Sharpening its revenue collection tools has seen the South African Revenue Service (Sars) require that several taxpayers explain why the revenue declared in their income tax return does not match the deposits detected in their bank accounts. Unsatisfactory answers have led to estimated or additional assessments and even hefty penalties being imposed. Sars has taken to augmenting taxpayer revenue.

Revenue augmentation is a process of comparing what a taxpayer declared as revenue in [their] tax return to the amounts actually deposited into taxpayer’s bank accounts.

If a taxpayer declared R1 million but the deposits suggest revenue of R10 million, they must explain why Sars should not raise an additional assessment to tax the “undeclared revenue”.

Sars has had access to taxpayers’ information from third-party data providers such as banks and other financial institutions since 2012.

As you can imagine that is a lot of data. They have lately improved their capacity and systems to process this data much more efficiently. That is why we are now seeing an increased utilisation of the data to verify information that is being declared [in relation] to what is being received from third-party service providers.

SARS has increased audit focus on individual taxpayers since January. These variances are huge, so it does make sense for Sars to pursue cases where they are likely to recover undeclared revenue

Taxpayers must realise that Sars is continuously seeking new, better and more efficient ways in which to obtain a “360-degree view” of taxpayers’ affairs.

This includes a review of movements in their bank accounts, their world-wide income and other assets in or outside SA.

If the taxpayer does not respond or does not supply adequate reasons why the deposits have not been declared, or that they relate to loans or inter-account transfers – or potentially from other non-taxable income – then Sars will raise these assessments.

The revised assessments can be challenged through the relevant dispute mechanism procedures. However, as we know these procedures take time, effort and can be costly

The tax law places the burden of proof on taxpayers. Sars may require a taxpayer to reconcile amounts on a line-by-line basis, and explain on a line-by-line basis – with evidence – why a particular deposit does not stand to be included in their gross income.

It may take a taxpayer weeks to fend off additional assessments. If they do not go through this extensive line-by-line exercise a likely outcome is that Sars will collect or try to collect the amount it has assessed, despite these assessments often – but not always – being ultimately incorrect.

Taxpayers who are currently the focus of Sars’s attention are the ones who are unlikely to respond when questions are asked about deposits in their bank accounts, or by the time Sars gets around to them there will be no assets in their name or money in the bank account.

There are instances of downright non-compliance and taxpayers are “ultimately held accountable for the correctness of their tax returns.

Once Sars has alerted the taxpayer to the discrepancy they have to engage with Sars.

Taxpayers should also note that if Sars raises an estimated assessment they will not be able to object to the assessment.

This means they cannot, in law, request reasons for the assessment, nor can they, in law, ask for payment of the often-overstated assessment to be suspended pending a challenge against these assessments

Taxpayers must distinguish between an original, additional and estimated assessment.

Nzimande advises taxpayers to invest time to understand and review the information declared on their tax returns, even if they have a professional that assists with the filing of their returns.

If there are issues with the declarations, the taxpayer is the one who will ultimately be held accountable.

What is a Tax Free Savings Account?

Basically it’s a type of savings account offered by financial institutions that invests your money in a combination of financial products such as unit trusts, bank savings accounts, fixed deposits, bonds, etc.

The difference between this and other savings or investment accounts is that all returns, i.e. the interest, dividends or capital gains earned, will be tax free in your hands.

This means that you’re not liable to pay tax on the growth of your investment, nor if you decide to withdraw from your account.

A tax free savings accounts- just means it is tax free, it is not a tax deduction, therefore it will not be used as a deduction to bring your taxable income down

Are There Limits to Tax Free Savings Accounts?

There’s an annual contribution limit of R36 000 per tax year, as well as a lifetime limit of R500 000. Once you have reached your lifetime contribution limit of R500 000 no further investment in a tax free savings account will be allowed.

 No limit of number of accounts

The annual limitation can be spread across as many savings accounts as you wish, provided you don’t invest more than R36 000 in total for the tax year (1 March to end February).

So if, for example, you’ve already contributed R10 000 to one tax free savings account for the period, you’ll only be able to invest a maximum of R26 000 to any others.

No carry over of annual contribution limit

The annual limitation can’t be carried over to the next tax year, you simply forfeit any unused amount and are given a new annual limit of R36 000 to invest in a tax free savings account.

For example, if you’ve invested R26 000 for the tax year, you can’t carry the R10 000 over to the next year.

Contribution to a tax free savings account for a minor

As a parent, you’re able to open a tax free savings account for your child(ren), but you need to be aware that any contributions you make to this account on their behalf counts towards their annual and lifetime contribution limit.

What are the Benefits of a Tax Free Savings Account?

Tax free growth, even if you reinvest

The critical advantage of a tax free savings account is that your growth or earnings on the initial investment are exempt from tax on withdrawal.

You’re able to reinvest (or capitalize) your returns and they don’t count towards your annual or lifetime contribution limit.

For example, if you invest R36 000 for the year and receive a return of investment of R2 000 that you re-invest, the total amount in the account will be R38 000, yet you’ll still be able to invest your full R36 000 the following year as the R2 000 reinvestment doesn’t count towards the annual or lifetime limit.

Unlimited withdrawals, with conditions

You’re free to withdraw from your tax savings account at any time you wish, however any replacement investment amount is treated as a new contribution and will therefore count towards your annual and lifetime limits.

Let’s pretend you withdraw an amount of R36 000 from your tax free savings account because you’re going through a short-term cashflow issue.

A few months later, in the same tax year, you come into a little money and so you deposit R36 000 back into your tax free savings account.

Provided you haven’t made any other contributions for the year, this amount takes you to your contribution limit for the year, plus it’ll be added your overall lifetime contribution.

If you’d already made a contribution in the tax year, this payment would have pushed you over your annual contribution level.

What Happens if I Exceed the Contribution Limit?

If you exceed your annual or lifetime limit, SARS imposes a stiff 40% penalty on the excess contributed.

This will be payable on assessment in the year you exceeded the limit.

For example, if in one tax year, you invest R20 000 in an account with one institution and R20 000 in an account with another, you will have contributed R4 000 more than the annual limit of R36 000.

The penalty will therefore be 40% of the excess contribution (R4 000 X 40%), giving you an R1 600 tax penalty to pay.

How Do I Report on My Tax Free Savings Account on My Tax Return (ITR12)?

The financial institution holding your tax free savings account will issue you with a tax certificate called IT3(s), which contains all the details you need for your tax return, e.g. contributions, interest, dividends, etc.

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The Office of the Tax Ombud dealing with SARS Disputes

The Office of the Tax Ombud (OTO) came to the rescue in a matter between the South African Revenue Service (Sars) and a taxpayer, ‘saving’ the taxpayer more than R500 000.

The taxpayer approached the OTO with its complaint when the objection it raised against an assessment was invalidated, preventing the taxpayer from lodging an appeal against the decision.

The dispute arose from a 2023 assessment in which Sars disallowed a claim for the tax exemption on income earned abroad.

The taxpayer objected and submitted supporting documentation for the claim.

Sars requested additional supporting documents, and the taxpayer obliged.

Sars did give reasons for rejecting the objection, and indicated that the taxpayer could submit a new notice of objection.

Following the invalidation of the objection, the taxpayer lodged a complaint with the OTO.

The OTO considered the matter and recommended that Sars withdraw the rejection and take a decision on the objection.

Sars adhered to the recommendation, allowed the dispute, and reduced the assessment by more than R500 000.

Sars can invalidate an objection if:

• The taxpayer does not set out the grounds of the objection in detail;
• The taxpayer does not use eFiling and does not specify the address where Sars can communicate with the taxpayer;
• The form is not signed or if the representative is not authorised to represent the taxpayer; or
• The objection is lodged more than 30 days after the date of the assessment.

There was no error in the objection; therefore, there was no defect to correct in a new notice of objection.

Sars’s reasons for the invalidation of the objection indicate that it had, in fact, considered the grounds of the objection and, thereby, the merits of the dispute.

It is thus evident that the reasons Sars gave for the invalidation of the objection fall outside the dispute resolution rules.

In the appeal process, alternative dispute resolution can be followed where the taxpayer and Sars meet to find a faster, less expensive solution.

The OTO notes that Sars is not allowed to invalidate an objection because it disagrees with the taxpayer’s grounds of dispute.

If Sars requests further supporting documentation – as it did in this case – it must decide to allow, disallow, or partially allow the objection based on the information submitted by the taxpayer.

Objections are “invalidly invalidated” more often than we would like to see. Although it is happening less frequently, it is still happening.

The 2020 Tax Ombud’s Systemic Investigations Report concluded that there was a 31% error rate where objections were incorrectly invalidated for various reasons.

There is no updated data to confirm whether the situation has improved or worsened.

If the objection is disallowed or partially allowed, the taxpayer can resubmit the objection to amend the non-compliance, or approach the OTO, as in this case, or the tax court to have it validated.

If Sars invalidates an objection, there is always something that can be corrected when submitting a new objection.

The taxpayer can submit the correct form, or properly set out the grounds for the objection, sign the form and supply an address if not using eFiling to address the non-compliance.

Generally, but not always, when Sars invalidates an objection, and you cannot address the reason for the invalidation in the next objection, it is an indication that the objection was invalidly invalidated.

National Treasury referred to the alternative dispute resolution proceedings during this year’s budget, noting that it can only be accessed at the appeal stage of a tax dispute.

 

What is a dormant company

A dormant company is classified as a company that has not actively traded for the full year of assessment.

Because there is no activity in the company, it’s easy to forget about it completely along with all red tape that goes with it.

Penalties

SARS have recently become a lot stricter about levying administrative penalties for non-submission and late submission of company tax returns (even if the company is dormant) and these penalties will continue to re-occur on a monthly basis until the submission of the tax returns.

So, if you’re director of a company or the public officer of a dormant company, you still have a duty to submit the company’s tax returns to SARS.

• Check with the Companies and Intellectual Property Commission (CIPC) to see which companies are registered on your name and identity number.
• You can also see here if the company is dormant or still active according to their records.
• Check on SARS eFiling to see if there are any outstanding tax returns for this company.
• Submit all outstanding tax returns to SARS and request the Tax Compliance Status.

De-register a company

When a company de-registers with the Companies and Intellectual Property Commission (CIPC), it implies the company is no longer registered and has no legal standing since it’s not doing any business nor has any assets or liabilities.

When a company de-registers with SARS, it will have no further tax obligations.

If you don’t intend to trade through your company, it would be advisable to de-register with both CIPC and SARS as soon as possible to avoid further administrative penalties.

 

 

Turnover tax is a simplified system aimed at making it easier for micro business to meet their tax obligations.

The turnover tax system replaces Income Tax, VAT, Provisional Tax, Capital Gains Tax and Dividends Tax for micro businesses with a qualifying annual turnover of R 1 million or less.

A micro business that is registered for turnover tax can, however, elect to remain in the VAT system

Turnover tax is worked out by applying a tax rate to the taxable turnover of a micro business.

Who is it for?

Micro businesses with an annual turnover of R 1 million or less. The following taxpayers may qualify:

• Individuals (sole proprietors)
• Partnerships
• Close corporations
• Companies
• Co-operatives

How to register?

To register for Turnover Tax:

• Do a quick test to see if you qualify for turnover tax

What records should be kept?

A big advantage of turnover tax is the reduced record-keeping requirements.

The following records must be kept:

1. Records of all amounts received;
2. Records of dividends declared;
3. A list of each asset with a cost price of more than R10,000 at the end of the year of assessment as well as of liabilities exceeding R10,000.

To take account of the typical expenses incurred by a micro business and to eliminate the need for detailed recordkeeping of deductible tax expenses, the turnover tax rates are significantly lower than the tax rates under the standard tax system.

Small businesses with an annual turnover of up to R20 million may qualify to pay Income Tax at a reduced tax rate.

A Small Business Corporation (SBC) is a private company that complies with various requirements per the Tax Act.

If it meets the definition of a SBC, it can take advantage of progressive tax tables (as opposed to the fixed standard corporate tax rate) and also accelerated depreciation for certain assets.

The latter means that less tax may be paid in the early years when the assets are purchased.

If you indicate that you are a small business on your Income Tax Return (ITR14), and meet all the requirements, the reduced rates will be applied automatically.

There is no need to apply for the reduced rates because your SBC status will be determined using information on your ITR14.

Is your business viewed as a Small Business Corporation by SARS?

Is your business Turnover less that R20 million per year?

Are the shareholders in your business all natural persons?

Do you only own your one business?

Does less that 20% of your turnover come from “investment” income?

Is less than 20% of your income from rendering a “personal” service?

If you have answered YES to all the above questions your business could be making massive Income Tax savings.

Personal service includes any service in the field of accounting, actuarial science, architecture, auctioneering, auditing, broadcasting, consulting, draughtsman ship, education, engineering, financial service broking, health, information technology, journalism, law, management, real estate broking, research, sport, surveying, translation, valuation or veterinary science, performed personally by any person who holds an interest in the company, close corporation or co-operative, except where such small business corporation employs three or more unconnected full-time employees for core operations throughout the year of assessment.

 

Expat Employees: Make sure your contract is in order for a SARS Audit:

Section 10(i)(o)(ii) exempts SA residents on their foreign income. Provided that you have worked outside of SA for a period of 183 days and in the 183 days you have one trip that is 61 consecutive days, the first R 1.25million foreign salary will be exempt from taxes in SA. Your 183 days can be any 12 months in the year and does not have to be from March to February. The 183/61 days excludes any travel days into and out of SA

From 1 March 2020 and in respect of years of assessment commencing on or after that date, foreign employment income earned by a tax resident of South Africa will no longer be fully exempt as the exemption under section 10(1)(o)(ii) will be limited to R1.25 million. Any foreign employment income earned over and above R1.25 million will be subject to normal tax in South Africa, applying the normal tax rates for the particular year of assessment. All requirements to qualify for the exemption under section 10(1)(o)(ii) remain the same.

 

Qualification criteria for the exemption

In order to qualify for the exemption, a taxpayer must be a tax resident of South Africa who earns certain types of remuneration for employment services rendered outside the Republic.

If your contract refers to you as an independent contractor, service provider, contractor or personal representative, you will not qualify for Section 10(i)(o)(ii) exemption.

The exemption does not apply to an individual who is a non-resident for tax purposes as foreign sourced income in relation to foreign services is not from a South African source and therefore not subject to tax in the hands of a non-resident in South Africa.

 

What are the requirements to qualify for the exemption?

In order to qualify for the exemption, a taxpayer must –

• be a tax resident of South Africa
• earn certain types of remuneration
• in respect of services rendered by way of employment;
• outside South Africa;
• during specified qualifying periods
• not be subject to an exclusion

 

What type of income qualifies for the exemption under section 10(1)(o)(ii)?

The following amounts fall within the scope of the exemption:

• Salary
• Taxable benefits
• Leave pay
• Wage
• Overtime pay
• Bonus
• Gratuity
• Commission
• Fee
• Emolument
• Allowance (including travel allowances, advances and reimbursements)
• Amounts derived from broad-based employee share plans
• Amounts received in respect of a share vesting

 

Employment relationship

The exemption under section 10(1)(o)(ii) only applies if an employment relationship exists. The services that are rendered for or on behalf of the employer must be rendered under an employment contract.

The term “any employer” means that services rendered to resident or non-resident employers could qualify for exemption.

An “employee” under the common law excludes an independent contractor or self-employed person.

Directors in their capacity as directors are holders of an office, not employees, and to the extent that they earn director’s fees, such fees do not qualify for exemption under section 10(1)(o)(ii).

The remuneration that qualifies is remuneration received by or accrued to an employee “by way of” the following amounts, namely, salary, leave pay, wage, overtime pay, bonus, gratuity, commission, fee, emolument or allowance, for services rendered

The term “any employer” means that services rendered to resident or non-resident employers could qualify for exemption. The term “employee” is not defined in the main body of the Act, and so must be given its ordinary meaning. An “employee” under the common law excludes an independent contractor or self-employed person

Directors in their capacity as directors are holders of an office, not employees, and to the extent that they earn director’s fees, such fees do not qualify for exemption under section 10(1)(o)(ii).

The remuneration must be received in respect of services rendered. Amounts payable by an employer to an employee, but which do not relate to services rendered, are not included in the scope of the exemption.

The Contractor is an independent entrepreneur carrying out his own business, and nothing in this Agreement shall be construed as creating a relationship of employer and employee between the Company and the Contractor.

Your employer will need to apply for the below employee//independent contractor tests and change the wording of your contract for this to be accepted by sars under section 10(i)(o)(ii)

SECTION 213 of the Labour Relations Act (LRA) provides that an employee is anyone, other than an independent contractor, who works for another person or who assists in conducting the business of an employer.

This definition omits only service providers who are external and/or truly autonomous.

Section 200A of the LRA states that, unless the contrary is proven and regardless of the form of the contract a person is presumed to be an employee if any one of the following circumstances exist:

The manner in which the person works or his/her hours of work is/are subject to the direction or control of another person;

The person forms part of the organisation;

The person has worked for the other person for an average of at least 40 hours per month for the last three months;

The person is economically dependent on the other person ;

The person is provided with tools of trade by the other person; and

The person only provides services to one person.

 

Limitation of the exemption

From 1 March 2020, foreign employment income is no longer fully exempt under section 10(1)(o)(ii).

The exemption is limited to R1.25 million in respect of each year of assessment during which the requirements of section 10(1)(o)(ii) are met.

The qualifying criteria for the exemption remain the same.

Any foreign employment income earned over and above R1.25 million will be taxed in the Republic, applying the normal tax rates for that particular year of assessment.

A double tax situation may arise in respect of the portion of the remuneration earned over and above the R1.25 million.

This will happen where a tax treaty does not provide a sole taxing right to one country; which means both countries will have a right to tax the income and the country of residence, in our case the Republic, will provide double tax relief.

Section 6quat is the mechanism under South Africa’s domestic law to claim relief from double tax where the amount received for services rendered outside the Republic is subject to tax in the Republic and in the foreign country.

This credit may be claimed on assessment when an individual submits an income tax return, provided certain requirements are met.

This effectively means that the foreign tax paid on the portion of remuneration included in income will be set-off against the South African normal tax paid so that no double tax is ultimately suffered.

An employer may at his or her discretion, under paragraph 10 of the Fourth Schedule, apply for a directive from SARS to vary the basis on which employees’ tax is withheld monthly in the Republic.

The potential foreign tax credit is taken into account to determine the employees’ tax that has to be withheld for payroll purposes. This is not the actual granting of the section 6quat credit.

The employee is still required to submit an income tax return in which the actual foreign tax credit under section 6quat should be claimed.

 

Foreign Tax Credits

Foreign tax credits will only be allowed with the following proof:

–      An Assessment issued by the foreign tax jurisdiction; and

–      A written statement with the following basic information:

–      The foreign tax year during which the income was received by or accrued to the taxpayer.

–      The precise name of the tax and the foreign country in which it has been levied.

–      The name of the law or tax treaty under which the tax was imposed.

–      Whether the tax was levied by the national government, a state or local authority and the name of such authority.

–      A copy of a receipt issued by the relevant revenue authority as evidence of payment of the amount of the tax (that is that the amount withheld has been remitted) or a letter from the foreign authority indicating the amount of tax payable by the taxpayer.

–      Documentary proof of taxes paid on the income in a foreign tax jurisdiction.

–      Breakdown between local and foreign taxable income.