Sars circles trusts involved in multimillion-rand scrap metal deal

The SA Revenue Service (Sars) has taken on six trusts that sold Amalgamated Metals Recycling (AMR) to JSE-listed Insimbi eight years ago for nearly R300m, suspecting them of underpaying capital gains tax on the transaction.

The trusts approached the high court in Pretoria to set aside Sars tax assessments in a bid to avoid paying more taxes on the transaction. They believe Sars did not comply with its own statutes.

ARM is a licensed metals recycling merchant. It collects, sorts, processes, recycles and resells recycled metal. Trustees sold the business to small-cap metal alloys supplier Insimbi Industrial in transactions concluded between July and December 2016, and thus in the 2017 tax year.

Sars issued its original assessments for that tax year on February 28 and March 9 2018. In February 2019 it sent queries to the taxpayers about entities that they collectively held a 100% interest in.

Sars notified the trusts at the beginning of 2020 that it would conduct an audit in respect of the tax consequences of the AMR transactions in the 2017 tax year. In July 2020 it issued each trust with a notice, inviting them to give reasons why it should not apply the “general anti-avoidance rule” as part of the country’s tax laws.

Sars applies such provisions when it considers that a taxpayer has entered into an arrangement designed to avoid expected tax liability.

Through their attorney, Werksmans, the trusts responded to the Sars letter in October that year disputing Sars assertions and pointed to what they believed were errors in the notice. Sars dismissed this, describing the Werksmans letter as “comprehensive but flawed” and made an additional request for information, to which the trusts acquiesced.

Penalty

Subsequent to this, Sars sent a letter to the trusts rejecting the responses and explained why it considered that the rule applied to the transactions.

Sars then calculated an amount for the understatement penalty, which is calculated as 75% of the tax liability. It then sent a letter of assessment to each trust setting out the relevant adjustment and penalties.

The trusts argued that they were not correctly assessed by Sars and asked the receiver of revenue to withdraw the assessments.

When this was rejected by Sars, the trusts approached the high court in Pretoria seeking the assessments be set aside as they believe Sars did not comply with its own statutes.

Sars denied this and argued that the trusts should not have approached the high court as they have failed to exhaust internal remedies.

Judge Norman Manoim agreed with Sars, opening the door for the matter to be heard at the tax court.

“Sars succeeds in its preliminary objections. The taxpayers have not made out a case for this matter to be heard in the high court in terms of section 105 of the Tax Administration Act (TAA). For the same reasons but by a different mechanism they have not made out a case for why they have not exhausted their internal remedies in terms of the TAA,” the judgment reads.

“The concern of the taxpayers in this matter seems less about whether they have an adequate remedy by following their internal remedies in terms of the TAA than the fact, often cited in their heads of argument, that by going that route they are prejudiced by having to follow the ‘pay now argue later principle’. That may be a burden to them, but it is not one relevant to whether this court should exercise its jurisdiction in terms of section 105.

“That is the fate of all taxpayers who dispute a Sars assessment — it is not a basis for exceptional circumstances.”

At the time the transaction was announced, the parties said the purchase price for the AMR Group and properties would be R284m, of which R234m would be payable in cash. The balance of R50m was to be settled in Insimbi shares, which were to be issued at R1 each.

AMR was founded in 2002 and has grown to be one of the largest informal employers in SA. The government estimates that the SA waste sector is valued at R15bn.

Numerous attempts to get comment from the trusts proved futile.

khumalok@businesslive.co.za