SARS has the power to gather information to ensure that taxpayers have complied with their fiscal obligations. Besides, SARS may require taxpayers to submit documentation in substantiation of the tax returns submitted or may conduct detailed audits on a taxpayer’s affairs by physically inspecting the taxpayer’s premises and carrying out an audit on site.
SARS will identify taxpayers for audit using various techniques, such as risk-profiling, taking account of various criteria, and often acting on media reports regarding vehicles, houses and other assets owned by a taxpayer. To reduce the risk of a SARS audit, a taxpayer’s standard of living must align to the income declared to SARS. In other words, a taxpayer’s standard of living must relate to the income declared to SARS.
SARS may commence a lifestyle audit on the affairs of a taxpayer because of information printed in the press or tip-offs or other anonymous information or, alternatively, where increases in the taxpayer’s assets are not supported by the levels of income reflected in their tax returns. SARS will seek to establish the net assets of the taxpayer at the beginning of the tax year and compare that to the net assets at the end of the tax year.
Where the increase in assets is not supported by the income reflected by the taxpayer, taking account of the taxpayer’s estimated living expenses, SARS will require the taxpayer to complete a lifestyle questionnaire. That lifestyle questionnaire calls for full particulars of all assets owned by the taxpayer, including details of entities to which the taxpayer is connected, and also requires the taxpayer to submit detailed living expenses, setting out how much the taxpayer spends on groceries, insurance, holiday and other travelling costs, and related personal expenditure. SARS utilises the lifestyle questionnaire in an attempt to establish the taxpayer’s annual living expenses, which forms an integral part of performing a capital reconciliation on the taxpayer’s affairs.
The difficulty that often arises in completing the lifestyle questionnaire is the taxpayer’s lack of records and, particularly, trying to explain to SARS deposits reflected in bank accounts when the taxpayer has been requested to supply bank statements to SARS for numerous years. Taxpayers are usually required to retain records for five years from the date on which the tax return is submitted to SARS. It is important that taxpayers retain the required records, otherwise it becomes difficult to satisfy SARS when questions are asked about the nature of amounts received in a bank account after many years have passed. Where the taxpayer is unable to satisfy SARS as to the nature of funds deposited in a bank account, SARS will, typically, regard those deposits as undisclosed income and will impose additional tax on the basis that the taxpayer has not disclosed income for tax purposes properly.
When SARS embarks upon a lifestyle audit it can, unfortunately, take an extended period to finalise the matter and this is exacerbated when records are not readily available to explain the increases in assets reflected by the taxpayer, or to address the nature of deposits received by the taxpayer in their bank accounts satisfactorily. When the taxpayer’s recordkeeping is poor, SARS will issue revised assessments subjecting the taxpayer to income tax on unexplained increases in assets owned. Challenging those revised assessments become difficult when the taxpayer’s records are poor, and explanations cannot be supplied of how the taxpayer acquired the assets.
In conclusion: SARS will normally resort to the lifestyle questionnaire when it has a suspicion that the taxpayer has not disclosed all income in the submitted tax return. If a taxpayer has failed to comply with fiscal obligations it is far better to engage with SARS sooner than later to rectify the matter. This may assist the taxpayer in seeking mitigation of additional tax of up to 200% of the tax due on undisclosed income that SARS is empowered to impose.
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