Estate agents, SARS and you: declare or beware
06 August 2014
Posted by: Author: Lesedi Seforo
Author: Lesedi Seforo (SAIT Technical)
"We conduct on-going research into compliance across different tax types and within tax types according to different industry sectors, taxpayer segments, profiles and other demographics in order to identify whether there are specific kinds of taxpayers…who are more or less likely to be non-compliant.”
These words appear in the SARS Compliance Programme, a document providing an overview of SARS’ plans to grow tax compliance for the five year period from 2012/2013 to 2016/2017.
The same document points out that one factor influencing compliance is a "perception of a credible threat of detection of non-compliance”. In other words, the perceived risk a taxpayer has that he or she will get caught.
Property investments and landlords
One area where taxpayers tend to be non-compliant is with the income earned from the rental of residential property. A lot of business owners use the earnings to invest in property. While some declare such income in their tax returns, others develop "convenient amnesia” in this area. This is no doubt influenced by what the aforementioned SARS document highlighted: these landlords perceive the risk of getting caught as being rather low. Which seems like a legitimate risk assessment since one’s tenant merely transfers the rent to the landlord’s account every month. Alternatively, a tenant could pay the rent to the estate agent, who then passes it on to the landlord.
In the latter instance involving the estate agent, however, the risk of getting caught is not as low as it once was.
In fact, it has skyrocketed.This is all thanks to a government notice released during 2013 concerning ‘third party returns’.
Third party returns
Remember previously it was stated that one factor influencing compliance is the risk of a taxpayer getting caught? In response to this, SARS has established what it calls "frameworks that constitute a credible threat of detection”.
Third party returns are one example of such a framework. They are essentially reports that a specified person must make to SARS in respect of a third party. Financial institutions have been making such reports to SARS for years now, in respect of dividend and interest income that investors have earned from these institutions. These third party returns are known as IT3 certificates.
So when you have earned, say, interest income from a particular investment made at a bank, that bank must send you an IT3 certificate showing the interest income you’ve earned for the tax year. What you may or may not have known, is that the tax law requires the institution to send the same IT3 certificate to SARS. And during 2013, this requirement was extended to include estate agents. Your estate agent must now notify SARS, in the form of a third party return, of the rental income you have earned during the tax year. This return must include your name, the amount of the rental income, your ID number, postal and physical address and FICA status.
Suppose you were not fortunate enough to come across this relevant piece of information and did not declare your rental income in your tax return. You may think you got away with it because you’ll receive an instant assessment showing that SARS owes you the usual tax refund. However, a few days later you may be shocked to receive an additional assessment which includes your rental income, as well as a rather nasty understatement penalty. Since SARS does not trumpet the fact that they receive third party returns from various persons regarding your income, you would be left scratching your head, wondering how they found out about your rental income.
In the Bible, Jesus said "your Father knows what you need before you ask Him”. Similarly, if you use an estate agent, SARS knows how much rental income you have earned before you even tell them!
Consult your SAIT registered tax practitioner for more details in this regard.