1723. Tax Evasion
Reliance on professional advice
April 2009 – Issue 116

Central to the much-publicised trial of Garth Le Roux, the former Springbok cricketer turned businessman, and his accountant Deon van Heerden on charges of tax fraud, involving some R633 000 in disputed tax, was the issue of whether it was lawful for one of Le Roux’s companies to "sacrifice" commissions given in return for discounts on the purchase price of a Fancourt property by another company in his stable without declaring those sacrifices to SARS for VAT and income tax purposes.

Conviction and sentence

Both men have now been convicted, Le Roux on three tax fraud counts, and Van Heerden, on seven. In her submission as to an appropriate sentence, the prosecutor is reported to have said that —

"the court should not send out the message that people with a ‘big cheque-book’ could buy their way out of prison".

The prosecutor contested the defence’s argument that the two accused were well-respected men in their communities, successful, family-orientated, first-time offenders, who did not deserve prison terms.

If the court was to show leniency, the prosecutor argued, it should be reflected in the length of the jail term, not in handing down a non-custodial sentence.

In passing sentence, the magistrate echoed the words of the prosecutor, saying that the accused had to be sentenced to imprisonment, without the option of a fine, so as to ensure that the public did not get the impression that people with big cheque-books can buy their way out of prison.

The court sentenced Le Roux and his accountant to an effective four years in jail. Both intend to appeal.

According to press reports, the prosecution is also considering appealing against the sentence, from which one may infer that SARS believes it ought to have been heavier.

Important consideration overlooked

It seems strange that, in neither the prosecution’s argument on sentence, nor in the defence’s submissions, nor in the magistrate’s reasons as to an appropriate sentence was detailed consideration given to what was surely an important consideration, namely that the offending tax returns, submitted by Le Roux and his companies, were based on audited financial statements, and that Le Roux had received professional advice that the tax treatment of the contentious commissions in those financial statements was appropriate.

Significant changes in tax law

And further, that between the occurrence of the events in question, and the criminal case, the principles of tax law in regard to the accrual of income had undergone significant changes as a result of the Supreme Court of Appeal decision in the case of Commissioner, SARS v Brummeria Renaissance (Pty) Ltd [2007] SCA 99, 69 SATC 205.

The magistrate is reported to have said in this regard that,

"Le Roux was clearly a very successful businessman, who clearly had a much greater knowledge of tax issues than he had shared with the court during his testimony. It is not possible that he honestly believed that he... did not have to pay income tax on amounts in excess of half a million rand earned at each of these occasions."

In other words, the view taken by the court was that a businessman is not justified in relying on the advice he is given by his professional advisers in regard to what must be disclosed in his tax return and supporting documentation, and can be held criminally liable where that advice turns out to be wrong.

That, with respect, is a far-reaching proposition, and it is to be hoped that the Supreme Court of Appeal will express a view on it.

Apart from the technical issues of tax law at stake in the case, it is to be hoped that the Supreme Court of Appeal will speak its mind on the important issue of whether this was an appropriate case for SARS to institute criminal proceedings at all.

PricewaterhouseCoopers

Editorial comment: It should be noted that "Le Roux’s companies" were in fact close corporations that generally are not audited and that Deon van Heerden is not a Chartered Accountant.