Revenue augmentation involves comparing the revenue a taxpayer has reported on their tax return with the actual amounts deposited into their bank accounts. For instance, if a taxpayer declares R1 million in their return but the deposits across various accounts indicate revenue of R10 million, SARS will ask the taxpayer to justify why they should not issue an additional assessment to tax the R9 million difference, which SARS considers as undeclared income.
Although this may appear to be a simple matter for a taxpayer to clarify, the truth is quite different. For the South African Revenue Service (SARS) to issue these assessments, they merely need to examine the deposits, perform a quick calculation, and voilà! It seems like a straightforward and uncomplicated procedure.
Taxpayers cannot merely reply by claiming, for example, that “those deposits are all loans” or “those deposits are merely inter-account transfers.” They also cannot assert that “based on the changes in the loan balance on my company's AFS, those deposits must be loan repayments” or simply state, “your calculation is incorrect.”
Tax law places the responsibility of proof on taxpayers. To justify why the South African Revenue Service (SARS) should not tax certain items, such as inter-account transfers and loan repayments, the taxpayer must often reconcile amounts on a line-by-line basis. They are required to provide evidence explaining why specific deposits should not be included in their gross income. Is this feasible? It seems they take considerable interest in the High Court ruling CSARS v M, (A5036/2023) [2023] ZAGPJHC (6 July 2023), which affirms that they can do so—variances in facts should not be assessed individually.
To clarify why this is considered low-hanging fruit, let me provide some context. For SARS to increase a taxpayer's revenue—by comparing deposits to declared amounts—proposing an often outrageous assessment likely requires only a few hours of work, given that they have access to data showing total deposits across all accounts. In contrast, taxpayers typically spend weeks (depending on the specifics of their situation) gathering data and collecting evidence to challenge that assessment. Skipping this detailed review process often results in SARS successfully collecting, or attempting to collect, the assessed amount, even though these assessments are frequently, though not always, incorrect.
To better illustrate why this is considered low-hanging fruit, let's take a moment to examine procedural law. These assessments are frequently, though not exclusively, classified as 'estimated assessments.' Taxpayers are unable to contest these specific types of estimated assessments. Consequently, they cannot legally request explanations for the assessment, nor can they ask for the often-inflated amounts to be put on hold while challenging these assessments. Ultimately, the taxpayer is required to provide a detailed, line-by-line justification for why each deposit is not taxable. This painstaking task is nearly unavoidable.
To summarize, taxpayers in these situations will genuinely feel and grasp the meaning behind the phrase that the balance of power leans in favor of the revenue authority.
It’s important to note that observant readers and others may quickly highlight that this process is generally applied in situations where a taxpayer is non-compliant. This includes instances where a tax return has not been submitted or when the taxpayer has not cooperated with SARS, such as failing to respond to at least two requests for necessary information. They would certainly be correct in this observation. The underlying sentiment suggests that if a taxpayer has neglected to file a tax return or provide relevant materials to SARS, they must simply accept the full force of the revenue collector—after all, this predicament is a result of the taxpayer's own actions.
The validity or significance of this sentiment, whether viewed from a moral or legal standpoint, is not something we will address here. Instead, we will pose two straightforward questions:
I remember a High Court ruling involving a motor company, likely located in the Pretoria East area. The judgment indicated that SARS must have valid reasons to issue an assessment, even though the burden of proof lies with the taxpayer. Additionally, tax law provides various penalties for non-compliant taxpayers, but, to our knowledge, none of these include issuing assessments based on non-existent income.
This process of revenue augmentation probably does a stellar job of winning the war against serious instances of noncompliance. This is fantastic. Perhaps, however, a more targeted approach and selection criteria could be employed as opposed to what seems to be a large-scale rollout of a process to collect low-hanging fruit.
In the interim, taxpayers who find themselves as collateral damage in the fight against non-compliance should seek professional help. It's important to understand that only after you have completed the challenging process of fulfilling your burden of proof will it become evident that you are collateral damage and not the adversary.
Original author: NICO THERON, Managing Director at Unicus Tax Specialists SA
