Global Courant
Settling personal tax matters to pay as little tax as possible is a right that every South African possesses; however, it must be done within the constraints of the law, says Tax Consulting SA.
The tax consultancy said the South African Revenue Service (SARS) has recently shown it will get behind those who try to be “innovative” and avoid the tax office.
“You have those taxpayers, sometimes misled even by unscrupulous tax advisors, who accompany tax returns or do not provide all the details of transactions. These kinds of attempts to be innovative with SARS by not making correct disclosures are the most basic of mistakes,” said Tax Consulting SA.
In a recent case in July titled CSARS v M, a taxpayer failed to disclose receipts totaling R5.6 million during the assessment years 2007 to 2010.
“A decade later, the taxpayer’s defense was that the amounts were repayments of interest-free loans advanced by the taxpayer to related parties, which had no tax consequences.”
“Also they tried the novelty that SARS should in any case not impose additional assessments, as more than three years had passed since the original assessments were issued by SARS,” said Tax Consulting SA.
After an original assessment by SARS, an additional assessment will be issued.
However, there is an exception in which SARS is not allowed to make an assessment three years after the date of the original assessment under the Tax Authorities Act (TAA).
However, Tax Consulting SA said section 92 of the TAA requires SARS to issue a supplemental assessment where it is satisfied that an existing assessment “does not reflect the proper application of any tax law to the detriment of SARS or the tax authorities”.
SARS, when making an assessment three years after the original assessment, may only do so if the provisions of Article 99(2)(a) have been met (namely, when the “full amount of tax due has not been determined … because of – (i) fraud; (ii) misrepresentation; or (ii) non-disclosure of material facts, the company said).
Duty of the taxpayer
Under Section 25(2) of the TAA, there is a legal obligation for a taxpayer to file a return that is “complete and truthful”. There is therefore a legal obligation of the taxpayer to provide information.
When a return contains a false statement of fact, it amounts to a misrepresentation.
If the declaration is not complete, this may amount to a failure to disclose a material fact.
The group said that if there is any misrepresentation, failure to disclose material facts or fraud, it could result in the statutes of limitations not applying if it is proven that the full amount of tax due has not been determined “because of” misrepresentation or fraud or failure to disclose material facts.
The words “because of” imply a causal relationship between false statements (misrepresentation, fraud, or secrecy) and failure to determine the full tax amount. In CSARS v M, the Supreme Court affirmed that SARS met this requirement and intended to reopen reviews based on confidentiality.
According to Tax Consulting SA, arguments by crafty taxpayers that SARS had been provided with all supporting documents (such as annual accounts) at the time of filing the return and set out the correct position will not hold.
Testimony
While national courts hold a taxpayer’s intention in high esteem, there is a distinction between the actual intention of the taxpayer – which is reflected by objective factors – and the testimony a taxpayer gives regarding that intention, the tax authority said.
In the CSAR v M decision, the taxpayer’s testimony in the tax court was that he received repayments on loans that were not taxable. However, the Supreme Court has considered the following in this regard:
“While the taxpayer explained in tax court filings that these receipts related to the repayment of money borrowed and advanced by him… he presented no evidence to support his claim that these deposits should not be treated as income in his hands. What’s more is that the documentation gives a different version”
Fraud, misrepresentation or failure to disclose material facts
The three-year statute of limitations does not apply in the event of fraud, deceit or concealment of material facts.
This does not only apply to income tax. The TAA extends its scope to include levies, contributions, penalties, interest and other monies.
Misrepresentation of Facts: Capital vs. Income
The courts of South Africa have established legal tests to determine whether an amount is capital or income.
These tests, such as the “fruit and tree” analogy and the one-time sale principle, depend on the specific facts of each case. The distinction between capital and income is a matter of fact and the law is clear on how these categories are treated.
Broadly speaking, capital refers to assets held for long-term investment or wealth accumulation, while income refers to regular income generated from day-to-day business activities.
Taxpayers cannot excuse ignorance of the law, as there is a legal maxim that ignorance of the law is not a valid defense.
Taxpayers who fail to disclose all income and capital receipts on their tax returns may be considered a material non-disclosure of facts. If a taxpayer deliberately misrepresents a receipt as a capital receipt instead of an income receipt, it constitutes a false statement of fact on the return.
In a case brought by the Spur Group, the Supreme Court stressed that taxpayers who make inappropriate or untrue disclosures in their returns may not receive favorable treatment. A complete and accurate statement in the tax return is required by law.
“If you have a dispute with SARS, be extra careful not to take the prescription card out of play too early. You may very well find that neither SARS nor the courts have a listening ear for you, and that the tax jurisprudence has stacked against you,” said Tax Consulting SA.
“Make sure your compliance process is ready one day when SARS decides to come visit or, even worse, tell you what your taxes should have been, as they have extensive financial records of anyone with a bank account, investments, real estate, etc.”
With commentary from Tax Consulting SA
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