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FAQ - 24 May 2017

24 May 2017   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

1. When can SARS conduct an audit?

Q: Can SARS do an audit on a company and that has a huge loss and then add back some expenses leaving the company in a smaller loss. Can interest and penalties be charged on this amounts?

A: Under section 40, of the Tax Administration Act, SARS may select a person for inspection, verification or audit on the basis of any consideration relevant for the proper administration of a tax Act, including on a random or a risk assessment basis.  The words “any consideration” makes this very wide and it is known that SARS often audits where the taxpayer is in a loss situation. 

Interest can only be charged if there is a tax debt.  If the adjustment, after the audit merely reduces the loss, there should be no adjustment to the tax debt and interest will consequently not apply. 

The understatement penalties, see section 222(3)(c), must be imposed on the difference between the amount of an assessed loss carried forward from the tax period to a succeeding tax period and the amount that would have been carried forward if the 'understatement' were accepted. 

We accept that SARS has identify an appropriate ‘behaviour’ and levied the penalty accordingly.  

2. Does a taxpayer need to keep details of entertainment expenses?

Q: Can you please assist with the tax law that require the taxpayer to keep the detail of each client that he/she entertain? SARS insist that the taxpayer that entertain clients need to provide details of each client that he entertain

A: The relevant law is found in sections 1, 29 and 46 of the Tax Administration Act.  As defined in section 1, relevant material means any information, document or thing that in the opinion of SARS is foreseeably relevant for the administration of a tax Act as referred to in section 3.  SARS is then entitled to call for the information under section 46 of the Act. 

It is section 29 of the Tax Administration Act that requires of the person (taxpayer) to keep records that will enable the person to observe the requirements of a tax Act and enable SARS to be satisfied that the person has observed these requirements.  The Act doesn’t deal with what is necessary to prove this – in other words, that record of the names of the clients entertained be kept.  In the past, in response to such a question, taxpayers showed the detail entered in their diaries. 

Section 30 explains the form in which the records are to be kept – relevant to your request is the “in their original form” part. 

If the taxpayer refuses to provide the information the comment by Judge Smith, in SARS v Brown is relevant.  The Judge said that “(a)ll that SARS is required to show is that the information sought is “relevant material” necessary for the administration of a tax Act.”  Because SARS asked for it we can accept they consider it relevant. 

If the taxpayer doesn’t have the information it should be pointed out to SARS in the response letter.  Section 46(3) of the Act states that the request “is limited to material maintained or kept or that should have been kept by the person in respect of the taxpayer”.  

Disclaimer: Nothing in this query and answer should be construed as constituting tax advice or a tax opinion. An expert should be consulted for advice based on the facts and circumstances of each transaction/case. Even though great care has been taken to ensure the accuracy of the answer, SAIT do not accept any responsibility for consequences of decisions taken based on this query and answer. It remains your own responsibility to consult the relevant primary resources when taking a decision. 


 

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