Tax assessment errors: What do I do now?

With the 2020 tax filing season in full swing, many taxpayers will likely engage in dispute proceedings as SARS issues their income tax assessments. This will particularly be the case where errors are contained on the so-called “auto-assessments” (which in itself is a misnomer). But how should the dispute process begin?

When an assessment is issued by SARS, they (usually) provide a short description of the reason for the assessment. Importantly, the SARS official is often restricted in what he/she can include on such an assessment as a reason (such as a selection from a “drop-down” list). For example, for additional VAT assessments (VAT217), taxpayers often find the following:

  • “Burden of proof not discharged”;
  • “Invalid tax invoice”; or
  • “Not a valid input claim”.

Such descriptions are not a clear indication of the relevant matter, particularly if it is evident that the alleged transgression is not present. The risk of such an unclear description is that a taxpayer essentially only has one opportunity to state its grounds of objection. This could seriously jeopardise a taxpayer’s case, since taxpayers may not appeal on a ground that constitutes a new objection against a disputed assessment. If a valid ground of objection is therefore not addressed in the objection itself, taxpayers may lose the opportunity to object to a specific ground.

In the example above – the assessment may indicate that the reason for the assessment is that there is not a valid tax invoice, but in fact, the issue relates to the time of supply, or the value of supply for VAT purposes – clearly not remotely related to the reason provided for on the assessment.

In terms of Rule 6 of the dispute resolution rules, a taxpayer who is aggrieved by an assessment may request SARS to provide reasons for an assessment. The reasons provided by SARS must enable the taxpayer to formulate its grounds of objection. The reasons for any administrative action must include the reasons for the conclusion reached, and it is not enough to merely state the statutory grounds on which the decision is based or repeat the wording of the legislation. The decision-maker should furthermore set out his understanding of the relevant law.

Requests for reasons for an assessment can be made on the eFiling system under the dispute section, as part of a taxpayer’s profile. When there is even the slightest uncertainty as to the reasons for an assessment, taxpayers are strongly advised to request reasons to ensure that they provide themselves with the best possible chance of success in a dispute.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

The importance of requesting reasons for an assessment by SARS

Generally, disputes with the South African Revenue Service (SARS) are the result of an assessment which has been issued by SARS to a taxpayer. An assessment is the determination of an amount of a tax liability or refund, by way of self-assessment by the taxpayer (such as in the case of VAT) or assessment by SARS (such as in the case of income tax). If taxpayers are not satisfied with an assessment, the Tax Administration Act provides for dispute resolution mechanisms, in terms of which taxpayers can object to the assessment, and subsequently appeal, if objections are not maintained.

 

Although objection to an assessment is the correct procedure to dispute a tax amount, taxpayers often lodge objections against assessments, without knowing exactly what they are objecting to. This could seriously jeopardise a taxpayer’s case, since taxpayers may not appeal on a ground that constitutes a new objection against a disputed assessment. If a valid ground of objection is therefore not addressed in the objection itself, taxpayers may lose the opportunity to object to a specific ground.

 

For example: when an assessment is raised by SARS because “expenses are not allowed as a deduction” it could be as a result of, among others, the following:

 

  • SARS considers the taxpayer not to carry on a trade;
  • SARS considers the expense not to have been incurred in the production of income;
  • SARS considers the expense not to have been actually incurred; or
  • SARS considers the expense to be of a capital nature.

 

Without having reasons for the assessment, the taxpayer cannot properly formulate its grounds of objection and may, therefore, find itself in a position where the real grounds for the assessment, may not be challenged on appeal.

 

In terms of Rule 6 of the dispute resolution rules, a taxpayer who is aggrieved by an assessment may request that SARS provide reasons for an assessment. The reasons provided by SARS must enable the taxpayer to formulate its grounds of objection. The reasons for any administrative action must include the reasons for the conclusion reached, and it is not enough to merely state the statutory grounds on which the decision is based or repeat the wording of the legislation. The decision-maker should furthermore set out his understanding of the relevant law.

 

A request for reasons for an assessment must be made within 30 business days from the date of assessment. Taxpayers (and their practitioners) are therefore encouraged to consider assessments as soon as they are issued by SARS. If there is any doubt as to why the assessment has been issued, a formal request for reasons should be issued without delay.

 

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Ring-fencing of assessed losses of certain trades – part 1

Persons are generally allowed to set off any losses incurred in respect of one trade against the income derived from another trade, thereby reducing their overall tax liability.

 

However, section 20A of the Income Tax Act[1]ring-fences losses incurred by natural persons from certain trades under specific circumstances. If applicable, the natural person will not be able to set off the loss incurred from that trade against the income from any other trade, but may only set off the loss against future income derived from the trade to which the loss relates.

 

The rationale for this provision was to disallow natural persons to conduct hobbies disguised as trades in order to set off expenses from that hobby against other income such as salary income or professional income.

 

The first requirement for section 20A to apply, is that the natural person must fall within the highest income tax bracket during the relevant year of assessment.[2] For the 2019 year of assessment, the person’s taxable income and any assessed loss or balance of assessed loss of the taxpayer must be equal to or exceed R1.5 million.

 

The second requirement relates to the nature of the trade carried on by the natural person.[3] In this regard, he or she (or any relative of that person) must be engaged in one of the following trades. These include the practising of any sporting activity, any dealing in collectables, any animal showing by that person, any form of performing or creative arts or any form of gambling or betting performed.

 

Also included are the rental of residential accommodation or vehicles, aircraft or boats (unless at least 80% of the accommodation, vehicle, aircraft or boat is used by persons who are not relatives of the natural person for at least half of the year). Farming or animal breeding will also fall within section 20A unless such activities are engaged in on a full-time basis.

 

Furthermore, he or she must have incurred an assessed loss in at least three of the preceding five years of assessment, ending on the last day of the relevant year of assessment.[4]

 

Both these requirements must be met in order for the loss in respect of the specific trade to be ring-fenced.

 

The take away is that taxpayers with additional income sources should carefully consider the provisions of section 20A to the extent that the current ITR12 income tax return for individuals require taxpayers to indicate whether or not the losses are ring-fenced. Taxpayers may also be requested by the South African Revenue Service to confirm why section 20A should not apply in instances where that question was answered ‘no’.

 

[1] No. 58 of 1962

[2] Section 20A(2)

[3] Section 20A(2)(b)

[4] Section 20A(2)(a)

 

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)