Insular Tax Compliance Must Become More Transparent - The 7 Habitual Tax Mistake Solution 4
01 July 2007
Posted by: Author: Frances Louw
Insular Tax Compliance Must Become More Transparent- The 7 Habitual Tax Mistake Solution 4
"An old-fashioned handshake is a good way to do business – unless the IRS demands copy” (Cullen Hightower)
In this day and age it is important that organisations take a more open-minded approach when it comes to tax compliance.
The process of transparency is not confined to completing a tax return and the disclosure made to SARS in it.It begins with transparency between the role players involved in a transaction, the key decision makers in the business and the people responsible for understanding the tax implications and compiling the return.Taxpayers who are aware of the disclosure requirements of transactions are in a better position to avoid unnecessary taxes, additional taxes, interest and penalties later on.
Transparent tax compliance is an essential element in obtaining finality of assessments issued by the Commissioner.Section 79(1) of the Income Tax Act empowers the Commissioner to raise an additional assessment upon a taxpayer at any time, even though he may have already raised an assessment upon that taxpayer for the same year of assessment and even if such an original assessment may have become final and conclusive.This leads to uncertainty in respect of a taxpayer’s tax exposure.Fortunately, the legislature did not give SARS carte blanche in this regard and the first proviso to section 79(1) could be of assistance, provided that the taxpayer applies it proactively.
The proviso limits the authority of the Commissioner to reopen an assessment and raise an additional assessment after the expiry of three years from the date of the original assessment, unless he is satisfied that an amount that should have been assessed to tax was not so assessed due to fraud, misrepresentation or non-disclosure of material facts.Unlike fraud and misrepresentation, nondisclosure of material facts could be an innocent mistake resulting in adverse tax consequences and should be avoided.
More of ten than not inadequate disclosure is the result of a lack of knowledge about a transaction on the part of the person compiling the tax return and not necessarily as a result of reluctance to fully disclose the transaction.This "lack of knowledge” could be overcome by having access to all the facts pertaining to a material transaction.It will ultimately lead to the person preparing the tax return being in a better position to complete the return, ensuring adequate disclosure and handling any queries. Accessibility to facts could be achieved by hands-on record keeping in the form of files containing all the documents pertaining to a material transaction; i.e. agreements, memoranda, minutes of meetings, resolutions, opinions and correspondence.
A complete understanding of the facts will include interaction between the various role players in a transaction, the key decision makers and the tax department.Inadequate disclosure can also be the result of a lack of understanding of the detail required when disclosing a particular transaction.The question arises as to what constitutes adequate disclosure in the context of section 79(1).
How much information needs to be provided to the Commissioner before a transaction has been adequately disclosed?One would think that a taxpayer can accept that the duty rests with the Commissioner and his officials to ask the necessary questions and call for the necessary supporting documentation in order for them to unravel the finer details of a taxpayer’s affairs.This is, however, not the case as the courts have been reluctant to expect that SARS should show such a degree of diligence.
In ITC 1459 (51 SATC 142) the meaning of material facts was interpreted by the court in the context of section 3(2).The court laid down a simple test to determine whether certain facts were material.It considered the information furnished subsequent to the Commissioner’s enquiries regarding the present transaction and compared that information with the detail in the returns, including their supporting documents.
It was held that from the lack of detail provided in the return it was obvious that the Commissioner or his officer did not have all the material facts.It was the absence of those facts which led to the issue of the original assessments.In addition, the court held that it was no answer to say that the Commissioner should have been alerted by what he saw, or was able to see, in the return and accompanying documents.The question was whether he had all the material facts when he issued all the original assessments.It did not matter that the Commissioner’s ignorance was due partly to a failure to make enquiries before issuing the assessments.
In ITC 1594 (57 SATC 259) it was held that an obligation rested upon a taxpayer to render an accurate and full return on which he could be assessed and not to do so in a vague or ambiguous manner casting the onus upon the SARS to elicit the complete picture by a series of queries.
It is therefore clear that it cannot simply be accepted that, as long as the correct boxes are ticked and the required supporting schedules are submitted, it is SARS’s duty to decipher the finer details of a transaction.A taxpayer is required to provide SARS with all the material facts which would influence his decision on how the transaction should be treated for tax purposes.It is also important to note that, in order to take advantage of the proviso, the crucial time to provide this information is before the original assessment is issued. The best opportunity is therefore in the tax return.
Transparent tax compliance means that SARS will find it very difficult (unless the other conditions of the proviso to section 79(1) are present) to issue an additional assessment after the expiry of three years from the date of the original assessment.This is a strategy worth considering, but it can only be accomplished when all the key decision makers within an organisation (for instance the chief executive officer, financial director and managing director), the role players in a particular transaction and the audit committee take an active interest in and work together with the tax department in achieving it.
Source: By Frances Louw (TaxTALK)