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[2018] ZASCA 128
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Commissioner for the South African Revenue Service v Pieters and Others (1026/17) [2018] ZASCA 128; 2020 (1) SA 22 (SCA); 82 SATC 12 (27 September 2018)
THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Reportable
Case
no: 1026/17
In
the matter between:
THE COMMISSIONER FOR
THE SOUTH AFRICAN
REVENUE
SERVICE
APPELLANT
and
RYNETTE
PIETERS
FIRST
RESPONDENT
GEORGE DA SILVA
RAMALHO
SECOND
RESPONDENT
EZECHIEL ALBERT
BEDDY
THIRD
RESPONDENT
Neutral
citation:
Commissioner,
South African Revenue Service v Pieters and others
(1026/17)
[2018] ZASCA 128
(27 September 2018)
Coram:
Navsa,
Tshiqi, Majiedt, Willis and Swain JJA
Heard:
10 September 2018
Delivered:
27 September 2018
Summary:
Income Tax – employees’ tax (PAYE) –
contracts of employees terminated in terms of s 38(9)(
b
)
of
Insolvency Act 24 of 1936
– awards to employees not subject
to PAYE in terms of paragraph 2(1)(
a
)
of Fourth Schedule to the Income Tax Act 58 of 1962.
ORDER
On
appeal from
:
Western Cape Division of the High
Court, Cape Town (Pillay AJ sitting as court of first instance):
The appeal is dismissed
with costs, including the costs of two counsel.
JUDGMENT
Majiedt
JA (Navsa, Tshiqi, Willis and Swain JJA concurring):
[1]
Prior to its demise, Slabbert Burger Transport (Pty) Ltd (the
company) was a large transport business with its main place of
business in Wellington in the Western Cape. The company was finally
wound up in the Cape Town high court on 8 February 2013. The
company’s shareholders initially resolved that it be wound up
by way of a creditors’ voluntary winding-up. The resolution
was
registered at the Companies and Intellectual Property Commission on 7
December 2012. Ultimately, however, the company was wound
up by the
court on the basis that it was unable to pay its debts.
[1]
[2]
The company had some 700 employees. Their employment contracts were
in terms of s 38(1) of the Insolvency Act 24 of 1936 (the
Act),
suspended on the date of the commencement of the winding-up on 7
December 2012. The contracts came to an automatic end 45
days later
by virtue of the provisions contained in s 38(9) of the Act.
[2]
At the time of the commencement of the company’s winding-up,
leave pay had accrued to the employees.
[3]
The three respondents, Ms Rynette Pieters and Messrs George Da Silva
Ramalho and Ezechiel Albert Beddy, were appointed provisional
liquidators of the company on 12 December 2012, with their
appointment made final on 19 March 2013. They prepared a liquidation
and distribution account (the L&D account). Prior to the
confirmation of the L&D account, the respondents awarded and paid
to the company’s employees certain amounts, which included
salaries, leave and severance pay. The respondents did not deduct
any
employees’ tax in accordance with para 2 of the Fourth Schedule
to the Income Tax Act 58 of 1962. The payments totalled
R9 580
319.12.
[4]
On 21 August 2014 the Commissioner objected to the confirmation of
the L&D account. His objection was based on the respondents’
failure to deduct employees’ tax (commonly known as ‘pay
as you earn’ or ‘PAYE’) from the amounts.
It was
the Commissioner’s case initially, that the respondents became
the ‘representative employer’ as envisaged
in the
definition section of para 1(a) of Part 1 of the Fourth Schedule to
the Income Tax Act. The Master upheld the Commissioner’s
objection against the contrary view postulated by the respondents,
namely that the payments are preferent awards under the Act,
not
subject to PAYE. The Master’s decision was that the respondents
were statutorily obliged to effect PAYE deductions from
the payments
made to the employees. He took the view that the liquidators were
representative employers as contemplated in the
Schedule and that
PAYE is payable by them in respect of the remuneration of the
employees. The respondents successfully approached
the Western Cape
Division of the High Court, Cape Town, (the high court) for the
review and setting aside of the Master’s
decision and
directions. This appeal is with the leave of that court.
[5]
The Master’s directions were as follows:
‘
(a)
The joint liquidators are directed to amend the First Liquidation and
Distribution Account to include the payment of PAYE as
an admin
expense on all remuneration earned by employees of Slabbert Burger
Transport (Pty) Ltd (in Liquidation) on the amount
of R9 580 319.12
made in terms of
s 98A
of the
Insolvency Act.
(b
)
If the said employees have already been paid, the joint liquidators
are directed to deduct all the PAYE that would have been paid
to SARS
out of their fees and lodge an Amended First Liquidation and
Distribution Account within 14 days of this ruling
’
.
[6]
The central question is whether payments made in terms of s 98A of
the Act are subject to the deduction of PAYE contemplated
in para
2(1) of the Schedule. It was common cause that the payments related
to salaries, accumulated leave and severance pay. In
relevant part, s
98A reads as follows:
‘
98A
Salaries or wages of
former employees of insolvent
(1)
Thereafter any balance of the free residue shall be applied in paying
–
(
a
)
to any employee who was employed by the insolvent –
(i)
any salary or wages, for a period not exceeding three months, due to
an employee;
(ii)
any payment in respect of any period of leave or holiday due to the
employee which has accrued as a result of his or her employment
by
the insolvent in the year of insolvency or the previous year, whether
or not payment thereof is due at the date of sequestration;
(iii)
any payment due in respect of any other form of paid absence for a
period not exceeding three months prior to the date of
the
sequestration of the estate; and
(iv)
any severance or retrenchment pay due to the employee in terms of any
law, agreement, contract, wage-regulating measure, or
as a result of
termination in terms of section 38; . . . .
(2)
(
a
) In order to ensure that the balance of the free residue is
applied in an equitable manner, the Minister may by notice in the
Gazette
determine maximum amounts which shall be paid out in
terms of subsection (1) in respect of –
(i)
paragraph (
a
),
any or all the subparagraphs thereof or any single employee; . . . .
’
[7]
As is evident:
(a) the payment of
salaries or wages to former employees for a maximum period of three
months are included in s 98A(1)(
a
)(i);
(b) leave or holiday pay
which has accrued are included in s 98A(1)(
a
)(ii); and
(c) severance or
retrenchment pay is included in s 98A(1)(
a
)(iv).
Paragraph
2(1) of the Schedule places an obligation on an employer or a
representative employer who is not a resident, to deduct
or withhold
from an employee’s remuneration an amount of employees’
tax. For the reasons that follow, I am of the view
that no such
obligation arises in respect of the payments made to the employees in
this case.
[8]
Section 98A was inserted into the
Insolvency Act by
s 2
of the
Judicial Matters Amendment Act 122 of 1998
. The section affords a
preference to the payment of the amounts in question to employees.
The amounts are subject to limitations
(a maximum of three months in
respect of unpaid salaries and wages and subject to an overall cap in
each of the categories determined
by the Minister of Justice.)
[3]
The amounts presently thus determined by the Minister are relatively
small. They are:
(a) R12 000 in respect of
unpaid salaries and wages;
(b) R12 000 for severance
pay; and
(c) R4 000 in respect of
leave pay.
The
claims of employees envisaged in
s 98A(1)(
a
)
need not be proved
(s 98A
(3)).
[9]
An initial attempt by the Commissioner to distinguish severance pay
from the other two categories was eventually abandoned and
counsel on
his behalf accepted that such amounts are no different than unpaid
salaries and wages and leave pay. That concession
is sound –
severance pay is clearly included in
s 98A(1)(
a
)(iv).
Furthermore, severance pay is calculated in terms of
s 41
of the
Basic Conditions of Employment Act 75 of 1997
– one week of pay
for every year employed. That calculation clearly pertains to the
pre-liquidation period, given the fact
that an employee is generally
precluded from performing work after the commencement of liquidation
(s 38(2)(
a
)).
[10]
The preference afforded these payments must be understood against the
backdrop of the importance of a
concursus
creditorum
,
which is generally recognized as a foundational concept in our law of
insolvency. It was described as follows in
Walker
v Syfret
:
[4]
‘
The
object of the [Insolvency Act] is to ensure a due distribution of
assets among creditors in the order of their preference.
’
Nothing
may be done which would result in the diminishing of the assets in an
insolvent estate or which would prejudice the rights
of creditors.
[5]
A liquidator is enjoined to safeguard the integrity of the
concursus
creditorum
.
A liquidator’s overriding duty is to the estate and to the
general body of creditors.
[6]
The free residue in the estate must be distributed by the liquidator
to the creditors strictly in the order of preference laid
down in
sections 96 to 102 of the Act.
[7]
Thus, for example, an insolvent cannot reach an arrangement with its
trustee or liquidator to pay in full the claim of a particular
creditor in the estate. In those circumstances this court has held
that such an agreement would enable the parties to subvert the
scheme
of distribution set out in the Act.
[8]
Sections 96 – 102 constitute a numerus clausus of the ranking
of statutory preferences in respect of the distribution of
the free
residue.
[9]
[11]
Reverting to s 98A – the provisions contained therein can
rightly be described as having a social justice objective as
they are
clearly aimed at alleviating the plight of employees who are left
unpaid by the financial woes of their liquidated employer
company.
More often than not, as the present instance demonstrates, these
would be vulnerable blue collar employees. The Legislature
plainly
deemed it necessary to attenuate the impact which liquidation may
have on a company’s employees. But it chose to
do so carefully,
by imposing a three month limit in respect of unpaid salaries and
wages and in placing a cap on the various amounts.
It is significant
that the capped amounts, set out in para 8 above, are relatively
modest. The objective is to ensure that the
remainder of the free
residue is applied equitably.
[10]
The limited relief proffered by s 98A has the effect that employees
have to stand at the end of the order of preference queue for
the
balance of their salaries (ie above the three month limit and the
cap). Self-evidently, employee tax deductions would reduce
the modest
amounts under s 98A.
[12]
Against this backdrop it is difficult to conceive how PAYE deductions
would apply to these modest amounts, legislated to relieve
the burden
on vulnerable, mostly blue collar workers, left stranded by a
financially distressed employer company. A close analysis
of para
2(1) of the Schedule leads to the compelling conclusion that its
provisions do not apply to s 98A payments. First, the
insertion of s
98A in the Act during 1998 caused a striking re-arrangement in the
order of preference. Prior to its insertion,
preference under certain
statutory obligations (including PAYE under the Schedule) ranked
above the salaries and wages of employees.
That order was reversed by
the insertion. The salaries and wages of employees now rank just
below the costs of execution and above
preference under certain
statutory obligations, which includes PAYE under the Schedule. The
change was plainly deliberate.
[13]
Section 99(1)(
a
)(iv)
of the Act deals with employees’ tax. It provides that SARS
holds a preference to ‘any amount which the insolvent
. . . has
under the provisions of the Fourth Schedule to [the Income Tax Act]
deducted or withheld by way of employees’ tax
from remuneration
or any other amount paid or payable by him to any other person. . .
’. It was common cause that there is
no indication that prior
to its liquidation the company deducted or withheld any amounts in
respect of employees’ tax contemplated
in this section. The
subsection therefore finds no application here. Ordinarily, PAYE
would be calculated with periodic deductions
utilising the relevant
tax tables, based on the contemplated annual income. Liquidation
would usually occur in an intervening period
of a particular tax
year. A correct calculation of the tax actually due or which SARS may
have to refund to the taxpayer, would
in such circumstances only be
able to be properly calculated after the end of the tax year. This is
a further reason why the Commissioner’s
contentions cannot be
upheld.
[14]
Section 101(
a
)
provides for the preference (after settlement of the s 99
preferences) of ‘any tax on persons or the income or profits of
persons for which the insolvent was liable under any Act of
Parliament or ordinance of a Provincial Council in respect of any
period prior to the date of sequestration of his estate, whether or
not that tax has become payable after that date’. As stated,
para 2 of the Schedule obliges an employer to deduct and pay over to
SARS employees’ tax on remuneration payable to employees.
Paragraph 4 of the Schedule provides that any amount ‘required
to be deducted or withheld in terms of paragraph 2 shall be
a debt
due to the state and the employer concerned, shall save as otherwise
provided, be absolutely liable for the due payment
thereof to the
Commissioner’.
[15]
During argument counsel for the Commissioner abandoned the initial
contention that the respondents, qua liquidators, were liable
for the
payment of PAYE as ‘representative employer within the
definition contained in Part I
of
the Schedule. Instead, counsel placed reliance on the definition of
‘employer’ for such liability. ‘Employer’
is
defined as follows in the definitions provision:
‘
any
person (excluding any person not acting as a principal, but including
any person acting in a fiduciary capacity or in his capacity
as a
trustee in an insolvent estate, an executor or an administrator of a
benefit fund, pension fund, provident fund, retirement
annuity fund
or any other fund who pays or is liable to pay to any person any
amount by way of remuneration, and any person responsible
for the
payment of any amount by way of remuneration to any person under the
provisions of any law or out of public funds (including
the funds of
any provincial council or any administration or undertaking of the
State) or out of funds voted by Parliament or a
provincial council’.
‘
Representative
employer’ is defined as follows:
‘
(
a
)
in the case of any company, the public officer of that company, or,
in the event of such company being placed under business rescue
in
terms of Chapter 6 of the Companies At, in liquidation or under
judicial management, the business rescue practitioner, liquidator
or
judicial manager, as the case may be;
(
b
)
. . .
(
c
)
. . .
(
d
)
. . .
who
resides in the Republic, but nothing in this definition shall be
construed as relieving any person from any liability, responsibility
or duty imposed upon him or her by this Schedule’.
[16]
It is striking that a clear distinction is made in these definitions
between the trustee in an insolvent estate, who is expressly
included
in the definition of an ‘employer’ and the liquidator of
a company who is expressly included in the definition
of a
‘representative employer’. The argument on behalf of the
Commissioner therefore fails at first base. This unequivocal
distinction by the Legislature supports the earlier judgment in
Van
Zyl NO v Commissioner for Inland Revenue
[11]
(the present definition of ‘employer’ in the Schedule was
effected in 2008 and that of ‘representative employer’
in
2014.)
[17]
It was forcefully contended that the interpretation advanced on
behalf of the Commissioner that s 98A payments are subject
to PAYE
under the Schedule, would not violate the statutory order of
preference in the Act. This contention is unsound for the
reasons set
out earlier. It is worth repeating that there is nothing in the
relevant provisions of the Schedule which bears out
an intention to
include a preference in the closed list of preferences in sections 96
– 102 not expressly mentioned there.
Upholding this contention
would also lead to startling anomalies. One example would suffice –
if prior to liquidation the
company had in fact withheld PAYE
deductions, but failed to pay it over to SARS, the amounts would fall
under s 99(1)(
b
)(ii).
If the s 98A payments were to be subject to PAYE, as the Commissioner
contends, they would rank ahead of s 99(1)(
b
)(ii)
PAYE amounts. This distinction in the ranking of PAYE payments is
devoid of any reason and is untenable in law. The startling
discrepancy does not arise if, as we hold, s 98A payments are not
subject to PAYE in terms of para 2(1) of the Schedule.
[18] Lastly, much
reliance was placed on para 3(2) of the Schedule in support of the
Commissioner’s contentions. It reads:
‘
The
provisions of paragraph 2 shall apply in respect of all amounts
payable by way of remuneration, notwithstanding the provisions
of any
law which provides that any such amount shall not be reduced or shall
not be subject to attachment’.
It
was submitted that this is an all-encompassing provision which was
intended by the Legislature to entrench the statutory obligation
in
para 2 of the Schedule. For this reason, so it was contended, para
3(2) takes precedence over all other legislative enactments.
A simple
reading of para 3(2) in the context of the relevant provisions of the
Act, makes it plain that it finds no application
here. The Act does
not contain ‘any provisions . . . which provides that any such
amount shall not be reduced or shall not
be subject to attachment’.
The amount in question here is the remuneration payable to the
employees. Section
98A(1)(
a
)
merely provides that the remuneration which must be paid ranks as a
preferent claim. It does not elevate the statutory obligation
to
deduct PAYE as a preference above the s 98A payment – the
converse, as explained above, is in fact true. Consequently
the
argument must fail.
[19]
The high court’s ultimate conclusion in setting aside the
Master’s decision and directions was therefore correct.
Counsel
for the Commissioner correctly did not seek to defend para (
a
)
of the Master’s directions, set out in para 5 above. The PAYE
obligation cannot be costs of administration. PAYE is
a tax on
employees’ remuneration. As stated, at the commencement of
liquidation the employees’ contracts of employment
were
suspended. Their claim for payment in respect of each of the three
categories therefore emanates from the period prior to
liquidation.
[20]
The costs of administration and liquidation fall under s 97 of the
Act and rank, together with other miscellaneous charges,
behind the
sheriff’s charges and the Master’s fees. Self-evidently,
those charges, fees and costs arise post-liquidation.
To categorize
PAYE as costs of administration would have the effect that income
tax, attributable to the company’s trade
before liquidation and
which thus becomes payable prior to liquidation, would also be a cost
of administration. That is plainly
untenable.
[21]
In view of the aforesaid conclusions, neither of the Master’s
directions can stand. The Master should have dismissed
the objection
to the L&D account. Ordinarily the Commissioner would not be
without recourse. In the event that, at the end
of the relevant tax
year, it appears that PAYE is payable by the employees, the
Commissioner may lodge a claim, which was not done
in this case.
[22]
The appeal must consequently be dismissed. The following order
issues:
The appeal is dismissed
with costs, including the costs of two counsel.
______________________
S
A Majiedt
Judge
of Appeal
APPEARANCES:
For
Appellant: C M Eloff SC (with him S K Witten)
Instructed
by: State Attorney, Cape Town
State
Attorney, Bloemfontein
For
Respondents: J C Butler SC (with him M W Janisch SC)
Instructed
by: Reitz Attorneys, Johannesburg
Heyns
& Partners Inc, Cape Town
Symington
de Kok Attorneys, Bloemfontein
[1]
Since the
company was unable to pay its debts, its winding-up was subject to
insolvency law as contemplated by s 339 of the previous
Companies
Act, 61 of 1973.
[2]
Section
38(9) reads:
‘
(9) Unless
the trustee or liquidator and an employee have agreed on continued
employment of the employee in view of measures contemplated
in
subsection (6), all suspended contracts of service shall terminate
45 days after –
(
a
) the date of the
appointment of a trustee in terms of section 56; or
(
b
) the date of the
appointment of a liquidator in terms of section 375 of the Companies
Act, 1973; or
(
c
)
the date of the appointment of a co-liquidator in terms of
section
74
of the
Close Corporations Act, 1984
, or if a co-liquidator is not
appointed, the date of the conclusion of the first meeting.’
[3]
See
s 98A
(2) and Notice No G 865, GG 21519 of 1 September 2000.
[4]
Walker v
Syfret
1911
AD 141
at 166.
[5]
Ward v
Barrett NO & another
1963(2) SA
546 (A) at 552D – H.
[6]
Commissioner
of the South African Revenue Service v Stand Two Nine Nought Wynberg
(Pty) Ltd & others
[2005]
ZASCA 55
;
2005 (5) SA 583
(SCA) para 14.
[7]
Section
391
, read with s 342 of the Companies Act 61 of 1973.
[8]
Commissioner
of the South African Revenue Service v Stand Two Nine Nought Wynberg
(Pty) Ltd,
supra,
footnote 7
para
8
.
[9]
Cooper
NO & andere v Die Meester & ‘n ander
1992 (3) SA
60
(A) at 82G-I.
[10]
Section
98A(2)(
a
)
of the Act.
[11]
Van Zyl
NO v Commissioner for Inland Revenue
1997 (1) SA
883
(C).