at minimising tax. The general rule is that a transaction lacks commercial
substance if it marks a substantial tax benefit but does not have a substantial consequence
upon either the business risks or the income of the taxpayer[26]. While it is possible to avoid
tax by transacting outside of the statutory scope, in terms of the common law the court will
examine the substance and form of the transaction[27]. This means that the court would
fathom whether the transaction is fabricated to avoid tax and should be set aside[28]. The
courts will look behind the veil of the transaction to determine its true purpose and are,
therefore, not restricted to examining the transaction at face value[29]. A transaction which
is intended to simulate a legitimate transaction, so as to conceal its real character and a
JFC name by which it is called, or give it a shape, intended not to express but to disguise its true
26,1 nature should not elude scrutiny in court[30].
Even in cases where a taxpayer employs other techniques to derive a tax benefit, such an
arrangement shall not avail a taxpayer refuge where a case of impermissible tax avoidance
can be shaped against the taxpayer. This will be the case if the sole purpose of the
transaction was to derive tax benefit[31]. However, if such arrangements were ab initio and
296 lawfully designed for business purposes, the court will be cognisant of the fact that a
taxpayer is allowed by law to employ other means to carry out business. In the ITC 1618
(1996) 59 SATC 290 case, the question was whether income for services rendered had
accrued to the individual who had originally entered into the contract and who physically
performed the work, or his close corporation through which he operated and which was
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is in the interest of justice that the court should reproach tax fraud, impermissible avoidance
and tax evasion similarly. This I suggest is what the law seeks to achieve[40].
In cases where a taxpayer has completely failed to honour tax debt the commissioner for
SARS has the power to appoint any appropriate person to collect tax on behalf of SARS[41].
Section 99 of the Income Tax Act and Section 47 of the Value-Added Tax Act (now repealed)
proved to be congener to the Prevention of Organised Crime Act of 1998 (hereafter POCA)
orders[42]. These tax provisions have undergone an eclipse and are not echoed in the current
statute. In hindsight, it can be averred that, Section 99 and Section 47 were envisioned to
afford the Receiver of Revenue an opportunity to claim unpaid taxes from the obtainable
assets of the taxpayer. The court in Matanzima v. Minister of Welfare and Pensions case[43],
describe section 99 (now repealed) of the Income Tax Act as similar to the law concerning
the attachment of debts due to a judgment debtor.
It is also a method or procedure by which a creditor can acquire money due to his debtor by a
third party. The Commissioner can act more promptly without resorting to the machinery
provided under garnishee proceedings but it is a similar process for a similar object. Upon
insolvency, however, this source of payment from the insolvent’s creditor ceases and payment is
confined to claims against the insolvent estate[44].
It is marked that Section 99 (now repealed) and the orders of POCA were complementary
devices and both served a useful purpose in preservations and seizures of property subject
to the commissioner’s claim. Thus, the purpose of implementing POCA provisions was to
capably combat money laundering, tax evasion and sophisticated forms of crime which
ordinary law may prove inadequate to curb[45]. POCA proves to be expedient since it
comprises mechanisms which include the confiscation orders, restraint orders, preservation
of property orders, and forfeiture orders. These machineries are sufficient in preventing any
party from dealing with the property in a manner which may result in the property being
consumed.
This section has enlightened that tax evasion, impermissible tax avoidance and tax fraud
bear the same resemblance, i.e. the menace to deprive the taxman of the much needed tax
revenue. From this perspective, it appears the court bear the responsibility to examine these
unlawful deportments with similar scrutiny, since these unlawful activities carries the same
adverse effect on tax.
return all material seized in addition to certain ancillary relief. Subsequently, the second
applicant launched a similar application. Thus, the matters were joined for a single hearing
before a full court. Although both applications were substantially similar, there are
important differences with regard to the relief sought. In the first application, an order was
sought for declaration that the warrant authorised was invalid ab initio, alternatively
seeking that it be set aside. The second applicant averred that searches and seizures involve
a violation of the rights to privacy and property in the Constitution as well as the common-
law rights to privacy and property. Although the constitutional soundness was not under
attack, the court was urged to carefully examine SARS’s actions because the processes of
search and seizure under warrant constitute a serious encroachment on the rights of the
applicants[48].
The applicants attempted to challenge the granting of the application for the warrants
for search and seizure on the basis that material inaccuracies and hearsay allegations were
admitted into evidence. The court rejected this contention and stated that the respondent, in
bringing the applications against the applicants, had before him proof that the applicants
had not been subject to proper taxation or tax assessments for a significant period. There
was, therefore, nothing to suggest that the warrants had been improperly obtained[49]. In
terms of the alleged infringement of the right to privacy and property, the court held that the
definition of privacy does not broaden to include the carrying on of business activities[50].
Furthermore, with regard to the alleged deprivation of property, the court emphasised that
the constitutional right prevents the arbitrary deprivation of property. The fact that the
granting of an application for a warrant requires a formal application supported by
information supplied under oath and the use of discretion by a judge disproved the view that
there was arbitrary deprivation of property involved[51]. The court’s decision clearly
illuminates the fact that fundamental rights are not always absolute especially regarding
matters of general applications. Where there is a prima facie case of noncompliance with tax
laws, the right to property that is connected to a tax debt or liability becomes limited[52]. In
consequence a defence of arbitrary deprivation of property cannot be sustained in court.
3.2 Suspected case of tax immorality and impeachable dispositions: Nedbank v. Pestana
2009 (2) SA 189 (SCA)
The case is an appeal which arises from a series of transactions, all taking place on 4
February 2004, involving the appellant’s Carletonville branch of Nedbank[53]. For the
purpose of this article the facts of the case may be summarised as follows:
The plaintiff had been conducting a current account at the branch since 1969. A
namesake, one Joseph Michael Pestana, conducted a similar account at the same branch. On
4 February 2004, at a stage when Pestana’s account was in credit in an amount of R496,546,
40, Pestana (taxpayer) requested the branch to transfer an amount of R480,000 from his
account to that of the plaintiff. At 11:33 the branch carried out Pestana’s (taxpayer) Taxing
instruction and “transferred the amount of R480,000 to the plaintiff’s account from Pestana’s assessment
(taxpayer) account”. The said amount was credited to the plaintiff’s account and his bank
statement reflected a credit entry to that effect, with a corresponding debit to Pestana’s
account. The staff member, at the branch, who attended to the transfer of the money to the
plaintiff’s account, was oblivious of the fact that the bank’s head office in Rivonia had earlier
that day, at 08:44, received a telefaxed notice in terms of Section 99 of the Act from the
Randfontein office of the South African Revenue Service (SARS) in respect of Pestana’s 299
account[54]. In terms of the pre-printed notice, SARS informed the bank that Pestana was
indebted to it in an amount of some R340m; it appointed the bank as the agent for Pestana
and required the bank to make payments in respect of the amount due to SARS ‘as funds is
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available or became available till full settlement’. The covering letter accompanying the
instruction impressed upon the bank that it was intended for its “very very urgent
attention”. Later that day, and after it had already transferred the R480,000 to the plaintiff’s
account, the branch was notified by its head office of the bank’s appointment in terms of
Section 99 of the Act (now repealed). The branch thereupon “reversed the transfer to the
plaintiff’s account” and, still on the same day, paid an amount of R496,000 to SARS from
Pestana’s account. The bank did not request the authority of the plaintiff to reverse the
amount of R480,000 and no authority to do so was given by the plaintiff. Against this
background, the parties asked the court to determine the following question of law: Was the
bank and having regard to its appointment in terms of section 99 of the Act, entitled to
reverse the payment of R480,000 without authority from the plaintiff? It was agreed between
the parties that if the answer to this question was in the negative, the plaintiff would be
entitled to judgment as claimed[55].
The appeal court in agreement with the court a quo held that:
Section 99 (now repealed) did not freeze nor did it transfer or effect a cession of the funds in
Pestana’s account to SARS’. Therefore, it did not deprive Pestana of the R480 000 standing to the
credit of his account. In executing that command in the ordinary course of its business, the branch
clearly intended to pay on behalf of Pestana and to accept payment on behalf of the plaintiff[56].
The court concluded that from the facts the transaction could not be unilaterally reversed,
and therefore the appeal failed.
done and must be seen to be done[61]”. This, in turn must inspire public confidence in the
legal system[62]. With regard to Pestana, the fact of the matter is, where a person has a tax
debt and suddenly makes a transfer which frustrates the collection of tax; then it is only fair
to question the disposition of such property[63].
This is a position in the law of insolvency, where the disposition of property in an
attempt to prefer creditors or disturb their claims is interrogated[64][65]. Although there is
no indication that Pestana’s estate was under sequestration, his conduct could merely imply
that the disposition was meant to frustrate or prefer one creditor over the other. Hence, it
was necessary and important to question the authenticity of the transaction[66]. The
question should precisely be why Pestana (the transferor) never intended to settle his tax
debt but instead preferred to transfer the funds to his namesake[67]. For the law to be
become thoroughly developed it needs to be challenged where there are implicit defects.
Although, the Supreme Court of Appeal in this case was invited to only determine
whether the transaction could be unilaterally reversed, as this was the issue the litigants’
wanted settled, the court a quo had an opportunity to investigate the merit of the transaction
between the two Pestanas[68]. It goes without saying that the law should impose the
reverence of tax, and any conduct typifying tax immorality should be addressed urgently
and with utter intolerance[69]. The old maxim that states “hard cases make bad law” holds
true to the Pestana case. However, in our critique of the court’s decision we should also offer
respite. Perhaps in the court’s defence one can somewhat concur that due to litigants
presentation the court was confined to specific issues. The court, therefore, could not deviate
from those issues. In any event the court’s decision in this case should be respected as it
serves as authority with regard to matters comparable to Pestana. It is also important,
however, to propose suggestions that may aid deter the recurrence of similar conduct.
court ought to apply a lenient penalty with regard to cases of negligence[75]. Thus, the
weight of punishment must be measured thru the magnitude of fraud or malice on the part
of the defendant or accused. With available communication resources, it has become a duty
of all taxpayers to acquaint themselves with laws that affects them. Therefore, a defence of
ignorance of law in an acute case of tax evasion shall not avail one sanctuary (Snyman,
1994). Although, POCA as argued, is triggered by organised and intentional conduct, in
some cases, it can only be known in hindsight whether a crime was committed with intent or
negligence. That said, it seems appropriate to submit that POCA should be the first port of
call, despite the manner in which tax evasion is committed – this should be necessary where
ordinary laws appear to be impotent to provide adequate remedy. Thus, the court upon
review of the facts of the case can determine whether the offender acted with negligence or
intention, and thereafter sanction a just penalty.
The law of insolvency also comprises machinery which is envisioned to impede fraudulent
transactions. This article aims to discuss mechanisms intended to limit dispositions not made
for value and the common law principle of the actio Pauliana. On the one hand, the former is a
statutory provision under section 26 of Insolvency Act 24 of 1936. This provision empowers the
court to set aside a disposition of property not made for value[76]. The bona fides of the
transaction is irrelevant; the aim is to prevent the transferor from impoverishing his estate to
the detriment of creditors. The transaction will not be set aside only if the transaction
constitutes a quid pro quo exchange. The common law actio Pauliana, on the other hand, is
intended to inhibit transactions made for value and those not made for value. This common law
canon accordingly functions in a two dimension modus. Thus, where a transferor conspires
with the transferee to defraud others the transaction may be set aside if the value exchanged for
the property is far less than its market price. Consequently, actio Pauliana is focussed on any
transaction intended to defraud creditors of the insolvent estate[77], its provisions are in fact
broader in ambit.
These insolvency law machineries would prove valuable in cases akin to Pestana more
so if the estate of the taxpayer is insolvent. Nevertheless, these insolvency agencies if
properly fabricated and coded into relevant statutory could prove useful in curtailing any
fraudulent transaction whether the estate of the transferor is insolvent or not.
to fit the designs of the process are section 26 of the Insolvency Act 24 of 1936 and the
common law principle of actio Pauliana. Section 26 should be reconstructed to match the
proposed process; it should therefore be formulated to read as follows[82]:
Every disposition of property may be set aside by the court if such disposition was
made to commit a crime.
The property so disposed, formed part of the crime, or was instrumental in the
commission of the crime[83].
The disposition of the property concerned was made at any point before or after the
investigation was conducted regarding the crime or at any time before or after the
order of preservation of property was sought.
With the employment of such machinery, in suspicious dispositions, it cannot be said that
there would be arbitrary deprivation of property where the property is preserved pending
the final order. In terms of tax fraud, it is central that the transferor must have an
established tax debt[84]. In accordance with the law, before the property is transferred to
SARS, a transferee would be afforded the opportunity to defend against the preliminary and
final court order, due to the granting of the rule nisi. That means if there is a just cause for
the transfer then the transferee can defend against the order by furnishing evidence that
supports his or her case against the order. Failure to defend adequately against the order,
together with the NDPP proving a case of fraud should culminate in the transfer of the
property to the aggrieved party, as lawful owner thereof[85].
The actio Pauliana is the common law principle in which a disposition may be set aside
as being in fraudem creditorum[86]. The word “fraud” in this context does not convey its
criminal-law meaning, the test is simply whether the aim of the transaction was to give one
party an unfair advantage over others[87]. However, with regard to this suggestion fraud
should don its criminal meaning. This insolvency machinery, integrated into CPA or tax
law, would prove useful in foiling fraudulent transactions destined to defeat the law. For the
object of improving the prevailing law, it must be submitted that where a disposition is
made for little value (as a ploy to conceal the true motive of the transaction, a conduct
leading to a simulated transaction), it must be shown both that the transferor intended to
commit a fraud or a crime and that the recipient of the disposition knew of his intention and
was privy to it[88]. With regard to tax fraud, if it appears that the recipient was privy to the
fraud or crime and has facilitated the disposition or consumption of the asset, the recipient
could face criminal prosecution[89]. In the case of a gratuitous disposition it should be
enough to prove fraud on the part of the transferor alone as the bona fides or otherwise of the
recipient is irrelevant[90]. With regard to tax evasion the transferor must have craftily
transferred property to another with the intent to minimise his income. In assessing income
tax the property transfer would simply be reversed. Similarly, the transfer must be set aside Taxing
and transferred to SARS if the property disposed of was liable for tax debt. In this regard, assessment
the property must have been transferred to prevent the creditor (SARS) from claiming
possession thereof, consequently defrauding the creditor.
The actio Pauliana in terms of its application in insolvency law, if invoked entitles the
complainant to recover not only the asset disposed of, but also any benefit accruing from the
fraud. This should be a position to be adopted (in the context of this suggestion) in cases
where a disposition is made to defraud the SARS or another[91]. If the property is 303
subsequently used to acquire other assets, if the action against the defendant succeeds, such
acquired assets should be forfeited or confiscated for the benefit of the lawful owner thereof.
For the proposed procedures to pass the constitutional acid test[92], the requirements
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Pertaining tax law, it is important that the Receiver of Revenue must have a liquidated claim
against the transferor, because if the claim is not based on concrete evidence, then the court
is entitled to refuse to hear the matter. If the court were to entertain a claim which is not at
least established on concrete proof, then this could inconvenience the defendant[93], not to
mention the frustration of the administration of justice. Whether a claim is a liquidated
claim is a matter of fact and such evidence must be furnished by the Commissioner for the
Receiver of Revenue to a competent court. The transfer must have been made with the intent
to commit fraud and for no value, or the consideration given is trifling[94]. The transferee
must be unable to provide proof that vindicates the transfer. Proof that vindicates the
transfer could be that the transfer constitutes a valid business transaction and the
transaction was made quid pro quo. The transferee could also claim that the transferor was
a trustee and he or she (the transferee) was entitled to receive the benefit in terms of any
agreement or any law which has got nothing to do with the trustee’s estate[95]. It should not
come to the aid of the defendant to claim that the targeted property is from a different source
and thus not exactly property liable for tax[96]. Whether a defence is a valid defence is a
matter of fact and every case should be judged on its own merits.
appointee to collect property to satisfy a tax debt, the property may be seized or frozen,
and the transferee will be invited to show cause why the property should not be realised
on behalf of or transferred to SARS. What is more, the disposition of property will be of
no effect since SARS is also now competent to seize property before the finalisation of
the preservation order. In any event, the transferee could be liable for the transferor’s
tax debt, if the asset was transferred without consideration or for consideration
below the fair market value of the asset[105]. Where the transferee assists in dissipating
a taxpayer’s assets in order to obstruct the collection of tax, the transferee would be
jointly and severally liable with the taxpayer for the tax debt to the degree that the
transferee is involved in reduction of the value of the assets available to pay the
taxpayer’s tax debt[106]. This machinery without doubt is destined to target cases akin
to Pestana and would prove effective in curbing similar tax mischief. Thus, when the
courts administer cases of disposition of property that is subject to tax debt, the courts
are summoned to scrutinise the legitimacy of the transfer. It is quite overt that these
provisions buttress the notion that the courts are invited to probe impeachable
dispositions of property subject to tax debt similar to cases of tax evasion and
impermissible tax avoidance.
The only limitation is that of the issue of the ill-gotten gains of tax fraud is not addressed
in the current statute. This lacuna can be sealed thru the incorporation of the insolvency
principle of actio Pauliana to the present mechanism. This would comprise the forfeiture of
any benefits gained from the property involved in tax fraud after the disposition of the same.
So when the property has been preserved under the preservation of property order, actio
Pauliana under CPA or tax law statute should be invoked to forfeit any benefit derived from
the fraud. This means that the court would have to determine the extent of the fraud and
forfeit any benefit derived therefrom.
In addition, the suggested solution will prove a potent remedy for fraud committed in the
banking sector which does not involve tax. With the adoption of the proposed tenets,
the problem pointed out by Schulze where he laments the decision of court to proscribe the
reversal of transactions that appear to be executed mainly for fraud[107], will equally be
addresses. In situations where fraudulent bank transactions are effected, then POCA should
be relied upon as the first port of call. Thus, it is important to extend the machinery of POCA
and insolvency to CPA to halt transactions meant to defraud others. It would therefore not
be necessary as Schulze suggests that the bank should reserve finalised transaction without
applicable authority, in that POCA principles would serve a purpose of preserving the
property concerned pending the prayer for restitution, forfeiture or confiscation order. It
ought to be kept in mind that the preservation order, in fact, targets and follows the trails of
property not the person in possession of the property[108]. It, therefore, matters not how
many times the property is transferred from one person to another; so long as it can be
traced it should be placed under the preservation order, thereafter the codified actio Pauliana Taxing
should be entreated. assessment
All the same, the procedures adopted by the legislature will surely enhance the collection
of tax and will have a significant impact in lessening tax fraud. As the then Minister of
Finance, Mr Trevor Manuel stated[109]:
SARS is committed to improving tax administration and nurturing a climate of voluntary
compliance with the objective of broadening the tax base so as to reduce the tax burden on all our 305
citizens[110].
These developments certainly aid the curbing of the transfer of property envisioned to skirt
tax, and delivers credence to the former Minister of Finance Mr Trevor Manuel assertions.
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6. Conclusion
The decision of the court in Pestana (supra) should be sustained for its viewpoint on the
conservancy of the mandate rule in banking law. But whether the decision should be
supported holistically is a matter that sparked a vigorous debate. The court has decided that
tax law should not be advanced at the peril of banking law. Thus the underpinning banking
law procedure has to be maintained[111]. However, the article has indicated that that should
not be how the story ends.
The article has provided mechanisms which could effectively deal with bank fraud
outside of the tax canons. Moreover, the article has provided an account of how the
amendment of tax laws has remedied the predicaments observed in Pestana case. In the
light that the banking rules cannot be adjusted since reversal of the transaction is
proscribed, the preservation order embargos further transfer of the property pending the
finalisation of the confiscation or forfeiture order. The property, will therefore, be
transferred to SARS only where it is established on the balance of probabilities that SARS is
entitled to it. This should mean that the possessor of the property should fail to provide an
acceptable reason why the confiscation order should not be made final[112].
Tax immorality can be likened to an inherent lingering ailment. It is an ill which could
flourish into a pandemic if left without a remedy. Hence, it was judicious of the legislature to
formulate a cure. The provisions of the Tax Administration Act will surely foil a possible
spiral and a potential chronic plague[113].
The adopted tax procedure certainly meets the constitutional muster, in that the
taxpayer will not be deprived of his or her property arbitrarily[114].
Notes
1. This is done by either, the sanctioning of criminal proceedings, or/and imposition of penalties;
see s 235 of the Tax Administration Act 28 of 2011.
2. Especially if arranged to fall outside of the ambit of the common law and the General anti-
Avoidance Rules (GAAR), that is section 80A-80L of the Income Tax Act 58 of 1962. If the
arrangement falls outside of what is permissible, penalties would be imposed on the delinquent
taxpayer; see s 223 of the Tax Administration Act 28 of 2011.
3. Where there is no dispute regarding the amount of tax debt, and there is no settlement
arrangement entered into that justifies postponement, the taxpayer must not deceptively dispose
property which is a subject of tax; see ss 162, 167, 169 and 143-150 of the Tax administration Act
28 of 2011.
4. S 201 of the Tax administration Act 28 of 2011and s 80A of the Income Tax Act 58 of 1962; deals
with the issue of impermissible tax avoidance.
JFC 5. The word tax immorality is meant to embody a conduct that is against the spirit of the tax laws
26,1 or is non-compliant with tax laws. Tax immorality would include tax evasion, impermissible tax
avoidance and tax fraud.
6. It will however be fraudulent to remove property that is subject of a comprehensive tax debt
away from the grasp of SARS if SARS intends to collect.
7. S 162 of the Tax Administration Act 28 of 2011. In cases where SARS sent relevant
306 correspondence notifying the party of the outstanding tax debt and a party fails to respond
timely, and as such the deadline for payment becomes exceeded.
8. See chapter 11 of the Tax administration Act 28 of 2011.
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9. 2009 (2) SA 189 (SCA). To understand the merits of the arguments that will be advanced in this
article it is advisable to first read the Nedbank v. Pestana case. A summary of this case is
provided below at subheading 3 2.
10. See Schulze WG “Electronic fund transfers and the bank’s right to reverse a credit transfer: one
small step for Banking Law, one huge leap for banks” 2007 (19) SA Mercantile Law Journal 379-
387; Schulze WG “Electronic fund transfers and the bank’s right to reverse a credit transfer: one
big step (backwards) for Banking law, one huge leap (forward) for potential fraud: Pestana v.
Nedbank (Act One, Scene Two)” (2008) 20 SA Mercantile Law Journal 290-297 and Schulze WG
“A final curtain call, but perhaps not the last word on the reversal of credit Transfers: Nedbank
Ltd v. Pestana” 2009 (21) SA Mercantile Law Journal 396-404.
11. Schulze WG “Electronic fund transfers and the bank’s right to reverse a credit transfer: one big
step (backwards) for Banking law, one huge leap (forward) for potential fraud: Pestana v.
Nedbank (Act One, Scene Two)” (2008) 20 SA Mercantile Law Journal 290 297.
12. The numerous amendments of income tax and estate duty (to name a few) will confirm this fact.
13. 2000 (2) SA 106 (E). See subheading 31 below for the facts of the case.
14. Ss 200 and 201 of the Tax administration Act 28 of 2011 and de Koker PA & Williams RC (2013).
I use the 2013 version of de Koker & Williams because this version was not affected by the
prevailing statute, and was a leading textbook at that time.
15. See s 80A of the Income Tax Act 58 of 1962; where impermissible tax avoidance conduct is
provided, thus an arrangement which falls outside these provisions will be permissible. Provided
also that the transaction does not fall under the scope of the common law, see note 30 and 31.
16. IRC v. Duke of Westminster (1936) AC 1 19; CIR v. DG Smith 60 SATC 397 402-3 and CIR v.
Estate Kohler 18 SATC 354 361-2.
17. This should be classified as de minimis, which in a true sense should result in permissible
avoidance. Similarly SARS should also not pursue the recovery of insignificant tax debt; see s 196
(2)(a) of the Tax administration Act 28 of 2011. In principle, SARS should not recover taxes
outstanding that are less than a certain amount. However, in practice, SARS goes on a witch-hunt
for very small amounts.
18. Ss 234(d), (e) and (j) of the Tax administration Act 28 of 2011.
19. This may transpire as a result of failure by the taxpayer to acquaint him/herself with law
amendments.
20. See Commissioner of Customs and Excise v. Randles Brothers & Hudson Ltd 33 SATC 48.
21. See Roshcon (Pty) Ltd v. Anchor Auto Body Builders CC and Others 2014 (4) SA 319 (SCA) para 37:
“the courts of law examines the transaction as a whole, including all surrounding circumstances,
any unusual features of the transaction and the manner in which the parties intend to implement it,
before determining in any particular case whether a transaction is simulated”.
22. See s 80A of the Income Tax Act 58 of 1962. Taxing
assessment
23. ITC 1762 (66) SATC 41; where the court found that the purchase price of a business was not
genuine and immutable.
24. Zandberg v. Van Zyl (1910 AD 302 309.
25. For what the term “misuse and abuse” entails see van Schalkwyk L and Geldenhys B “Section
80A(c)(ii) of the Income Tax Act and the interpretation of tax statutes in South Africa” 2009 (17) 307
Meditari Accountancy Research 167-185; further see Kujinga BT (2012), for a comparative study.
26. According to s 80(c)(2) of the Income Tax Act 58 of 1962; a transaction that lacks commercial
substance is a transaction that, inter alia, (i) a situations exist where the legal substance of a
transaction differs from the legal form, (ii) where a round trip financing is present, (iii) a tax-
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indifferent party is introduced as part of the arrangement (iv) the transaction involves elements
that have the effect of offsetting or cancelling each other.
27. Relier (Pty) Ltd v. CIR [1998] 1 All SA 183 (A) and CSARS v. NWK Ltd 2011 (2) SA 67 (SCA):
paras 42, 43 and 44. In terms of the common law for the transaction not to be set aside it must be
genuine and not simulated.
28. CSARS v. Bosch 75 SATC 1: para 40. See also n 21, 29 and 30.
29. Dadoo Ltd v. Krugersdorp Municipal Council 1920 AD 530: 547; where Innes CJ said the
following: “A transaction is in fraudem legis when it is designedly disguised so as to escape the
provisions of the law, but falls in truth within these provisions. Thus stated, the rule is merely
a branch of the fundamental doctrine that the law regards the substance rather than the form of
things – a doctrine common, one would think, to every system of jurisprudence [. . .].”
30. Commissioner of Customs and Excise v. Randles Brothers & Hudson Ltd 33 SATC 48 66-67.
31. Sections 80A through to 80L contain the provisions of the General Anti Avoidance Rule (GAAR)
of the South African income tax. These provisions regulate what is to be regarded as
impermissible tax avoidance arrangements; this statute forms part of the Income Tax Act 58 of
1962.
32. ITC 1618 (1996) 59 SATC 290 297-298.
33. Schemes that may prima facie seem lawful but are in actual fact intended to unlawfully avoid tax
often prompts the legislature to amend tax laws to prevent future tax immorality. See s 80A-80L
of the Income Tax Act 58 of 1962 and s 35 of the Tax Administration Act 28 of 2011.
34. Broomberg EB “Then and now-II” 2006 (21) Tax Planning Corporate and Personal (online
version).
35. Income ss 80B(1)(a)-(e) of the Tax Act 58 of 1962 and s 223 of the Tax Administration Act 28 of
2011.
36. See s 80J of the Income Tax Act 58 of 1962 and chapter 8 of the Tax Administration Act 28 of
2011.
37. Ss 43, 235 and chapter 8of the Tax Administration Act 28 of 2011. Sentencing should not exceed
five years.
38. S 234 of the Tax Administration Act 28 of 2011. The sentence however should not exceed two
years.
39. This conduct would fall outside the conduct which tax laws regard to tax evasion or
impermissible avoidance; see s 235 of the Tax Administration Act 28 of 2011 and s 80A of the
Income Tax Act 58 of 1962.
40. Ss 145(a)(i); s 234(n) and (o) of the Tax Administration Act 28 of 2011.
JFC 41. This rule was authority under Income s 99 of the Tax Act 58 of 1962 and also under s 47 of the
26,1 Value-Added Tax Act 89 of 1991. The prevailing authority is now found under s179 of the Tax
Administration Act 28 of 2011. S 99 of the Income Tax Act: states that [t]he Commissioner may, if
he thinks necessary, declare any person to be the agent of any other person, and the person so
declared an agent shall be the agent for the purposes of this Act and may be required to make
payment of any tax, interest or penalty due from any moneys, including pensions, salary, wages
or any other remuneration, which may be held by him or due by him to the person whose agent
308 he has been declared to be.
42. See Stanfield v. C: SARS 64 SATC 189 also reported 2002 (1) SA 726 (C): The dispute between the
parties involved the interpretation of a special court order made in relation to the Prevention of
Organised Crime Act (POCA), where members of the South African Police Service confiscated
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money from the taxpayer’s house in a case where both SAPS and Standard Bank were appointed
as the Commissioner’s agents for the purposes of collecting those amounts.
43. 52 SATC 330.
44. Matanzima v. Minister of Welfare and Pensions 52 SATC 330 335.
45. See the Preamble of the Prevention of Organised Crime Act 121 of 1998. See further note 73 infra.
46. 2000 (2) SA 106 (E).
47. See ss 59-66 of the Tax Administration Act 28 of 2011 for new procedures for search and seizure.
48. Deutschmann NO v. Commissioner for South African Revenue Services, 2000 (2) SA 106
(E) 112-113.
49. Deutschmann NO v. Commissioner for South African Revenue Services, 2000 (2) SA 106 (E) 115-
123
50. Deutschmann NO v. Commissioner for South African Revenue Services, 2000 (2) SA 106 (E) 123
51. Deutschmann NO v. Commissioner for South African Revenue Services, 2000 (2) SA 106 (E) 124.
52. Park-Ross v. Director: Office for Serious Economic Offences 1995 (2) SA 148 (C) and Metcash
Trading Ltd v. Commissioner for the SA Revenue Services 2000 (3) BCLR 318 (W).
53. Nedbank v. Pestana 2009 (2) SA 189 (SCA) 191.
54. See note 41 for the provision of section 99. In the case of Pestana Nedbank was appointed as an
agent to collect tax on behalf of SARS’s.
55. Nedbank v. Pestana 2009 (2) SA 189 (SCA) 191-192.
56. Nedbank v. Pestana 2009 (2) SA 189 (SCA) 195-196.
57. See heading 2. What tax immorality entails and how it should dealt with above.
58. The fact that the court should remain neutral and not unreasonably enter the fray should be
taken into consideration. The questioning should, however, not mean that the court has entered
the fray or is introducing new evidence, as the matter involves the initial transfer and subsequent
reversal thereof. Even though the South African procedural system is adversarial in nature, the
court is however competent to raise issues by questioning witness or testing legal arguments of
counsel.
59. See Schwikkard S.E & Van der Merwe P.J (2008). It is correct to say that the court should not
involve itself in counsels’ arguments, however, this does not mean it should not be involved at all;
see note 58 above.
60. Nedbank v. Pestana 2009 (2) SA 189 (SCA) 194-5.
61. Suseex Justice (1924) 1 KB 256 259.
62. S v. Marx 1989 (1) SA 222 (A) 225 and S v. Sallem 1987 (4) SA 772 (A). Taxing
assessment
63. See Schulze WG Electronic fund transfers and the bank’s right to reverse a credit transfer: one
big step (backwards) for Banking law, one huge leap (forward) for potential fraud: Pestana v.
Nedbank (Act One, Scene Two). 2008 (20) SA Mercantile Law Journal 290; Here the author
questions the reason for the sudden transfer of funds which frustrates the income tax rule. He
suggests that if such conduct is not kept in check, then this could be an opening for fraudulent
transactions. 309
64. S 2 of the Insolvency Act 24 of 1936; defines disposition as “any transfer or abandonment of
rights to property, and includes a sale, lease, mortgage, pledge, delivery, payment, release,
compromise, donation, or any contract therefor, but does not include a disposition in compliance
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Consequently one should not be allowed to fashion a defence on the fact that the funds are not
liable to tax because they are derived from a source that is not taxable, for example dividends;
also see note 96. If it is clear that the defendant has an outstanding tax liability, the funds should
be frozen. This implies that the funds should be frozen even in the transferee’s bank account;
thereafter the onus rests with the transferee or transferor to furnish evidence that vindicates the
transfer.
84. If the person, whether knowingly or not, was supposed to have paid tax in the presiding year and
did not, tax will automatically be due. With regard to this situation SARS will then have to
determine whether the owed amount is immediately due and payable. See note 3 above.
85. The National Director of Public Prosecution should act as a trustee for the South African
Receiver of Revenue or any victim of fraud and as such fulfilling the role provided in Prevention
of Organised Crime Act.
86. Although the transferor may not be insolvent, it is however important to note that the Receiver-
of-Revenue is a creditor if indeed the transferor owed tax. The use of actio Pauliana is intended to
grant SARS an opportunity to claim funds by way of a legal suit. The goal of implementing the
actio Pauliana in cases of tax evasion or fraud is to supplement the employment of Prevention of
Organised Crime Act or any relevant tax law in situations where a transfer is primarily intended
to frustrate the collecting of tax.
87. Beddy NO v. Van der Westhuizen 1999 (3) SA 913 (SCA) 916.
88. Hockey NO v. Rixom and Smith 1939 SR 107 118.
89. S 234(O) of the Tax Administration Act 28 of 2011.
90. Kommissaris van Binnelandse Inkomste v. Willers1999 (3) SA 19 (SCA) 28-29.
91. Interest, dividends or any profit which accrues from the disposition should be forfeited or
confiscated as well.
92. S 25 of the Constitution of South Africa, 1996 provides that no one should be arbitrarily deprived of
property. Deprivation would generally be arbitrarily if it is procedurally unfair and serves no
governmental or community need. In other words, the deprivation would advance no legal course.
The court in Mkontwana v. Nelson Mandela Metropolitan Municipality 2005 (2) BCLR 150 (CC)
para 32:
Whether there has been a deprivation depends on the extent of the interference with or limitation
of use, enjoyment or exploitation. It is necessary in this case to determine precisely what
constitutes deprivation. No more need be said than that at the very least, substantial interference
or limitation that goes the normal restrictions on property use or enjoyment found in an open and
democratic society would amount to deprivation.
93. Obviously the defendant will have to leave whatever he was engaged in to defend against the
claim in court.
94. The meaning of fraud should be understood within the connotation of the action Pauliana. Taxing
This means that the disposition must have been made for no value (that is, titulo lucrative) assessment
and if the disposition was made for value (that is, titulo oneroso), such value must not justify
the transfer. This should mean that under normal business transaction the transfer would
seem suspicious or seem like a donation. Furthermore prima facie evidence should suggest
that the transaction is not based on the market value, where the willing buyer and the willing
seller concept should be satisfied. However, this excludes instances where reasonable
discount is given. 311
95. Millman NO & Stein NO v. Kamfer 1993 (1) SA 305 (C).
96. Itzikowitz AJ “Financial institutions and the stock exchange” 1998 Annual Survey of South
African Law 512 513, stated the following: ‘As pointed out in the opinion (Opinion for Standard
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Bank 1998) the obligation to pay tax attaches to the taxpayer and not to the revenue on which the
tax is payable. The taxpayer is not obliged to pay tax from the revenue on which he or she has
been assessed; it can be paid from any source. It cannot therefore be argued that had the taxpayer
not committed the tax evasion, the money in his or her account would have been less and that the
money is a benefit derived or retained as a result of an unlawful activity. The benefit which one
would undoubtedly have retained from the tax evasion is not the money in the account but the
enhancement of one’s overall financial position.’
97. S 163(1) of the Tax Administration Act. See also CSARS v. Krok [2014] 2 All SA 66 (GP) and
Krok v. CSARS 2015 (6) SA 317 (SCA).
98. This would be done where the removal or consumption may frustrate the collection of the full
amount of tax due.
99. S 163(2)(a) of the Tax Administration Act. See further CSARS v. Van der Merwe 76
SATC 138.
100. S 163(2)(a) of the Tax Administration Act.
101. S 163(4)(b) of the Tax Administration Act. See also CSARS v. eTradex (Pty) Ltd 2015 (3) SA 596
(WCC).
102. S 163(9) of the Tax Administration Act.
103. Ss 156 and 179 of the Tax Administration Act.
104. S 163 of the Tax Administration Act.
105. S 182 of the Tax Administration Act. Contrast this section with the common law provision of
actio Pauliana, see note 94 and 96 above.
106. S 183 of the Tax Administration Act.
107. See note 10 above.
108. S 38 (1) of the Prevention of Organised Crime Act No 121 of 1998: The National Director may by
way of an ex parte application apply to a High Court for an order prohibiting any person, subject
to such conditions and exceptions as may be specified in the order, from dealing in any manner
with any property (emphasis added).
109. When he reigned in office.
110. Budget Speech delivered on February 21st of 2001.
111. See Nedbank v. Pestana 2009 (2) SA 189 (SCA) 195-6.
112. The word possessor in this regard means the person who a financial institution holds the funds
on behalf of. In this regard it would be the transferee since the issue will concern the legitimacy
of the transfer.
JFC 113. The perpetuation of such criminal conduct is possible since syndicates could operate with
26,1 personnel employed by financial institutions and in some instances these personnel could
inform offenders to transfer funds which were subject to seizure in terms of s 179 of the Tax
Administration Act to other accounts prior to the completion of seizure as was witnessed in the
Pestana case. These tax provisions have certainly limited a possible trend.
114. See s 25 of the Constitution of South Africa 1996.
312
References
de Koker, P.A. and Williams R.C. (Eds) (2013), Silke on South African Income Tax, chapter 19, available
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Corresponding author
Paul Nkoane can be contacted at: p.nkoane@yahoo.com
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