Chairperson SAIPA Tax Committee
SARS has limited resources to audit and enforce a large tax base. For the last few years SARS has been engaging comparative testing and shifting the burden of reconciling these comparatives on to taxpayers. For some years now SARS has had great success with regards to the EMP501 reconciliation, and comparing individual taxpayer’s third party and employer documentation. SARS introduced a new supplementary declaration (known as the ‘IT14SD’), in which the company is expected to reconcile its annual financial statements and IT14 return to other documentation previously filed with SARS with regards to VAT, customs, and employees’ tax. This may sound simple, but this is not an easy request for so complex a reconciliation.
The expectation with regards to the introduction of the IT14SD was that this was intended to identify risks, allowing taxpayers to identify and remedy variances, and allow SARS to better focus enforcement and audit resources. It was not expected that SARS would issue additional assessments for non-submission denying legitimate deductions that were not the focus of the reconciliation.
The IT14SD was not freely available to taxpayers and tax practitioners in advance. The IT14SD is a new process, and sufficient time was not available to develop the systems and reporting required to efficiently and effectively track and respond timeously. The IT14SD is currently applied with regards to historic years of assessment, prior to the introduction of the IT14SD, and not only required with regards to future years of assessment.
Considering the complexity, the other deadlines, and normal business operations, it is difficult for the taxpayer and tax practitioner to submit the IT14SD timeously. The taxpayer will, in most cases, require the significant engagement of its resources, and because of the complexities and additional testing required, the taxpayer will generally engage the assistance of a tax practitioner. Very few taxpayers will embark on this solo, and tax practitioners already have their hands full. The taxpayer has little hope of obtaining an extension from SARS.
The taxpayer is given notice to submit the required IT14SD within 21 days, followed by a final notice to submit within 21 days. Failing to submit the required IT14SD yields an additional assessment as a result of non-compliance. The additional assessment effectively denies all the deductions and allowances claimed against income tax. This is counterproductive with regards to efficient and effective tax administration, and surely could impacts on taxpayer morality. However, SARS motivates their actions by expressing that there is currently insufficient penalty for non-submission. Still, this action fails legal support, considering that SARS is bound by the provisions of the tax legislation. SARS has made it clear that the IT14SD is here to stay, and may even be integrated into the IT14 return in future.
When a taxpayer files the IT14SD with a difference greater than R100 an assessment is pursued. It is our understanding that the assessment will be based on the higher amount, whether VAT or income tax. Where the taxpayer has not submitted the requested IT14SD, SARS issues an additional assessment rejecting all income tax deductions and allowances, triggering a chain reaction with regards to under-estimation penalty with regards to provisional tax.
The implementation of IT14SD and the aggressive issuing of additional assessments without audit engagement and limited access to SARS persons who could be engaged to discuss differences, or request for additional time to comply, appears to be in conflict with the SARS Service Charter. Published commentary on the SARS Service Charter expresses that "[t]he significance of the Charter should not be underestimated. It articulates both a symbolic and a substantive break with the secretive and authoritarian mindset that characterised the South African revenue authority in the era predating the democratic Constitution."
While we accept the need for SARS to apply effective and efficient risk and audit strategies, including reconciliation of comparative information, the additional reconciliation and disclosure should not be substantially demanding on the taxpayer’s resources. We should consider the collective of the tax administration and compliance requirements and changes over the past few years. Also, all the information, except for the substantiation of variances, which is required from the taxpayer with regards to the IT14SD, is already available to SARS, from the NAT 75 and 61 and the VAT201, EMP201, EMP501, and IT14 submitted to SARS.
The purpose of comparing the IT14 and annual financial statements to the previously filed VAT, employees’ tax and customs documentation/returns is to identify VAT, income tax, and employees’ tax risks. Even if the taxpayer failed to file the requested IT14SD, SARS can still apply the same risk testing from the information previously submitted. It's our opinion that it is not reasonable to revise an income tax assessment and income tax liability which is not related to the information requested in terms of the IT14SD, when in fact the requested information is already available to SARS. SARS could issue an assessment for the difference identified (which triggered the notice to file a IT14SD), and an administrative penalty could be imposed in terms of the new Tax Administration Act.
While the use of IT14SD appears to cast the net far wider than was previously possible with limited audit and enforcement resources, the question to be addressed is - should this burden merely be passed on to the taxpayer, without a transitional and educational period?
Generally the additional assessments issued by SARS result in a substantially distorted tax liability, and, in some cases, the tax liability is just outrageous! As SARS applies the 'pay now, argue later' provisions, taxpayers could be pursued for the outstanding assessed tax value that is based on an assessment that is deliberately and knowingly incorrect and not substantiated in law. Taxpayers will also be refused tax clearance certificates that will have a substantial impact on business.
We have received comments from tax practitioners and taxpayers, in which it was identified that tax practitioners did not receive e-mail notification that an IT14SD must be submitted for a specific client, and similarly did not receive notification of additional assessment. Generally the tax practitioners will not be navigating their e-filing profile on a daily basis searching for any new items for any one of their many clients. In some cases, the notice and IT14SD was sent by post to the taxpayer, and the taxpayer only became aware of this process on receiving a second notice or a phone call from SARS. This was further exacerbated by notices being sent during December 2011 when most companies are shut down for the festive season, or have limited staff resources available, not to mention the delay in postal delivery.
Section 33 of the Constitution confers a right to just administrative action on the taxpayer, which is lawful, reasonable, and procedurally fair. Also, the taxpayer should be provided reasons for an assessment or decision made by the Commissioner. The additional assessment issued merely express that the additional assessment is based on the IT14 return filed by the taxpayer. It is clear that the additional assessment is not based on the IT14 return! An original assessment was, in fact, issued as a result of the IT14 return, and the additional assessment as a result of non-submission of the IT14SD.
Section 3 of PAJA prescribes that administrative action which materially and adversely affects the rights or legitimate expectations of any person must be procedurally fair.
Surely it cannot be said that SARS estimated the taxable income of the taxpayer in the absence of SARS conducting a review or audit of the deduction and allowances claimed, as it has been held in various case law that the burden of proof shifts to the Commissioner when an estimated assessment is issued, and the Commissioner is required to apply his mind in arriving at an estimated assessment which must be based on findings of fact. As no audit was conducted, nor inquiry with regards to the deductions or allowances claimed, the automatic disallowance of legitimate deductions does not constitute an assessment where the Commissioner has applied his mind.
Section 79 of the Income Tax Act, with regards to additional assessment, requires that the Commissioner is satisfied that such amount should be assessed to tax. However, as no review or audit of the deductions or allowances was engaged, it surely could not be said that the Commissioner could reasonably be satisfied that the deductions and allowances claimed should not have been allowed.
Let’s not forget, the burden of proof requirements of section 82 of the Income Tax Act is not applicable in these circumstances as SARS has not requested any proof or justification of income or expenses.
The notice to submit the IT14SD and the guides available on SARS website failed to communicate the true consequences of non-compliance. The notice merely stipulates that it’s an offence not to comply. So, why is an additional assessment issued?
The guide 'How to complete the Supplementary Declaration (IT14SD) form for Companies and Close Corporations' express that the IT14SD form (not return) is intended to reconcile VAT, PAYE, and customs declarations. The SARS-issued 'External Frequently Asked Questions Supplementary Declaration for Companies or Close Corporations (IT14SD)' clearly expresses that 'SARS will give the Company/Close Corporation an option to submit either revised IT14 or IT14SD. However, if the revised IT14 declaration did not resolve the risk, SARS will request the Company/Close Corporation to submit the IT14SD', also 'SARS will not allow the Company/Close Corporation to submit the revised IT14 after submitting IT14SD'. It has come to my attention that SARS, in some cases, has issued additional assessment for non-submission of IT14SD even though the taxpayer had filed revised VAT or IT14 return(s).
The SARS-issued guide How to complete the IT14 Return expresses that the balance sheet information should be '[t]he figures to be used are the figures reflected in the annual financial statements', the income statement information should be '[t]he figures to be used are the figures reflected in the annual financial statements', and that '[w]hen completing the relevant part of the return, the normal accounting meaning attached to the terms reflected in the tax return must be followed'. The tax computation portion of the tax return recognises that the annual financial statement information is not the tax base and 'where the accounting and tax treatment of items are different, the full accounting amount must be reversed and similarly the full tax treatment amount disclosed' in order to correctly assess the tax liability. Equally, the annual financial statement information may, in many cases, not be comparative to VAT disclose due to differences in accounting and financial reporting treatment. In fact, the accounting and financial reporting treatment will vary dependent on the industry sector in which the taxpayer operates and the application and interpretation of relevant financial reporting standards. Many companies will report the income statement and balance sheet information to the nearest R1 000, while it required that variances greater than R100 must be reconciled and motivated.
In many industries, such as construction and manufacturing, the direct labour costs is attributed to cost of sales and not separately disclosed in the annual financial statements. In other industry sectors, not all amounts that are subject to output tax are regarded as revenue for purposes of its financial reports.
It is required to reconcile the cost of sales (excluding inventory adjustments) per the IT14 and annual financial statements to the VAT declarations, when, in fact, the VAT201 return never required the discloser of cost of sales. Also, not all expenses incurred would have supported an input tax deduction.
Where goods are imported, often the effective rate of VAT exceeds 14% due to the valuation rules with regards to imported goods.
If an additional assessment has been issued due to non-submission, it is important that the taxpayer lodges an objection and request to suspend payment pending outcome of the dispute without delay. The notice to submit an IT14SD should not be ignored!