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Provision in the Tax Administration Act may be subject to abuse.
Sars often prepares these estimates ‘by comparing deposits into a bank account to turnover declared on the tax return’. Picture: AdobeStock
The South African Revenue Service (Sars) has the power to raise estimated assessments when the information supplied by a taxpayer is considered incorrect or inadequate.
The apparent subjectivity of the parameters used when issuing estimated assessments make the provision subject to abuse, argues Nico Theron, founder of Unicus Tax Specialists.
The Tax Administration Act authorises Sars to issue an estimated assessment if a taxpayer fails to submit a return; submits a return or relevant material that is incorrect or inadequate; or fails to respond to requests for relevant material, even after multiple reminders.
If any of these requirements is unmet, Sars may issue an estimated assessment, which is then based on its own calculations of the taxpayer’s liability, says MaxProf auditor Debora Motana in a published article.
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Troubling …
Theron finds the subjective nature of the parameters for inaccurate returns or information or inadequate returns or information troublesome.
“If, for example, the taxpayer submits detailed information, but the Sars auditor does not understand it, is the information inaccurate? Perhaps not. Is it inadequate? Well, perhaps, for that auditor but perhaps not for the next one.”
He says hypothetically the provision can be relied on when an accurate assessment is objectively speaking possible – but subjectively, the auditor may be snowed under or lack the expertise to get to an accurate assessment and revert to an easy way out, thereby shifting the workload to the taxpayer.
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Methodology
Theron notes that Sars often prepares these estimates by comparing deposits into a corporate taxpayer’s bank account to turnover declared on the tax return.
“If the deposits are higher, they will typically propose to tax the difference. They will propose this even though it is trite that the sum of deposits in a bank account will seldomly yield the same number as turnover.
“This much, frankly, is ridiculously obvious to anybody with a basic understanding of commerce and accounting.”
When Sars estimates a taxpayer’s tax bill by comparing bank statements to turnover, the onus is on the taxpayer to prove – on a deposit-by-deposit basis – why the difference is not taxable.
Theron argues that accurate assessments are to be preferred and that estimated assessments should only be raised as a last resort and not simply if the taxpayer failed to file a return, failed to respond to multiple requests, or submits information or a return that is inadequate or incorrect.
Motana warns taxpayers to be vigilant in adhering to the requirements outlined in the provision (Section 95 of the act) that grants the power to Sars to make an estimated assessment.
She also notes that the onus is on the taxpayer to demonstrate whether the assessment is valid or needs adjustment.
Court case
Motana refers to an appeal case before the tax court in Johannesburg where Taxpayer RPC took an estimated assessment on appeal. It was not satisfied with the methodology used by Sars in determining the assessments.
In its judgment in favour of Sars’s methodology, the court quoted from the Africa Cash & Carry v Sars case where the tax court stated that an estimated assessment “by its very nature” is subject to change based on an evaluation of the evidence and any information that becomes available.
The tax court must place itself in the shoes of the functionary to determine whether the methodology followed and the assumptions on which the estimated assessments are based, are reasonable and produce a reasonable result.
In the Taxpayer RPC case the court found that the methodology used by Sars is not expected to be precise, as long it satisfies the objective test.
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‘Cash-cow-grabbing norm’
Theron says an organ of state such as Sars must act within the four corners of its empowering provisions.
He questions whether the raising of estimated assessments is used as a last resort to protect the fiscus or whether it is used because it is effective and convenient.
“I can understand, from a business perspective, that estimated assessments might be used as cash-cow-grabbing norm. Indeed, we are seeing an increase in estimated assessments.”
* Sars announced last week that it has issued auto-assessments to 5.8 million taxpayers, up from five million last year. Taxpayers have from 21 July until 20 October to file their tax returns or make changes to their auto-assessments. Provisional taxpayers have until 19 January to file their tax returns.
This article was republished from Moneyweb. Read the original here.
