Revenue Augmentation: Low Hanging Fruit

In an apparent effort to win the war against non-compliance, it seems SARS has taken to augmenting taxpayers’ revenue. While perhaps not a new practice, it certainly appears to be happening on a larger scale than in the past. Put differently, more and more taxpayers are being asked to explain deposits in their bank accounts.

Revenue augmentation is a process of comparing what a taxpayer declared as revenue in their tax return to the amounts actually deposited into the taxpayer's bank accounts. If a taxpayer declared, say, R1m in their tax return but the deposits in their various bank accounts suggest revenue of R10m, SARS will require the taxpayer to explain why SARS should not raise an additional assessment to tax the difference of R9m – representing, according to SARS, undeclared revenue.

While that seems like a straightforward thing for a taxpayer to explain, the reality is that it is not. For SARS to raise these assessments, all they need to do is look at the deposits, do a quick math calculation, and “Bob's your uncle”. It appears to be a quick and simple process.

Taxpayers, on the other hand, cannot simply respond by stating, for instance, “those deposits are all loans,” “those deposits are all inter-account transfers,” or “considering the movement in the loan balance on my company’s AFS, those deposits can only be loan repayments,” or “your calculation is wrong.”

You see, tax law places the burden of proof on taxpayers. For the taxpayer to explain why SARS should not tax things like inter-account transfers and loan repayments, the taxpayer is often told to reconcile amounts on a line-by-line basis and explain, with evidence, why a particular deposit should not be included in that taxpayer’s gross income. Can they do that? Well, SARS appears to be very fond of the High Court judgment CSARS v M, which supports their approach (differences in facts are not something that ought to be considered on a case-by-case basis).

To explain why this is low-hanging fruit, let’s put this in context. For SARS to augment a taxpayer’s revenue (i.e., to compare deposits to what was declared) by proposing an often-preposterous assessment, cannot, we think, take more than a couple of hours (they have data showing total deposits across all accounts). For the taxpayer to fend off that assessment often takes weeks (fact-dependent) of data crunching and evidence collection. Not going through this extensive line-by-line exercise is likely to result in SARS collecting or trying to collect the amount assessed, despite these assessments often (but not always, to be fair) being ultimately incorrect.

To further illustrate why this is low-hanging fruit, let’s consider procedural law for a second. These assessments are often, but not always, a particular type of assessment called an “estimated assessment.” Taxpayers cannot object to these particular types of estimated assessments. This also 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. Rather, the taxpayer must ultimately explain on a line-by-line basis why each deposit is not taxable. Going through this tedious exercise is almost unavoidable.

In short, taxpayers who find themselves in these positions will truly understand what it means when it is said that the balance of power favors the revenue authority.

Now, keen readers (and some others) will be quick to point out that this process is typically followed in cases where the taxpayer is not compliant or because the taxpayer was not cooperating with SARS. They would, of course, be right. The sentiment then seems to be that if you failed to file a tax return or failed to send SARS relevant material, then you must face the full might and fury of the revenue collector – after all, being in this position is the taxpayer’s own doing.

Whether there is truth or value to this sentiment (from a moral or legal perspective) is not something we will attempt to answer here, save to ask two simple questions:

  • Is it reasonable to raise a tax bill on a basis that is most likely incorrect and grossly overstated, leaving it to the taxpayer to prove SARS wrong in due course?
  • Does a taxpayer’s punishment for non-compliance include paying tax on non-existent income?

I recall a High Court judgment where the taxpayer was a motor company, presumably based in the Pretoria East region, that suggested that SARS must have proper grounds for raising an assessment, despite the burden of proof being on the taxpayer. Further, tax law allows for several forms of punishment of non-compliant taxpayers, none of which (to our knowledge) includes raising assessments on non-existent income.

This process of revenue augmentation probably does a stellar job of winning the war against serious instances of non-compliance. This is fantastic. However, perhaps 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 meantime, those taxpayers who are collateral damage in the war against non-compliance would do well to seek professional assistance. It is only after you have gone through the tedious exercise of discharging your onus of proof that it will be clear you are collateral damage and not, in fact, the enemy.

Unicus Tax Specialists SA is a tax dispute resolution specialist firm. We have assisted numerous taxpayers in illustrating that they are, in fact, not the enemy in the war against non-compliance.

Join Nico Theron on June 19th for "Current Issues: Tax Disputes, Suspension of Payment, Grounds for Appeal"

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