ITR 14: Get It Right the First Time!

Prior to the introduction of Tax Administration Act No 28 of 2011 (“TAA”) the role of the tax compliance function was largely underappreciated. 

In terms of the TAA, the taxpayer is obligated by law to take “reasonable care” when completing any tax return and to have “reasonable grounds” for any tax position taken. Failure to do so will result in the obligatory imposition of 25% or 50% understatement penalties respectively. These penalties are imposed even if the taxpayer is in an assessed loss situation. 

The onus to prove that reasonable care was not taken when preparing a tax return or that the taxpayer did not have reasonable grounds for a tax position taken, rests with SARS. In order for SARS to make this assessment, SARS will need to evaluate the processes and procedures adopted by the taxpayer when the tax return was prepared and when tax positions were taken. 

If any tax return is prepared without a robust internal process to ensure its accuracy, then SARS is likely to impose the punitive understatement penalties where errors are identified.

The role of the tax compliance function has therefore escalated in importance since this function, if properly mandated, does not only protect the taxpayer against the over or underpayment of tax, but also against various penalties including but not limited to underestimation of provisional tax penalties, understatement penalties and late payment penalties.

In so far as the ITR 14 tax return process is concerned, the following basic procedures are recommended: 

  • The tax calculation should be supported by a bespoke tax pack where all tax critical items are analysed to a sufficient degree of detail to ensure that the tax computation will withstand robust SARS scrutiny.
  • The ITR 14 process should include the identification of all tax uncertain positions. A tax uncertain position is one where it is likely that SARS will challenge the position taken by the taxpayer. Such tax uncertain positions should be supported by a well-documented position paper or formal tax opinions as envisaged in section 223 of the TAA. 
  • The importance of non-financial information in the ITR 14 such as shareholder information, group structure, connected party transactions etc. should not be underestimated. This information is used by SARS to build a “risk profile” around the taxpayer. The internal or external tax compliance function should provide guidance to the shareholders regarding the risk profile of the company.
  • The external tax practitioner should formally communicate that the taxpayer should carefully review the tax pack and register of tax uncertain positions since the final responsibility for the accuracy and completeness of tax returns rests with the taxpayer.

Unfortunately, and despite the onerous penalty regime followed by SARS, many taxpayers do not allocate sufficient resources in the form of time, human resources and finances to the tax compliance function. Many taxpayers only realise the value of a highly skilled and professional internal or external tax compliance function when a costly dispute with SARS arise. 

For more information, please click here for the ITR 14 webinars presented by Johan Heydenrych, Director Tax Services at Kreston South Africa.

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