Taxpayers are feeling the effects of a radically hardened attitude by SARS towards taxpayer responsibilities. This, according to Neill Hobbs, CEO of specialist tax advisory firm Hobbs Sinclair, is not only demonstrated in the recent announcement by SARS of non-compliance penalties (which kicked in from December 1), but is also apparent in the increase in requests for supporting documentation and verification of tax returns.
Hobbs says that his firm has seen a remarkable uptick in the depth of SARS’s requests for clients to justify expenses by providing supporting documentation or motivation after a tax return has been submitted.
“We have seen many requests for information supporting expenses claimed for in a tax return,” Hobbs says. He says there is a definite interrogative approach adopted by SARS when reviewing company-assessed losses, with SARS requesting confirmation of the company’s intention to make a profit, business plans and forecasts, and explanations of the reasons why the company is trading at a loss. In its efforts to collect revenue from the private sector, SARS is taking a firm stance on individuals, trusts and private companies by:
- Charging admin penalties for late submission of income tax and VAT returns;
- Rigorously scrutinising financial statements;
- Limiting the deductions against prior years’ tax losses to 80%;
- Interrogating expenses and cost of sales; and
- Querying the deductibility of expenditure and allowances.
Hobbs warns that to avoid disallowances, the tax practitioner must prepare a watertight and compliant “tax pack” for submission with full supporting documentation for interrogation by SARS.
“It is vitally important to justify tax-deductible expenditure before a return is assessed, especially as objections appear to be disallowed out of hand. This opens up the taxpayer to a lengthy and costly appeal if the initial assessment is incorrect and the objection is disallowed,” he says.
According to information released by the Tax Ombudsman nearly 70% of objections initially disallowed are overturned on appeal. This is particularly harsh for the taxpayer, especially as SARS will not withhold collection action in the event of the disallowance of an objection.
“There has been an increase in instances where SARS is taking monies directly out of taxpayers’ bank accounts to collect taxes due. Alternatively, SARS can instruct debtors to pay amounts owing to the taxpayer directly to them, or they can lodge a judgement against non-compliant taxpayers,” says Hobbs.
He warns that non-compliance can be crippling. “Pro-active tax compliance may appear to be expensive, but non-compliance can be catastrophic.” A principle focus for any tax practitioner should be tax prediction and tax protection advises Hobbs. “Your tax expert should be making sure you are 100% compliant and upright in your tax matters while using every available allowance within the Tax Act to reduce taxable income.”
It’s not all bad news, says Hobbs: “Firstly, effective tax compliance is welcomed as it spreads the tax burden over all taxpayers. Secondly, we have a dynamic Tax Act that is geared towards uplifting the economy by providing effective incentives for local investment. It is possible to live in South Africa and dramatically reduce your income tax rate by investing in incentivised, productive assets in this country.”
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