Bad News: SARS Can Assess You Even After Three Years
30 September 2010
Posted by: Author: Annalie la Grange
Bad News: SARS Can Assess You Even After Three Years
The three-year rule only applies if full disclosure was made
In terms of Section 79(1) of the Income Tax Act, the SARS Commissioner shall raise an additional assessment if he is satisfied that, inter alia, any amount which was subject to tax and should have been assessed to tax has not been assessed to tax.However,only in limited circumstances may the Commissioner issue an additional assessment after the expiry of three years from the date of the assessment.
The Commissioner may raise an additional assessment outside the three year prescription period if he is satisfied that the full amount of tax had not been assessed "due to fraud, misrepresentation or nondisclosure of material facts”.
Furthermore, the Commissioner and the taxpayer may agree to extend the prescription period—a request which we see quite often in the context of audits conducted by SARS.However, the focus of this article is on what constitutes "non disclosure of material facts” in the context of e-Filing of income tax returns.
The term "non-disclosure of material facts” is not defined in the Act. Various writers have considered the phrase and, in summary, concluded that it refers to facts or information which should be disclosed in the taxpayer's income tax return, but which the taxpayer has failed to disclose.The material facts and information in his income tax return is therefore crucial, but in practice, how does a taxpayer do so in the context of e-Filing?
In accordance with Section 66of the Act, the Commissioner annually gives notice to all taxpayers who are required to submit income tax returns.Section65 of the Act determines that all returns to be submitted in terms of the Act must be in such form and be submitted in such manner (including electronically) and at such place as may be prescribed by the Commissioner.
The Act itself does not prescribe how an income tax return is to be completed, and does not give any guidance as to when a submission will be treated as having complied with the requirement that the taxpayer makes a full disclosure of all the material facts.In our view, the primary guide in respect of what constitutes material facts which should be disclosed by the taxpayer is the income tax return itself (IT14) and the related information brochure issued by SARS.
The 2009 IT14 does not stipulate which documents should be submitted with the return.In the guide issued by SARS entitled 2009, How to complete the IT14 return ("the guide”), it is stated that although the taxpayer will require the relevant financial statements and information to complete the return, "[n]o documentation other than that which has been stated must be submitted with the return.All documentation must however be retained by the taxpayer for a period of five years after submission of the return”.According to this wording, the guide would indicate what additional documentation, if any,should be submitted with the income tax return.Therefore,unless expressly indicated otherwise, no documents, including the annual financial statements,should be submitted with the return but should rather be retained for a period of five years from the submission of the return.
The e-Filing process further supports the principle that only the income tax return, and no supporting documentation, should be submitted. This is on the basis that it is not currently possible to attach any annual financial statements, supporting schedules or other information when submitting the return.It is anticipated that this may change in future.
It appears that, provided a taxpayer completes his income tax return as instructed by the guide,answers all questions correctly, and maintains adequate records of the required supporting information, it could be argued that SARS should not be able to allege that there had been material non-disclosure by the taxpayer.This would be on the basis that a taxpayer's obligation to furnish information in the income tax return is confined to what is set out in the form of the return prescribed by the Commissioner in terms of Section 65 of the Act.
However, in ITC 1582 [57SATC 27] it was held that all material facts had not been disclosed by the taxpayer, despite the fact that the taxpayer had completed his return properly and submitted same to SARS together with the relevant annual financial statements.The facts which were not disclosed were that amounts constituting discounts had been granted to various group companies for tax reasons, which allowed the Commissioner to apply the anti-tax avoidance provisions.It was held that the granting of the discounts which had not been disclosed to the Commissioner was a relevant material fact in determining the taxpayer's liability for income tax.
The non-disclosure resulted in the amounts not having been assessed to tax.The fact that the appellant had properly filled in its income tax returns and that these returns had been accompanied by proper and full annual financial statements drawn up according to generally accepted accounting practice did not support the appellant’s contention that full disclosure was made.It was stated that Section 79(1) does not require SARS to be satisfied that the income tax return has not been properly completed or had not been accompanied by the required documentation, but only that relevant material facts have not been disclosed, as a result of which an amount of tax has not been assessed.
In accordance with ITC 1582,once a taxpayer has correctly and fully completed the income tax return, the question then arises whether there are any other material facts not provided for in the return which will affect the amounts assessed to tax or the amount of tax chargeable. If so, we are of the opinion that these additional facts should be submitted with the income tax return.Therefore,if there is an item in the supporting documents or the annual financial statements of the taxpayer which has not been disclosed in the income tax return which constitutes a material fact, such information should be disclosed to SARS.
The responsibility to determine if there are any documents containing material facts that are not disclosed in the income tax return lies with the taxpayer.As stated above, the current e-Filing process does not allow a taxpayer to submit any supporting or additional information when submitting an income tax return.
To avoid a contention by SARS that there had been non-disclosure of material facts, it is therefore recommended that hard copies of the relevant material information be presented to the branch office where the taxpayer is registered, for consideration by SARS.
Source: By Annalie la Grange (Tax breaks)