How SARS catches tax-dodgers
SARS auditors employ methods that most people wouldn’t have even considered. How does the South African Revenue Service (SARS) catch those who do not contribute their fair share to state coffers? Here are some tests that SARS auditors perform to see if you are being somewhat economical with the truth. Comparing VAT returns to your income tax return When you submit your IT14 company tax return, you are required to make certain disclosures including your company’s turnover. But according to Mark Twain, if you tell the truth, you don’t have to remember anything. If you are cooking the books, at least try to remember to make sure that your turnover per your VAT return tallies up with the turnover disclosed in your financial statements. Because many tax dodgers are dumb as well, SARS catches many a tax reprobate by doing this simple cross-check. Whichever way you try to fiddle with the numbers, SARS has got you. If the turnover in the VAT returns is short, you will get nailed for under-declaring your VAT. If it is the income statement figure that is light, then you haven’t declared all your sales for income tax purposes. In both cases, you will land in hot water. Checking your tax returns against other records Did you know that the details in the Deeds Office and the National Vehicle Registry are a matter of public record? SARS does and they catch many a tax evader through a couple of simple checks. For instance, if you have a Porsche and a Sandton penthouse registered in your name, and you have declared income of R40 000 per month, you may have some explaining to do. Working out that the car and the house will be setting you back the best part of R100 000 per month in repayments is not rocket science, particularly if these items have been purchased recently and the titleholder is a bank, or a mortgage is registered against the property. And don’t try to claim that you have inherited something when you haven’t wills are also public documents, and for a SARS auditor to pay a visit to the offices of the Master of the Supreme Court is no problem. Observing your lifestyle Do you play golf, go on holiday at a posh resort, or dine in fancy restaurants? Guess what SARS employees do as well. Contrary to popular belief, people who work for SARS do have a life outside of work, and they enjoy the finer things in life just as much as the rest of us do. And it’s amazing how much people reveal about themselves after a few beers or one or two bottles of wine particularly when it comes to some smart scheme they have cooked up to “put one over the taxman” (or so they think). “The walls have ears”, and so do SARS employees. However, even if you don’t shoot off at the mouth, the fact that you are able to afford such niceties must say something about your income levels. A quick glance at your most recent tax return will reveal how honest you have been in declaring what you earn. Using some common sense One of the oldest tricks in the book is to fiddle with the cost of your car, or inflate the number of kilometres travelled. But as we revealed in the previous paragraph, SARS employees do sometimes venture out into the big wide world. They also watch TopGear, and they know how much various cars cost. And although even entry-level cars will set you back a pretty penny nowadays, don’t think you are being clever by listing that VW Polo Vivo at R500 000. They also sit in the same traffic that you do each morning. They know what the approximate distance is between Johannesburg and Pretoria. They also have a fairly good idea of which jobs involve extensive travel, and which ones don’t. Such snippets of information are stored in the collective memory banks of SARS audit teams, ready to be recalled when they look at your return. And how about fiddling with that odometer reading? Think again there are ways of checking this as well. When you renew your licence each year, you are required to declare the odometer reading on the form. While this measure is primarily to stop people from putting their cars through the ‘fountain of youth’ when the time comes to sell, it is also a useful thing for SARS to check and compare to what you have declared on your return. There have also been a number of instances where SARS has called for service records. Alternatively, they simply call you up and request that you make your vehicle available for inspection on a given day. As far as your logbook is concerned, SARS not only requires extensive details of your trips (i.e. they no longer just accept ‘client visit’ they’re now after names and addresses), but their auditors are a whizz on Google Maps. You also may have some explaining to do if you’re Joburg-based and have travelled to Durban on ‘business’ two days after the schools have broken up for the December holidays. If you genuinely do make a business trip of this nature, it’s a good idea to have some supporting documents confirming this. Following the paper trail A couple of years ago, SARS changed the requirements for a valid tax invoice, to be issued whenever VAT is charged. For those invoices exceeding R5 000, you are now required to include not only your own address and VAT number on the invoice but that of your customer as well. The reason for this is to create a paper trail for SARS auditors to follow. When they conduct an audit at your business premises, they also note down some VAT numbers from your invoices. Upon their return to the office, these numbers are checked on their systems. Many a fictitious VAT number has been uncovered in this manner, while this method also
Your retirement ‘gift’ to SARS
In last month’s issue of Tax Breaks, we dealt with the tax treatment of retirement lump sums when one resigns or is dismissed (prior to reaching normal retirement age). However, when you actually retire from a retirement fund, the rules are a bit different – and SARS gives you a bit more of a break. Definition of retirement In the ‘good old days,’ retirement meant that you had reached a certain stage where you stopped working, had a shindig at which you were presented with your gold watch, went on pension, and spent the rest of your days trying (unsuccessfully) to perfect your golf swing. However, everyday words always seem to mean something different when it comes to tax, and the concept of retirement is no different. From a tax point of view, the term ‘retirement’ refers not to the time when you decide (or circumstances force you) to stop working, but rather the event that triggers your retirement from a retirement benefit fund. The difference between ‘retirement’ and ‘withdrawal’ is that should you elect to receive your entire fund or part thereof as a lump sum, such lump sum is taxed at more favourable rates if your exit from the fund qualifies as a retirement. You can therefore ‘retire’ from a fund in the following circumstances: Any time from your 55th birthday onwards; or At any age, provided that such retirement is due to disability or ill-health. In most cases you will only be entitled to retire if such disability or ill-health is of a permanent or long-term nature. Note that retiring doesn’t mean that you will never be entitled to work again. With modern healthcare and more active lifestyles, many people are being retained as consultants – or even starting completely new careers. Even in the case of ill-health or disability retirements, there are many cases where the person’s disability or health status nonetheless enables them to work in areas that are less physically strenuous than the job from which they were medically boarded. Taxation of lump-sum benefits upon retirement Using similar scenarios as in last month’s article, except for the fact that the person has retired rather than withdrawn from their fund, the tax calculation is as per the table below. Transfer of benefits to another retirement fund If you have reached retirement age but you plan to continue working, you need to have both a tax consultant and an investment advisor run the numbers for you, especially if you don’t need to start drawing a pension immediately. Depending on your personal circumstances and tax position, it may be more advantageous for you to withdraw from your employer’s fund and transfer the benefits to another fund, or consider making your fund “paid up” (provided that the rules allow for this) rather than to take a retirement benefit. However, make sure that you take all of the possible implications into account, especially if you are entitled to receive certain post-retirement benefits (such as subsidised medical aid or the enjoyment of staff discount benefits that may be extended to retired employees as well). The last thing you want is to resign rather than retire in order to save a little bit of tax, but then end up with no post-retirement medical cover! Pensions / annuities In the case of your retirement from a pension or retirement annuity fund, your lump sum is usually limited to one-third of the total amount invested. The balance must be utilised to purchase an annuity (pension). Such annuity is fully taxable, just like your salary used to be (except that you no longer have a car allowance or other tax-preferential perks). This is different to voluntary purchase annuities, where part of the annuity represents the return of capital (with only the income portion therefore subject to tax). Lump sums received upon retrenchment With effect from 1 March 2011, severance benefits received will be treated on the same basis as a retirement lump sum, thus qualifying for the preferential tax treatment. However, if you are retrenched prior to your 55th birthday, you will not be able to retire from your retirement fund-which means that any lump sums paid out from your retirement fund will still be treated as a withdrawal (unless your severance has been for reasons of ill-health, in which case the normal retirement lump sum tax tables are applicable). In practice, your employer and your retirement fund are separate legal entities, and you should therefore be receiving two IRP5 certificates. The biggest tax risk is that since (for example) your employer’s payroll department will be dealing with your severance, while a fund manager could be handling the retirement fund, it’s possible that either (or both) entities might not know the full circumstances of your severance, and end up putting the wrong lump sum codes on the directive application. It is therefore critical that you receive appropriate tax advice once you have received notification of your severance package and available retirement fund lump sum, but before any tax directives are applied for. Once the directive has been and the IRP5 certificates have been issued, rectifying any errors is both difficult and time-consuming – in the case of one of my own clients, it took two years to sort things out with the employer and get the excess tax refunded by SARS. Receipt of previous retirement benefits The tax tables applicable to retirement fund lump sums received upon retirement are ‘once-in-a-lifetime’ scales. As will be seen more clearly from the calculation example above, this means that while a first-time taxable retirement lump sum of R500 000 would be exempt from tax, a subsequent lump sum of R200 000 would be subject to tax at 18%, being the rate applicable to the next band. This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information
Submit your return on time, or face penalties
Non-residents and earners of foreign income are also receiving extra attention this year The tax season for the 2022 tax year has just started, and it will be one of the shortest to date. The period to submit tax returns opened on 1 July 2022 and runs to 24 October 2022 for individual taxpayers who are not provisional taxpayers. Determining whether you need to file a tax return On 3 June 2022, SARS Commissioner Edward Kieswetter declared who he requires to file a tax return for the 2022 filing season. In general, you only need to submit a tax return if any of the following circumstances apply to you: You received a salary or retirement income from more than one source; Your salary or retirement income was from a single source, but exceeded R500 000; You conducted a trade within or outside South Africa; You are a South African tax resident but received employment income from outside South Africa; You receive travel, subsistence, or office-bearer allowance against which you will be claiming expenses; You have a company car; You held funds in foreign currency or assets outside South Africa with a combined value exceeding R250 000 at any stage during the tax year; You had capital gains or losses exceeding R40 000 on the disposal of local assets; You received income or capital gains from any foreign asset; or You hold participation rights in a Controlled Foreign Company. However, if a tax return is issued to you or you receive notification from SARS that you are required to submit a return, such return will need to be submitted even if you have answered ‘no’ to all of the criteria listed above. Comments on the notice issued by the SARS commissioner The Commissioner indicated in his notice that he requires South African tax residents to disclose their foreign assets and funds they held during the 2022 tax year. He also requires tax residents to declare all foreign-sourced earnings (irrespective of the amount received) and mentioned more than once that residents who received any amount for services rendered abroad need to submit tax returns. This underlines SARS’s continuous focus on South Africans who are working in foreign countries, and it is critical that these South Africans declare their foreign earnings – even if they are subject to the foreign exemption, and irrespective of whether tax has been deducted by the foreign jurisdiction (although such tax will entitle the taxpayer to foreign tax credits to the extent that such tax does not exceed the equivalent South African tax liability on such income). Only taxpayers who do not fulfill the South African residence tests do not need to declare their foreign earnings or assets. It is thus critical for South Africans who have left the country permanently to formalise their non-resident status with SARS in order to align their factual situation with their SARS tax status. Taxpayers who have completed the Tax Emigration process in order to become non-resident for tax purposes are only taxed on South African sourced earnings, and not their worldwide earnings. Accordingly, SARS is taking an extremely stringent approach in considering whether or not a taxpayer is non-resident. Also, bear in mind that while there is an option to include the date upon which you ceased tax residency in your tax return, doing so does not result in the necessary manual intervention by SARS to prove and obtain non-resident status in the majority of cases. SARS KEY TAX SUBMISSION DATES Filing Season 2022 24 Oct 2022 Taxpayers other than provisional taxpayers filing online (eFiling or MobiApp) 24 Oct 2022 All taxpayers unable to file online (to be done at a SARS branch by appointment) 23 Jan 2023 Provisional taxpayers filing online (eFiling or MobiApp) Provisional tax returns 31 Aug 2022 First provisional tax return and payment, 2023 tax year 30 Sep 2022 Third provisional tax return (voluntary top-up) and payment, 2022 tax year 28 Feb 2023 Second provisional tax return and payment, 2023 tax year The Notice of Non-Resident letter is currently the most reliable form of proof that you are recognised as a non-resident. If you are a South African permanently living abroad and have not received this letter, the chances are good that you are still recognised as a tax resident on SARS’s systems. SARS will be issuing penalties for late submissions To prevent any administrative penalties for late submission, it is critical that you submit the 2022 tax return within the SARS-mandated filing period (see box below). Late in the 2021 filing season, SARS announced that taxpayers who file their tax returns after the filing season’s deadline will face administrative penalties. SARS appeared to be particularly strict in the application of their notice since penalties were issued on practically all returns submitted after the filing season for the 2021 tax year had closed. The penalty amount will depend on taxable income or assessed loss of the taxpayer and ranges between R250 and R16 000 per month. The monthly penalty as determined in accordance with your taxable income or assessed loss can be applied on a monthly basis for up to 35 months. It is therefore imperative that taxpayers (whether a tax resident in South Africa or not) take Filing Season seriously. The general view of South Africans abroad is that “SARS will never catch me”, or “I refuse to pay/give anything to SARS/that government”. While that view is understandable where one sees maladministration and corruption running rife in South Africa, it does not stand as a defence to taxpayers who do not meet their legal obligations to file a tax return and declare the relevant income. A taxpayer’s best defence is to be proactive with SARS and ensure that they remain complaint in terms of the Acts, so as to not give SARS any ammunition to raise penalties or worse. Written by JONTY LEON and REINERT VAN RENSBURG While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither writers of