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The Krok judgment - a renewed focus on high net worth individuals
High net worth individuals and their associated trusts have in the past been identified by the South African Revenue Service (SARS) as posing a risk of non-compliance to tax legislation. Taxand South Africa discusses the SARS v Krok and Jucool Enterprises inc. case and how it renews the focus of SARS in this regard.
In 2002 Mr Krok relocated to Australia from South Africa and then in 2008 relocated to the UK. Mr Krok had blocked assets in South Africa which he used to enter into 2 separate sale agreements with Jucool Enterprises Inc. The sole shareholder of Jucool is Jucool Trust and the discretionary beneficiaries of the trust are Mr Krok and his children. The sale agreements recognised that the capital of the blocked assets themselves could not be remitted from South Africa and that the transfer of such assets would be subject to the consent of the South African Reserve Bank (SARB).
The Australian Tax Office (ATO) assessed Mr Krok on the basis that he was resident in Australia during the period from 2002 to 2008. The position of the ATO was that Mr Krok was liable to Australian income tax in respect of income derived from the South African assets during the time that he was resident in Australia as well as Australian capital gains tax when he ceased to be tax resident in Australia. SARS accordingly received a request from the ATO regarding the DTA concluded between South Africa and Australia in terms of which they were asked to assist with the tax collection and conservancy of assets of Mr Krok, pending the collection of the amount alleged to be due by him in terms of Australian tax laws.
On this basis SARS submitted an application to the High Court for the confirmation of a provisional preservation order in terms of which a curator bonis was to be appointed and in whom the rights of all assets of Mr Krok would vest for as long as SARS was collecting taxes for the ATO or until SARS was satisfied that a suitable arrangement for the collection of such taxes had been made.
The evidence before the Court was that Mr Krok acted contrary to his assertion that Jucool was the beneficial owner of the South African assets. In an affidavit of Jucool’s deponent it was stated that it was expressly a term of the sale agreements that the assets are sold subject to the restrictions arising from the exchange control regulations and that delivery of the assets would require specific permission. In this regard, the court agreed with the view of SARS that these admissions destroyed any notion of an immediate transfer of rights upon the conclusion of the sale agreements.
Also published in Thomson Reuters' Taxnet Pro, 13 March 2014
Taxpayers, in particular high net worth individuals and their associated trusts, should take note that:
- Inter-governmental tax collection is possible in certain circumstances
- It is clear that SARS and the courts do not tolerate purported transactions in circumstances where the actions of the parties involved contradict the ostensible terms upon which such transactions are concluded