Do you have tax skeletons in your closet?
23 September 2014
Posted by: Author: Erich Bell
Author: Erich Bell
For most tax professionals, standing at a braai and
explaining what one’s profession entails may be an uncomfortable experience,
especially if one’s guests do not have an accounting or law background. Some of
the questions that would normally arise include, ‘oh, so you work for SARS?’ or
‘that’s nice, I’m, however, not keen on talking about my financial affairs’. A
couple of moments later, that awkward silence starts to set in. With this
example, I’m almost certain that SARS officials receive an even warmer welcome
among their fellow guests.
The reality is that tax professionals do not work for SARS,
even though they ensure that the fiscus
receives what is due to it. The job of a tax professional is a balancing act by
attempting to ensure that our clients do not pay too much, nor too little tax.
The other reality is that taxpayers would not fear SARS, unless they have tax
skeletons in their closet. However, taxpayers do not need to fear SARS, as
contrary to popular believe, SARS is in fact lenient and the law provides for
this leniency through the so-called ‘voluntary disclosure programme’ (hereinafter
‘VDP’) contained in Part B of Chapter 16 of the Tax Administration Act (No. 28
of 2011) (hereinafter ‘TAA’). For this relief to apply, one needs to come clean
with SARS on one’s tax affairs, which would in turn lead to SARS not imposing
various penalties and criminal prosecution. Before I continue with the nice
part relating to the relief afforded by the VDP, I first need to give an indication
to non-compliant taxpayers as to what harm their tax skeletons may cause them.
The harm caused by
Most of the above taxpayers would evade taxes by understating
their income (i.e. by not declaring all income) or by overstating deductions
(i.e. to claim allowances on personal-use assets) and to pray that SARS does
not discover their non-compliance through lodging an audit. This type of
behaviour is also known as tax evasion and may lead to the imposition of a fine
or even imprisonment for a period not exceeding five years.
In addition to the above, a lot of taxpayers do not submit
any returns at all and then hope and pray that SARS doesn’t come knocking on
their doors. Although the VDP would not provide relief for the non-submission
of a return as there would normally be no understatement, it is nevertheless
necessary to bring the ramifications of such non-submission to your attention.
Furthermore, for the non-submission of a return, taxpayers are not aware of the
fact that SARS has 15 years to recover a tax debt from the date of assessment (which date would only take place once
an assessment is issued by SARS based on a return was submitted by the taxpayer
for i.e. income tax or the date on which a return was submitted by the taxpayer
for a self-assessment tax i.e. VAT). It therefore follows that this 15 year
period would only start running once a return was submitted which led to an
assessment for income tax purposes or once a return was submitted for i.e. VAT
purposes and that this period of 15 years may therefore even become a 100 years
if no return was submitted.
If a return was not submitted, SARS has the authority to
issue an estimate assessment which would estimate a taxpayer’s tax liability
and request payment accordingly. This assessment would not be subject to
dispute and the taxpayer would therefore have to pay the outstanding estimated
tax liability. Here the only recourse would be to use the Promotion to
Administrative Justice Act (No. 3 of 2000) to challenge the fairness of the
administrative action (i.e. the issuing of the estimate assessment), but this
in itself would not absolve the taxpayer from first paying the tax as per the
estimate assessment and it would normally take a long time to get the matter
resolved through our South African court system, that is, in instances in which
the taxpayer has a valid case (which would rather be the exception than the
Furthermore, the failure to submit a return within the
particular deadline would constitute a criminal offence which would lead to a
fine or imprisonment for a period of not exceeding two years.
Most of the different tax Acts imposes penalties and
interest on the late payment of tax and the notorious understatement penalty may
also come into play where a taxpayer understated his/her/its income or
overstated his/her/its deductions. These penalties are imposed in order to
deter non-compliance and to ensure that the fiscus
receives all taxes when due in terms of a tax Act.
How does the VDP
A person may generally apply for voluntary disclosure relief
if the person has a ‘default’, which may potentially be subject to an
understatement penalty and if the disclosure of the default would not result in
a refund becoming due to the taxpayer. A ‘default’ generally means the
submission of inaccurate or incomplete information to SARS or the failure to
submit information to SARS where the aforementioned action resulted in either
the taxpayer not being assessed for the correct amount of tax, the correct
amount of tax not being paid by the taxpayer or an incorrect refund being made
by SARS. It is important to reiterate that this relief would not be available
for the non-submission of a return and that it would only be available in
instances where income was understated or deduction overstated.
Furthermore, a taxpayer would not be entitled to apply for
voluntary disclosure relief if the taxpayer is aware of a pending audit or
investigation against him/herself, unless the default would not have been
detected during the audit or investigation.
The relief provided by the VDP are as follow:
- SARS would not pursue criminal prosecution for
the tax offence resulting from the default;
- SARS would grant relief for the understatement penalty
(a penalty of 200 per cent may be reduced by 190 per cent if the application
was made before SARS lodged an audit against the taxpayer);
- Relief for penalties imposed on instances of
administrative non-compliance, excluding penalties for the late submission of a
return or the late payment of a tax.
Should a taxpayer not be sure whether he/she/it would
qualify for any relief in terms of the VDP in respect of a particular default,
then he/she/it may make an anonymous application to SARS which application does
not contain any identifying information of the taxpayer. SARS will then in
return issue a non-binding opinion as to whether the taxpayer would qualify for
any relief. Although this opinion is not binding between SARS and the taxpayer,
it provides a useful tool to the taxpayer to determine beforehand if he/she/it
would qualify for the relief before formally applying, which formal application
would disclose the taxpayer’s identity.
Should a taxpayer’s application for voluntary disclosure
relief be successful, SARS would issue a written agreement which would contain
details on the material facts of the default on which the relief is based, the
amount of tax, including the amount of the understatement penalty (which may be
reduced to R nil in certain instances) payable by the person, the arrangements
and date for payment and other undertakings between SARS and the taxpayer. SARS
would then normally also issue an assessment to the taxpayer to give effect to
the relief provided by the VDP.
In addition to the above relief, should the taxpayer
experience financial difficulties, he/she/it may apply to SARS for an
instalment payment agreement where the tax debt can be paid in one sum only
after a period of time or in instalments over a certain period of time.
Pitfalls when it
comes to voluntary disclosure applications
Even though the VDP contains some welcome relief, it imposes
harsh sanctions on taxpayers who were not fully honest with their voluntary
disclosure applications which gave rise to a written agreement between the
taxpayer and SARS. In this regard, if SARS is satisfied that the taxpayer
failed to disclose a matter that was material for purposes of the application,
- Withdraw any relief granted under the VDP;
- Regard any amount already paid under the
voluntary disclosure agreement to constitute part payment of any further tax
liability that may stem from the default; and
- Pursue criminal prosecution for the relevant tax
The VDP provides some welcome relief which may chase most
tax skeletons out of the closet. There are, however, inherit risks associated
with the application which may lead to the imposition of serious sanctions by
SARS. For these reasons it is advised that taxpayers make use of SAIT tax
professionals to ensure that they mitigate all risks, while at the same time
qualifying for some welcome relief in terms of the VDP.