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‘Sars using procedural tactics to collect additional revenue’

Deadline for non-provisional taxpayers looms.

As stakeholders await more information about the commission tasked with the inquiry into tax administration and governance at the South African Revenue Service (Sars), some tax practitioners have reported a marked increase in verification or audits. 

Hendrik van Deventer, chief operating officer at Stellentrust, says requests for supporting documents to verify the information submitted in tax returns have increased substantially. They find that Sars requests supporting documents almost every time any deductions or credits are claimed.

There are definitely more such requests than in the past, he says.

Keith Engel, chief executive officer of the South African Institute of Tax Professionals (Sait), says there has been a flawed narrative that Sars has become a renegade agency desperate to get revenue under the leadership of commissioner Tom Moyane.

But the truth is that the industry has been watching a trend over the last five to ten years where Sars has become increasingly aggressive to collect additional revenue by using “procedural tactics”, he says.

A lot of their members say that while they used to get comebacks on about 5% to 10% of tax return submissions, the numbers have increased to around 50% to 80%, which are often followed by another process.

Engel says a lot of procedural steps are being added, thereby effectively pushing the burden heavily onto the taxpayer, also with regard to certain tax refunds.

Although more refunds are given more readily, some taxpayers have found that they immediately get a query and potential assessment saying they have to prove why they were entitled to a refund. If not, they had to pay the money back with interest.

“So they are using a burden of proof strategy to put a very heavy onus on taxpayers and so they make an assertion without proof. You have to prove you are innocent and that has been a revenue activation strategy that has been growing over the last five [to] ten years and now it’s becoming much more intense as their need for revenue becomes more desperate.”

Tax revenue is projected to fall almost R51 billion short of earlier estimates this year, the largest downward revision since the 2009 recession. National Treasury said on November 7 the inquiry into Sars would help to assess what factors were responsible for the under-collection of revenue by Sars and what steps the authority had to take to improve performance management systems. Sars argues that it has largely been incorrectly blamed for the downward revision.

Engel says tax practitioners find that they face an increasing compliance burden when interacting with Sars to defend taxpayers against what they perceive as unsubstantiated allegations, but because of Sars’ concern about corruption, tax practitioners may find themselves talking to a machine, instead of the auditor who made the tax assessment.

He says while the assessor might have reasonable grounds to be looking for information, the fact that there is no direct communication between the Sars official making the assertion and the party who has to respond, means that the taxpayer has to enter into a guessing game where they submit documents which may not be good enough.

“Sars has created a wall between the taxpayer and the assessor because they are afraid of corruption, but by doing that they’ve lost communication [with the taxpayer] and that is adding to the compliance burden and adding to the frustration and I think Sars recognises that,” he says.

Rupert Oberholster, tax practitioner at Pro-Accounting, says he has only seen a small increase in the number of verification or audits requests. These requests usually relate to significant increases in a taxpayer’s medical expenses from one year to the next or where the taxpayer claimed considerably more kilometres than in a prior period.

However, Sars has been stricter with these requests during the current tax season, and has asked for information it hasn’t previously requested – for example a sales invoice for a car in addition to a taxpayer’s logbook, he says.

Although the Tax Ombud recently found that Sars unduly delayed tax refunds in certain cases and recommended various remedial actions, Van Deventer says it doesn’t appear that the situation is improving.

In some instances, Sars has delayed the process by requesting supporting documents for VAT periods going back five to seven years. VAT registrations in particular have been a nightmare, he says.

Sars says the level of audits conducted is in the region of 21% across all Personal Income Tax (PIT) returns, which is in line with previous years.  

“This refers to all Personal Income Tax returns, including credits, debits and nil returns. In respect of credit (refund) assessments we are currently stopping 15%.” 

It did not provide specific details about verification requests.

Sars says it has noted media references alleging that it is auditing lower amounts.

“We are in the process of obtaining the merits of this case, as it is very difficult to provide a response without specific case details.”

In October, Sars said its risk mitigation measures have saved the fiscus R20 billion in fraudulent claims across all tax types in the current financial year and that it paid roughly R120 billion in refunds.

During his Medium-Term Budget Policy Statement, finance minister Malusi Gigaba said Treasury has noted a slippage in tax compliance.

Most individual taxpayers (non-provisional taxpayers) have until November 24 to submit their tax returns. 

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It is time big business steps up to the plate and starts refusing to collect PAYE. The only way to stop the looting and save this country is to cut off the funding. Otherwise an inevitable collapse will occur.

I have just had a 27 question Audit from Sars.
This is for a small property business that now runs at a loss due to higher electricity charges, higher rates and due to higher unemployment , there are less tenants and rents are lower.
Perhaps I should apply to run the country. My above failure qualifies me.

@Gringo

I can possibly help (…if you havent as yet responded to SARS’ audit query). Am in tax practice & have a H.Dip.Tax Law qualifaction at least.

Answer the questions SARS asked in your return letter (do it on a word-doc & then convert to PDF)

The issue for SARS the past year or so, they picked on a number of people claiming rental-losses year-after-year, with seemingly (to SARS) with no prospect of ever showing a profit in the foreseeable future. SARS then thinks, how come you keep on doing the “trade” of rental-prop, if it’s not worth your while? (i.e. why not sell the property, which makes a loss). Why keep on funding the loss year after year?

SARS people sometimes forget that rental-property is a longterm asset, and will show losses during the early years of a homeloan, as the interest is higher vs capital. Plus you get the odd bad tenant destroying the place.

Besides answering the SARS questions to your best ability, a strong motivation is always good to be ADDED IN below your answers, as to prove to SARS that you have a “genuine intention to make a rental profit in the foreseeable future”. SARS may decide to allow your rental losses, and give you a refund, if they know that one day in future, your rental will turn in a profit…so that they can tax that going forward.

(It’s like a farmer claiming losses for a few years in a row,…drought…, but the farmer still has THE HOPE of securing a profit in years to come, as farming conditions turn again in his favour). Same approach with rentals, or any other trade/business you may have.

Can use the inserts below….just modify them applicable to your own situation.

(extract 1)
Case Law motivation:

Revenue needs also to be aware of laid down CASE LAW, which tax courts considers in cases to prove the element “reasonable prospect”.
Applicable Tax Court cases refers:

• ITC1319 ; 1980 ; 42 SATC 263
• ITC1424 ; 1987 ; 49 SATC 99
• J v COT ; 1993 ; 55 SATC 62

In the above case-law, the court held that the (subjective) genuine intention of the taxpayer to derive a future profit, and that the element of reasonable prospect (irrespective how long this may take!!). The above objective answers have clearly exceeds a mere “reasonable” prospect of profit. There thus exists a (objective) expectation of a long-term rental profit. (…otherwise, such investment would be pointless). The taxpayer remains hopeful that on reasonable grounds that he will derive a longterm rental profit. The above court cases were based on much more uncertain farming operations (same tax principle can be applied)…with rental-property the long-term expectation of a profit (as we all know, once bulk of homeloan is paid) is even MORE certain in the long run. The Courts have allowed the losses even in scenarios where future prospects for profit were less certain as in risky farming business environment.

(extract 2)
This is also known as the “facts & circumstances test” (under Section 20A ring-fencing) providing the escape clause for this taxpayer.
The taxpayer remains hopeful that his 2 properties will turn into a long-term profit, as this is his end-goal (otherwise it would make no sense to retain loss-making assets indefinitely, SARS would agree.)

(extract 3)
This is a positive indication that this property will also turn to a profit in future years, as the loss shrinks, as the homeloan-interest becomes less over time. Makes thus business sense to keep for long-term profit motive.

Secondly, there may be another issue for SARS asking questions: you may’ve declared on your past returns 3yrs (out of 5yrs) as rental losses (or 6 out of 10yrs) AND IF your annual taxable income exceeds the 41% top marginal bracket (i.e. over R700K p.a.)…then SARS can “ring-fence” your rental-losses (i.e. not giving you a refund re the loss, and carry it forward into 2018 tax yr) when IF you make a future (taxable) profit one day, today’s losses can offset future profits…so that you save tax in future profit-making years.

If you rent the property to any family member or connected person, SARS will in any case try to ring-fence the rental loss under their “suspect trades” rules.

Can get very technical as one can see….but one the other end, SARS’ aim (i think) is to tire people out & to give up the ghost. Rather tire SARS out by giving full response…I wonder if SARS study such responses…some are too onerous, and they see “OK, the taxpayer has his/her ducks in a row…not worth battling”. Rental loss allowed”

Thanks Michael
My accountants are assisting me.
As you no doubt know it is just getting harder with extra admin, costs and trying to keep existing staff employed never mind creating new jobs. At what point do we just walk away from all this nonsense.

The 51bn shortfall could well be simply the result of cooking the books last year by withholding refunds to meet their targets. The delayed refunds paid out this year reflect as a reduction in collections. Expect more of the same.

They can collect an immediate R660 000 000 tax debt owed by Adriano Mazzotti – illegal cigarette maker, gangster and Dlamini-Zuma backer.

“In an affidavit that Mazzotti signed in May 2014, he admits his complicity and that of his company, Carnilinx, in a host of crimes, including fraud, money laundering, corruption, tax evasion and bribery.”

After being retrenched in 2015, I paid their taxes according to their tax directive. Surprise surprise – due to underpaying and interest, I had to fork out close to 60k. So why have a tax directive then?

SARS – may you burn in hell. Go cursed, you gupta thieves.

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