The issue of lifestyle audits and the use of third-party data by the South African Revenue Service (SARS) has once again come under the spotlight, with tax experts warning that taxpayers must disclose any substantial transactions, including those made with cryptocurrencies.
Speaking in a panel discussion at the recent South African Institute of Taxation (SAIT) Tax Indaba, Jacques van Wyk, chief executive of JGL Forensic Services, noted that the introduction of crypto assets has complicated the investigative process at a forensic level because it challenges tax jurisdictions.
While van Wyk is pro-crypto taxation, he believes that people do not heed SARS’ warnings. He urged SARS to use its data and set the necessary examples, which would nudge those who are purposely non-compliant to re-evaluate their position on the matter.
With substantial third-party data at its disposal, SARS can view anything from your new yacht to credit card transactions and foreign investments, says specialist advisory firm Tax Consulting SA.
“Through mutual information-sharing agreements with other countries, they can gain access to an individual’s offshore transactions,” the firm said.
“However, the crypto-asset analysis goes beyond third-party data analysis. The digital information around crypto is layered, complex, and requires many human resources to examine and rework. SARS is aware of the demand and the subsequent workforce shortage to cull through all the data.”
The firm noted that social media is an incredibly rich source of information, which means it’s not advisable to show off your new sports car or crypto gains while owing money to SARS.
“If you are one of the elusive crypto millionaires who cashed in on the global crypto wave, you might have to reconsider the safety of your hiding spot,” it said.
“A sure-fire way for SARS to gauge that something is amiss is to look at someone’s lifestyle and to see if what they are spending is in line with what they are earning. The burden of proof ultimately falls on the taxpayer to explain any discrepancies.”
Understanding SARS’ intent behind enforcing crypto tax compliance
Former acting SARS commissioner Mark Kingon says that the revenue collector has gone on a massive recruitment drive in recent months, focusing on employing forensic auditors and veterans who can assist with upskilling the younger specialists.
Kingon said that one of the specific objectives of SARS is to increase and expand the use of data.
Where simplifying the processes using data, analytics, and artificial intelligence fails to encourage compliance, SARS will employ its comprehensive knowledge management system to investigate and police non-compliance.
According to Thomas Lobban, head of crypto-asset taxation at Tax Consulting SA, local investors are often not open to voluntary compliance.
He cautions traders who boast about their crypto gains on social media platforms that it could land them in hot water if SARS were to take note of their feeds.
Non-compliance is still proving to be an issue in the crypto asset space among South Africans, said Lobban.
“This stems largely from a misunderstanding of the tax laws applicable, paired with the overarching sentiment that SARS is not entitled to tax them on their gains.
“It is understandable why SARS would embark on a compliance enforcement exercise. In cases where a taxpayer is not able to prove the source of their income used to fund their lifestyles, SARS is forced to dig deeper.”
You must report
Keith Engel, chief executive of SAIT, further expressed his concerns about taxpayers who believe they are playing a game with SARS by seeing how long they will get away without paying their taxes.
“Whatever your profits, you are legally obligated to report them. If you don’t report them, it is tax evasion,” Engel said.
“SARS is committed to getting third-party data from the more prominent crypto trading platforms. While SARS is getting this done, people think they can continue to get away with it, but they will get caught two or three years down the road.
“If those individuals didn’t report the income, SARS can go back forever. When they get you, they will want the tax, plus interest and penalties. Then you’re really in trouble.”
The consequences of a lifestyle audit can severely impact your relationship with SARS if irregularities come to light. If you suspect you are not fully compliant, it is wise to disclose your earnings and, if necessary, seek relief through the Voluntary Disclosure Programme (VDP).
If SARS decides to audit your lifestyle, the VDP window is no longer an option – even after being notified of a possible audit, said Tax Consulting SA.