Tax shock may await Tannenbaum's investors
June 18, 2009
By Roy Cokayne
Investors in the Ponzi-type investment scheme operated by Barry Tannenbaum, which allegedly fleeced billions of rands from about 400 people, could be in for a painful tax surprise even if they rolled over their investments and lost both their capital and profits.
Provided it was not an illicit scheme, the SA Revenue Service (Sars) would regard any profit from the investment as a dividend and therefore taxable, Sars spokesman Adrian Lackay said yesterday.
However, if it is proved to be an illicit scheme, participants might be forced to pay money they made to liquidators.
Lackay added that there might be a capital loss, but the profits were of a revenue nature and therefore taxable, stressing that a "normal pyramid scheme" was taxable.
Sars taxed the Krion Financial Services pyramid scheme, which raised about R1.5 billion from about 10 000 investors largely in the Vaal triangle before it was liquidated in July 2003.
Lackay said Sars' approach in the Krion scheme was that the orchestrators had no intention to repay all the money they raised and the purpose was to enrich themselves. The funds were not illicit and were therefore taxable in their hands.
However, the situation might be a bit different in the Tannenbaum scheme. If it was found to be an illicit scheme, funds collected by the liquidators were the proceeds of crime and not taxable.
The liquidators would engage creditors and all the funds collected would go into one pot from which there would be a distribution to creditors.
Lackay added that the investigation by the task team set up to investigate Tannenbaum's scheme was in its early stages and a factual basis and validity needed to be found for the allegations in the public domain.
The master of the South Gauteng High Court yesterday appointed trustees for the provisionally sequestrated estate of Tannenbaum.
Attorney Ivan Zartz said the liquidators of a Ponzi scheme could claim the return of money from the agents who earned commissions from the unlawful scheme.
Any business brokers who persuaded their clients to invest in the scheme might be sued for negligence if they failed to conduct a proper investigation into how the scheme was operated.
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