Dormant Companies And SARS Debt: The Risk Of Personal Liability

Many business owners assume that once an entity has ceased trading and become dormant, its tax affairs can simply be left unattended. Unfortunately, this can create a significant and often overlooked risk: personal liability for the entity’s outstanding SARS debt.

An entity being dormant does not mean that its tax debt disappears. SARS may continue to pursue an outstanding tax debt long after the business has ceased trading. Section 171 of the Tax Administration Act gives SARS 15 years within which to institute recovery proceedings, but that period runs from the date on which the assessment became final, not from the date on which the business stopped trading. Where returns were never submitted at all, no assessment has ever become final and the 15 years has not begun to run. The fact that an entity is no longer trading therefore does not, in itself, bring the matter to an end.

Dormancy also does not switch off the entity’s own filing obligations, and this is where the cost of doing nothing begins. The Commissioner’s notice for the 2026 year of assessment requires a resident company to submit an income tax return for any year in which it held assets, or had liabilities, of more than R1 000, and an unpaid SARS debt is precisely such a liability. If the return is still not submitted after SARS has issued a final demand and 21 business days have passed, a fixed administrative penalty of at least R250 a month runs for each outstanding return, for up to 35 months. Failing to submit a return is also, on its own, an offence under section 234(2)(d) of the Tax Administration Act. A dormant entity does not stand still. Its debt grows.

More importantly, where SARS is unable to recover the debt from the business, it often seeks to hold the entity’s directors or members personally liable for the outstanding tax debt.

That exposure is real, but it is not automatic, and it does not follow merely from the entity’s inability to pay. It arises under specific provisions of the Tax Administration Act, of which three do most of the work in practice.

Section 180 makes a person personally liable for an outstanding tax debt where that person controls or is regularly involved in the management of the entity’s overall financial affairs, and a senior SARS official is satisfied that the person was negligent or fraudulent in respect of the payment of the tax debt.

Section 182 makes a connected person who received an asset from the entity for no consideration, or for less than its fair market value, liable up to the value of that asset, where the asset was received within a year before SARS gives notice of the liability.

Section 155 makes the entity’s representative taxpayer, in the case of a company its public officer, personally liable where funds that could lawfully have been applied to the tax were paid away instead.

Two things follow. The first is that section 180 turns on what a person actually did rather than on the office that person held, so resigning as a director does not close the exposure. The second is that SARS must give the person an opportunity to make representations, either before holding that person liable or as soon as practical afterwards, under section 184(2). Those representations are usually the point at which the exposure is either closed or lost, and they are worth taking seriously.

There is a related trap that catches people who believe they have walked away. A company must at all times be represented by a public officer, and if none is appointed the Tax Administration Act appoints one by default, working down a priority list that starts with the managing director, then the financial director, then the company secretary, and ends with SARS designating any suitable person it considers appropriate. That public officer is responsible for everything the company must do under a tax Act and is subject to the penalties for the company’s defaults (section 246(3) and (5)). Nobody has to accept the appointment for it to attach.

Deregistration does not solve the problem

Business owners should also be cautious about simply allowing a dormant entity to become deregistered by CIPC, which CIPC may do where annual returns have not been filed for two or more years in succession and the entity fails, on demand, to give satisfactory reasons or to show cause why it should remain registered (section 82(3)(a) of the Companies Act).

That caution applies to close corporations as well, but not for the reason usually given. The provision that once made the members of a deregistered close corporation automatically and jointly liable for its outstanding liabilities, section 26(5) of the Close Corporations Act, was repealed with effect from 1 May 2011. Section 26 now does no more than apply the deregistration provisions of the Companies Act to a corporation. A close corporation and a company stand in the same position.

What deregistration actually does is this. It brings the entity’s legal existence to an end, and its assets pass to the State as bona vacantia. It does not create personal liability where none existed. What it does do is preserve any liability that a former director, member, shareholder or other person already carried for an act or omission before deregistration, and that liability continues and may be enforced as if the entity had never been removed from the register (section 83(2) and (3) of the Companies Act). Any interested person, and that includes a creditor such as SARS, may apply to CIPC to reinstate the registration, and reinstatement operates retrospectively to the date of deregistration.

Members of a close corporation should be alert to a different provision, one that has nothing to do with deregistration and everything to do with dormancy. Where the office of accounting officer stands vacant for six months, a member who knew of the vacancy and is still a member at the end of that period becomes jointly and severally liable for every debt the corporation incurred during the vacancy, and for every debt incurred while the vacancy continues and that person remains a member (section 63(h) of the Close Corporations Act). Accounting officers routinely resign when a corporation stops trading, and the members are usually the last to know.

The position regarding dormant entities with outstanding SARS liabilities should therefore be dealt with proactively, rather than simply leaving the entity dormant in the hope that SARS will not come knocking.

Liquidation may provide a solution, but not from personal liability

Where an entity has ceased trading and has outstanding tax liabilities that it cannot pay, formal liquidation may be an option worth considering.

Liquidation provides a formal mechanism through which the affairs of the entity can be brought to an end in a structured manner. The Tax Administration Act allows a senior SARS official to write off a tax debt that is irrecoverable at law, and a debt owed by an entity in liquidation qualifies once the liquidator has given notice that a final dividend has been paid, or that no further dividend will be paid (sections 197 and 198(1)(b)). Two qualifications matter, and neither is usually mentioned. The write off is a discretion, not an entitlement. More importantly, section 198(2) provides that a tax debt is not irrecoverable at law if SARS has not first explored action against, or recovery from, the assets of the persons who may be liable for it as financial managers, shareholders, transferees or the public officer. Liquidation does not put those people beyond reach. It is the step that obliges SARS to look at them.

The route into liquidation matters as well. Where a company is wound up otherwise than by an involuntary liquidation, the shareholders who received assets of the company in that capacity within the year before the winding up are jointly and severally liable for its tax debt, up to the value of what they received (section 181 of the Tax Administration Act). Before any voluntary winding up of an entity that owes SARS, the first question to answer is what the shareholders or members have taken out of it in the preceding twelve months.

In practice, liquidation can also change the manner in which SARS deals with the taxpayer’s outstanding affairs. Once a liquidation is underway, SARS may deal with its claim through the liquidation process rather than continuing ordinary collection measures against the dormant entity, even where there is little or nothing to recover. Once a liquidator is appointed, the liquidator assumes all the functions and responsibilities of the entity’s public officer for the duration of the liquidation (section 248(1) of the Tax Administration Act), which is often the practical relief the directors are actually looking for.

The key point is that “dormant” should not be confused with “resolved.” An entity that has stopped trading but still owes SARS money may continue to present a financial and personal-liability risk for years to come.

Dormant companies and close corporations with outstanding SARS liabilities should therefore consider the appropriate course of action before the problem escalates into personal liability proceedings. That course may be liquidation, or a compromise of the tax debt under section 200 of the Tax Administration Act, or simply bringing the entity’s returns up to date and dealing with what is left. Which one is right turns on the entity’s own facts, and on what has been taken out of it. It is materially cheaper to make that decision before SARS issues a personal liability notice than to answer one afterwards.

Intellectual property disclaimer: The contents of any article published by Pieterse Sellner Erasmus should not be construed as professional legal advice.