In CSARS v Pieters and others, the Supreme Court of Appeal (SCA) was tasked with deciding whether liquidators were required to withhold employees’ tax from payments made to employees under section 98A of the Insolvency Act. The company in question was an insolvent transport company which had employed approximately 700 people. Forty-five days after the appointment of the liquidators, the employment contracts for these employees were terminated under section 38(9) of the Insolvency Act.

During the liquidation process, the employees accrued salary entitlements, leave pay and severance pay. The liquidators determined the quantumhereof and paid amounts owing to them in terms of the provisions of the Insolvency Act.

SARS objected to the liquidation and distribution (L&D) account lodged by the liquidators, on the basis that no provision had been made for the payment of employees’ tax (PAYE) in respect of the payments made by the liquidators. The Master of the High Court accepted SARS’ objection and ordered the liquidators to amend the L&D Account to reflect the employees’ tax as administration costs and deduct the actual employees’ tax payable from their liquidators’ fee.

As stated above, the key issue that the SCA had to decide was whether the liquidators were obliged to withhold employees’ tax on payments made in terms of section 98A of the Insolvency Act.

SARS argued that the liquidators fell within the definition of “employer” where they made these payments. The Master of the High Court agreed and ordered the liquidator to amend the liquidation and distribution account.

The SCA held that the provisions in the Insolvency Act were clearly social justice provisions aimed at alleviating the plight of being unpaid as an employee as a result of the financial woes of an employer. The court held that the provisions in the Fourth Schedule to the Income Tax Act do therefore not apply to payments made under section 98A of the Insolvency Act. To categorise 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 before the liquidation, would also be a cost of administration. That is plainly untenable. On this basis, SARS’ appeal was dismissed.

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