ICR Utility Management Proprietary Ltd and Another v Headbush and Others (1213/2020) [2021] ZAECPEHC 31 (25 May 2021)

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[2021] ZAECPEHC 31
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ICR Utility Management Proprietary Ltd and Another v Headbush and Others (1213/2020) [2021] ZAECPEHC 31 (25 May 2021)

OF
INTEREST
IN
THE HIGH COURT OF SOUTH AFRICA
(EASTERN
CAPE LOCAL DIVISION, PORT ELIZABETH)
Case No:1213/2020
In
the matter between:
ICR
UTILITY MANAGEMENT PROPRIETARY LIMITED
First Applicant
KOENA
ESTATES PROPRIETARY LIMITED
Second
Applicant
and
MATULE
PATIENCE HEADBUSH
First
Respondent
THOMAS
FRANK LAWRENCE N.O.
Second Respondent
ALEXANDER
SELLO HEADBUSH N.O.
Third Respondent
MATULE
PATIENCE HEADBUSH N.O.
Fourth Respondent
JOHN
ROSS THANDO KEENA HEADBUSH N.O.
Fifth Respondent
LAWRENCE
MASIZA VOSTER INC.
Sixth Respondent
SOUTH
AFRICAN REVENUE SERVICES
Seventh Respondent
JUDGMENT
Govindjee
AJ:
Background
[1]
This
is an application for declaratory and interdictory relief, compelling
the payment of tax to the South African Revenue Service
(‘SARS’).
[1]
[2]
The applicants’ practice note frames the dispute as follows:
‘…
the
matter is not a tax dispute, but it is a dispute between the
Applicants who had a duty to withhold the (dividend) tax, and the
First Respondent and the trust (represented by the Second to Fifth
Respondents) who are liable for the tax, as to what methodology
is to
be followed in order for the taxes to be paid to SARS.’
According
to the applicants’ founding affidavit, ‘The foundation of this
application, and the right which the Applicants have
in order to
request this relief…flow from the provisions of the tax
legislation, more in particular the liability which the income
tax
legislation imposes upon the First Respondent and the trust to pay
the taxes herein mentioned.’
[2]
This
affidavit goes on to add:
‘
In this instance,
the tax obligation was not as evidently clear as that of employees’
tax which is a very well known feature in
ordinary day business
dealings, but the point remains that the parties ultimately liable in
law for the taxes are the First Respondent
and the trust.’
[3]
There
is agreement that the matter concerns dividends tax.
[3]
On the first to sixth respondents’ version (referred to, for
convenience, as ‘the respondents’), the application does not
concern
the question of the liability of dividends tax but rather the
question of who, in terms of the Sale of Shares agreement (‘the
agreement’)
is liable to pay that tax. From that perspective, the
issue is whether the agreement amended,
inter
partes
,
the liability for the actual payment of the dividends tax to SARS.
The respondents frame the question as one directly related to
the
interpretation of the terms of the agreement, and thus requiring
arbitration in terms of the provisions of that agreement.
[4]
The agreement was entered into during November 2018. The applicants
purchased back some of their own shares from the first respondent and
the Sello Headbush Vula Trust (‘the Trust’), represented
by the
second to fifth respondents, in their capacity as trustees). The
purchase price of R7,2 million was paid into the trust account
of the
sixth respondent during December 2018.
[5]
Clause 4.4.3 of the agreement reads as follows:
‘
All payments to
be made to the Sellers in terms of this Agreement shall be made in
cash or electronic bank transfer, without any deduction
and free of
any deductions, bank exchange or set off and into the bank account
nominated by the Sellers in clause 4.4.2 above.’
[6]
In terms of clause 4.5
‘
Tax:
4.5.1  Each of
the Parties shall be liable for and make payment of all taxes levied
on each of them respectively, in respect
of this Agreement and the
contemplated transactions, as and when same falls due, subject to the
provisions of clause 4.5.2 below.
[7]
The closing of the transactions was regulated by Clause 5, read
in
conjunction with annexure ‘B’ to the agreement, providing for
signature, retention of documentation and exchange of the documents
of title provided the purchase price was paid.
[8]
During
February 2019, the auditors of the applicant, subsequent to the
implementation of the agreement, made enquiries regarding the
payment
of dividends tax to SARS as a result of the implementation of the
transaction. The applicants’ understanding of the dividends
tax
position is as follows:
[4]
·
The agreement provides that each party is liable for all taxes levied
on each of them;
·
As the transaction was a share buyback from retained income, payment
by the two companies of the
purchase prices to the first respondent
and the Trust are regarded as dividend payments, so that dividends
tax was applicable to
the transaction;
·
In
terms of the
Tax
Administration Act, 2011
,
[5]
the applicants were to withhold the dividends tax, but did not do so
because they were contractually obliged to make payment of the
full
purchase price into the trust account of the sixth respondent, which
they did.
·
This portion of the money paid to the sixth respondent remained the
property of the applicants and
the sixth respondent had no authority
to release the funds of the applicants, without the applicants’
prior instructions and permissions.
[9]
The
application appears to be motivated by the concern that SARS ‘…may
accuse the Applicants, and may even endeavour to hold the
Applicants
liable, on the basis that the Applicants did not subtract from the
amounts paid to the First Respondent and the trust,
the tax
component.’ The applicants contend that it is the first respondent
and the Trust that is ultimately liable in law for the
dividends
tax.
[6]
They seek to be placed
in the position they would have been in had they subtracted the
dividends tax prior to the closing of the
transaction.
The
legal position
[10]
A
survey of the applicable statutes suggests that both the applicants
and respondents could be responsible for the payment of the
dividends
tax. Section 64EA
(a)
of the
Income
Tax Act, 1962
[7]
clearly places the liability for dividends tax in the hands of a
‘beneficial owner’ of a dividend. It provides that ‘Any
beneficial
owner of a dividends tax, to the extent that the dividend
does not consist of a distribution of an asset
in
specie
,
is liable for the dividends tax in respect of that dividend.’
‘Beneficial owner’ is defined as ‘the person entitled to the
benefit of the dividend attaching to a share’,
[8]
suggesting that the first respondent and the Trust are liable for
payment of the dividend taxes to SARS. Section 64K goes on to add
that if, in terms of section 64EA
(a)
,
a beneficial owner is liable for any amount of dividends tax in
respect of a dividend, that beneficial owner must pay that amount
to
the Commissioner by the last day of the month during which that
dividend is paid by the company that declared the dividend,
unless
the tax has been paid by any other person.
[11]
Section
64G(1) provides, however, that a company that declares and pays a
dividend must withhold an amount of dividends tax from that
payment
calculated as contemplated in section 64E (except to the extent that
the dividend consists of a distribution of an asset
in
specie
).
In terms of
section 157(1)
(b)
of the
Tax
Administration Act, 2011
,
a ‘withholding agent’ is personally liable for an amount of tax
which should have been withheld under a tax Act but was not
so
withheld. That Act goes on to state that ‘an amount paid or
recovered from a withholding agent in terms of subsection (1) is
an
amount of tax which is paid on behalf of the relevant taxpayer in
respect of his or her liability under the relevant tax Act’.
[9]
A ‘withholding agent’ is defined to mean a person who must
withhold an amount of tax and pay it to SARS under a tax Act.
[10]
[12]
The
agreement aside, the position, in sum, appears to be that the
applicants are considered to be withholding agents, having declared
and paid a dividend as part of the buyback.
[11]
They should have ordinarily withheld dividends tax from the payment
made to the first respondent and the Trust.
[12]
By failing to do so, they became personally liable for an amount of
tax which should have been withheld but was not so withheld.
This
opens the door to SARS recovering that amount of tax from the
applicants, which is ultimately the motivation for this application.
Importantly, any amount paid by the applicants to SARS, or that SARS
recovers from the applicants, should it choose to do so, would
seemingly be paid ‘on behalf of the relevant taxpayer in respect of
his or her liability under the relevant tax Act’.
[13]
As beneficial owner of a dividend, it is the first respondent and
Trust that is responsible for dividends tax.
[14]
Recovery from the applicants, or payment made voluntarily by the
applicants to SARS, would be recovery or payment on behalf of the
first respondent and the Trust.
[13]
Is this position altered by the agreement? The applicants were
obliged, in terms of
clause 4.4.3, to make all payments without any
deduction and free of any deductions. As far as tax was concerned, to
repeat, clause
4.5.1 provides that ‘each of the Parties shall be
liable for and make payment of all taxes levied on each of them
respectively,
in respect of this Agreement and the contemplated
transactions, as and when same falls due…’
[14]
Read together with the applicable legislative provisions, the
intention appears to
have been for the first respondent and the Trust
to make payment of the dividends tax (because the applicants were
contractually
obliged to make payment
sans
any deduction).
That liability and payment would, in terms of the agreement, arise
once the tax had been levied. In all probability,
this must relate to
the imposition of an amount of tax on the part of SARS, which has not
occurred to date.
[15]
But this
prima facie
reading of the applicable legislation and
the agreement is not the end of the matter. The parties specifically
agreed to private
arbitration ‘should a dispute occur…in regard
to any matter arising out of this Agreement or its interpretation or
their respective
rights and obligations under this Agreement…’
[16]
As
tempting as it may be to express a firm view on the matters raised,
and to seek to clarify the legal position to bring the matter
to
finality, the question is whether a dispute has now occurred between
the parties in regard to a matter(s) arising out of the agreement
or
its interpretation. That appears to me to be the case. At the very
least, there is a live dispute between the parties pertaining
to
their respective rights and obligations: the applicants should have
withheld the dividends tax but failed to do so, making them
personally liable to pay the tax on behalf of the first respondent
and the Trust, who should themselves have paid the tax to the
Commissioner by the last day of the month during which that dividend
was paid. Notwithstanding this, the agreement seeks to postpone
liability and payment until taxes are levied or imposed. Should the
applicants simply pay the dividends tax that should have been
withheld on behalf of the first respondent and the Trust, in terms of
section 157(2)
of the
Tax
Administration Act, 2011
,
and then institute an action for the recovery of that amount? Should
the first respondent and the trust immediately pay the dividends
tax
to SARS, despite the applicants’ breach of their obligation to have
withheld the dividends tax, because they are the beneficial
owners of
the dividend? Is there any merit in waiting for SARS to actually levy
the tax on either of the parties given the circumstances?
These are
unquestionably disputes that emanate from the way in which the
agreement was constructed, and its apparent failure to deal
with the
issue of dividends tax in accordance with legislative prescripts. I
am satisfied that the disputes ventilated are fully
covered by the
arbitration clause, and that there is no real risk of an arbitrator
ruling otherwise. The parties are, in terms of
clause 10 of the
agreement, obliged to refer such issues to arbitration.
[15]
[17]
The applicants have failed to make out a case for the relief claimed.
Their application
is dismissed with costs.
A.
GOVINDJEE
ACTING
JUDGE OF THE HIGH COURT
Appearances:
Obo
the Applicants:
Adv M.P van der Merwe SC
Instructed
by:
Jarvis Jacobs Raubenheimer Inc c/o  Van Heerden Attorneys, 7
Bird Street, Central, Port Elizabeth
Obo
the 1
st
to 6
th
Respondents:
Adv B.C Dyke SC
Instructed
by:
Lawrence Masiza Voster Inc., 214 Cape Road, Mill Park, Port Elizabeth
Heard:
20 May 2021
Delivered:
25 May 2021
[1]
SARS is the Seventh Respondent and apparently abides the outcome of
the application, having failed to file any papers in the matter.
[2]
Para 8.
[3]
Section 1 of the
Income
Tax Act, 1962
(Act 58 of 1962) defines ‘dividend’ to mean any amount
distributed by a company to its shareholders, and the expression
‘amount
distributed’
inter
alia
includes any reduction of the profits of a company as a result of
the acquisition, cancellation or redemption of shares issued
by that
company.
[4]
Paragraph 7.2. of the founding affidavit.
[5]
Act 28 of 2011.
[6]
Par 16 of the applicants’ heads of argument.
[7]
Act 58 of 1962.
[8]
Section 64D of the Income Tax Act, 1962.
[9]
Section 157(2)
of the
Tax Administration Act, 2011
.
[10]
Section 156
of the
Tax Administration Act, 2011
.
[11]
Section 156
of the
Tax Administration Act, 2011
.
[12]
Section 64G(1) of the Income Tax Act, 1962.
[13]
Section 157(2)
of the
Tax Administration Act, 2011
.
[14]
Section 64EA
(a)
of the Income Tax Act, 1962.
[15]
It might be added that clause 2.9 of the agreement confirms that
‘the expiration or termination of the Agreement shall not affect
such of the provisions of this Agreement as expressly provided that
they will operate after any such expiration or termination
or which
of necessity must continue to have effect after such expiration or
termination, notwithstanding that the clauses themselves
do not
expressly provide for this’.