Beware: SARS doesn’t forget
Arranging personal tax affairs to pay the least amount of tax is a right every South African possesses; however, it must be done within the constraints of the law, says Tax Consulting SA.
The tax advisory firm said that the South African Revenue Service (SARS) has recently demonstrated that it will come after those trying to be “innovative” and dodge the taxman.
“There are those taxpayers, sometimes even misled by unscrupulous tax advisors, guiding tax disclosures or not providing all details pertaining to transactions. These types of attempts to be innovative with SARS by not making correct disclosures are the most elementary mistakes,” said Tax Consulting SA.
In a recent July case titled CSARS v M, a taxpayer failed to disclose receipts totalling R5.6 million during the 2007 to 2010 years of assessment.
“A decade later, the taxpayer’s defence was that the amounts were repayments of interest-free loans advanced by the taxpayer to related parties, which bore no tax consequences.”
“Also, they tried the novelty that, in any event, SARS was precluded from raising additional assessments as more than three years had elapsed since the original assessments were issued by SARS,” said Tax Consulting SA.
An additional assessment is issued following an original assessment by SARS.
There is, however, an exception whereby under the Tax Administration Act (TAA), SARS is not permitted to make an assessment three years after the date of its original assessment.
Tax Consulting SA, however, said that section 92 of the TAA obliges SARS to issue an additional assessment where it is satisfied that an existing assessment “does not reflect the correct application of a tax Act to the prejudice of SARS or the fiscus”.
SARS, when making an assessment three years after its original assessment, may only do so if the provisions of section 99(2)(a) are satisfied (namely, where the “full amount of tax chargeable was not assessed … due to – (i) fraud; (ii) misrepresentation; or (ii) non-disclosure of material facts, said the firm.
Duty of the taxpayer
Under section 25(2) of the TAA, there is a legal obligation for a taxpayer to submit a return that is “full and true”. There is, therefore, a legal duty of disclosure on the part of the taxpayer.
Where a return contains a false statement of fact, it will amount to misrepresentation.
Where the return is not complete, it may amount to non-disclosure of a material fact.
The group said if there is a misrepresentation, non-disclosure of material fact or fraud, this may result in the prescription periods being inapplicable, where it is proven that the full amount of tax chargeable was not assessed “due to” misrepresentation or fraud or non-disclosure of material fact.
The words “due to” imply a causal link between false statements (misrepresentation, fraud, or non-disclosure) and the failure to assess the full tax amount. In CSARS v M, the High Court confirmed that SARS satisfied this requirement and intended to reopen assessments based on non-disclosure.
According to Tax Consulting SA, arguments by crafty taxpayers that SARS was furnished with all supporting documents (such as annual financial statements) when the return was submitted and which set out the correct position will not stand.
Testimony
Although domestic courts have held the intention of a taxpayer to a high level of importance, there is a distinction between the actual intention of the taxpayer – which materialised through objective factors – and the testimony that a taxpayer provides in respect of that intention, said the tax firm.
In the CSAR v M decision, the taxpayer’s testimony in the Tax Court was that he received repayments of loans which are not taxable. The High Court, however, held the following in this regard:
“While the taxpayer explained in papers before the Tax Court that these receipts related to repayment of monies lent and advanced by him … he led no evidence in support of his contention that these deposits should not be treated as income in his hands. What is more is that the documentation gives a different version”
Fraud, misrepresentation or non-disclosure of material facts
The prescription period of three years does not apply if there is fraud, misrepresentation or non-disclosure of material facts.
Such is not just the case for income tax. The TAA extends the scope of such to include levies, contributions, penalties, interest and other monies.
Misrepresentation of facts: Capital v Revenue
South Africa’s courts have established legal tests to determine whether an amount is a capital or revenue.
These tests, such as the “fruit and tree” analogy and the once-off sale principle, depend on the specific facts of each case. The distinction between capital and revenue is a factual question, and the law is clear on how it treats these categories.
In broad terms, capital refers to assets held for long-term investment or wealth accumulation, while revenue pertains to regular income generated from day-to-day business activities.
Taxpayers cannot claim ignorance of the law as an excuse, as there is a legal maxim stating that ignorance of the law is not a valid defence.
Taxpayers failing to disclose all revenue and capital receipts in their tax returns can be considered a material non-disclosure of facts. If a taxpayer intentionally misrepresents a receipt as a capital receipt instead of a revenue receipt, it constitutes a false statement of fact in the return.
In a Spur Group case, the Supreme Court of Appeal highlighted that taxpayers who make improper or untruthful disclosures in their returns may not receive favourable treatment. Making a complete and accurate disclosure in tax returns is a statutory requirement.
“When you have a dispute with SARS, be extra careful not to pull the prescription card too soon out of the deck. You may well find that neither SARS nor the Court gives you a sympathetic ear, and tax case law is stacked against you,” said Tax Consulting SA.
“Make sure your compliance is litigation ready when SARS one day decides to come for a visit or even worse, to tell you what your taxes should have been, as they have extensive financial records on everyone with a bank account, investments, property etc.”
With commentary from Tax Consulting SA
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