The total number of liquidations increased 18.9% in the first quarter of 2021 compared with the same period in 2020. Picture: 123RF/VADIM GUZHVA
The total number of liquidations increased 18.9% in the first quarter of 2021 compared with the same period in 2020. Picture: 123RF/VADIM GUZHVA

In terms of the Statistical Release on liquidations and insolvencies published by Stat SA in July 2021, there has been a 21.5% increase in the number of liquidations in the first seven months of 2021 compared to the first seven months of 2020. This has not deterred the SA Revenue Service from collecting outstanding tax debts from defaulting taxpayers.

In this edition of Business Law Focus, host Evan Pickworth speaks to tax executive at ENSafrica, Ntebaleng Sekabateabout the key tax considerations to keep in mind when a company is in financial distress.

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Business Day law and tax editor Evan Pickworth. Picture: REBECCA HEARFIELD
Business Day law and tax editor Evan Pickworth. Picture: REBECCA HEARFIELD

Generally, when a business is in financial distress, it is not uncommon that the first financial obligations that fall by the wayside are the business’ tax obligations. This is unsurprising as business owners are likely to prioritise payments to employees, suppliers and other creditors to keep their operations afloat. However, this is not an advisable strategy, as debts to Sars accumulate interest, and where applicable, administrative noncompliance penalties that accumulate monthly. In addition, where a taxpayer understates its tax liabilities, Sars may impose understatement penalties, that range from 10% of the tax debt in a standard case, and up to 200% where there is intentional tax evasion on the part of the taxpayer.

There are, however, several tax considerations that need to be kept in mind by taxpayers where the business is in financial distress and is no longer able to operate, or once liquidation proceedings have commenced and compromises are entered into with creditors.

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