By Nico Theron and Hopolang Mollo
Income tax season beckons and in line with what the doctor has ordered, a key consideration for individual taxpayers submitting their returns should be a prescription. Indeed, there is a three-year prescription rule.
It is commonly accepted that an assessment prescribes three years from the date of its issuance in terms of section 99(1) of the Tax Administration Act No 28 of 2011 (the TAA). However, the provisions of section 99(2) of the TAA, which are often neglected by taxpayers in making their income tax submissions, afford the commissioner the ability to lift the proverbial veil of prescription.
This article seeks to distinguish between the two common assessment types for this tax season, and some aspects taxpayers should consider regarding prescription for both.
Auto-assessments
Over the past few years, the South African Revenue Service (Sars) rolled out the auto-assessment system in which assessments, without the submission of a return by the taxpayer were automatically issued based on data collected by the authority from third parties ie employers, medical aid schemes, banks, and so forth.
Presumably, the underlying assumption is that the data collected from third parties constitutes what the taxpayer’s return – had it been made at their own submission – would comprise ie that the auto-assessment would be full and complete in all material respects. Though colloquially termed “auto-assessments”, these assessments are technically estimated assessments made by Sars in terms of section 95(1)(a) of the TAA. Accordingly, taxpayers are afforded the opportunity to revise these assessments; in the event that the auto-assessments are inaccurate or incomplete, the prescribed period for such revision this upcoming tax season is October 21, 2024 as promulgated by the commissioner under the provisions of section 95(6) of the TAA.
Original assessments based on a taxpayer’s return
The second type of assessment is the self-proclaimed mogul’s misfortune—the original assessment made by Sars based on the return submitted by the taxpayer. In making the submission of the return, taxpayers need to diligently consider their streams of income, the correct tax treatment thereof, exemptions which may apply, deductions and so forth.
Prevention is said to be better than cure. What, then, can the taxpayer do when making the submission of their tax returns to reasonably ensure the prescribed period of limitation on their assessments? Ideally, engage the assistance of a registered tax professional in filing their tax return, given the complexities of tax legislation and the arguably narrow yet wide ambit under which Sars lifts such a veil.
In the absence of the option provided for or even where it proves to be inadequate, some common mistakes made by taxpayers, which may jeopardise the expiry of the assessment, follow.
Common mistakes made by taxpayers in submitting their tax returns
- Failure to declare all income.
- Under the naïve assumption that no one person intentionally does not declare income to Sars, said failure specifically relates to resident taxpayers omitting income received or accrued in foreign jurisdictions.
- Incorrectly classifying the nature of a receipt or accrual.
- Are the monies gross income or capital in nature?
For resident taxpayers working abroad
- Miscalculating the limitation on the section 10(1)(o)(ii) exemption provided for under the Income Tax Act No 58 of 1962 (ITA).
- Failure to retain relevant supporting documentation such as travel diaries, leave applications, letters of employment, etc.
For taxpayers receiving a travel allowance
- Failure to keep a travel logbook entirely or in the prescribed manner.
- Document retention failure.
For entrepreneurs: invoices relating to trade income and expenditure
For philanthropists: section 18A certificates.
For your hair transplant, medical invoices to claim a rebate on qualifying medical expenditure not covered by your medical scheme, under section 6B of the ITA.
Common mistakes by taxpayers receiving auto-assessments
You will remember that the legislation provides for the taxpayer to revise an auto-assessment in the event that it is incorrect or incomplete. Taxpayers to whom auto-assessments are issued are thus liable to ensure their accuracy. Sars being oblivious to your after-hours trade as a streamer, does not exonerate you from paying taxes thereon. Material disclosures not made to Sars, despite the return being issued by them of their own volition, still constitute a form of misconduct that Sars, given reasonable grounds, may eventually audit and, if necessitated by the lapsing of a three-year period, lift the veil of prescription.
How do the assessments differ?
The key distinction between an auto-assessment and an original assessment based on a taxpayer’s submission is arguably the alleviated administrative burden on the taxpayer in the former. Beyond that, be it an auto-assessment or an original assessment based on a return submitted by the taxpayer, the income and deductions, if any, for a single taxpayer should be identical irrespective of who made the submission. Simply put, the return ought to be full and complete in all material respects.
The importance of full and complete returns
As alluded to above, the veil of prescription may be lifted in relation to original assessments in terms of section 99(2)(a), in the event that tax was not fully charged owing to fraud, misrepresentation or non-disclosure of material facts.
It becomes worth noting that in terms of section 95(1) of the TAA, the “auto-assessment” constitutes an original assessment.
The requisites for Sars to lift the veil of prescription at least insofar as they relate to fraud and non-disclosure of material facts are definitive. As far as misrepresentation goes, there is an argument to be made that it may, in some circumstances, come down to an interpretation of the law; thus it is not an objective truth. Nonetheless, on the assumption that all the requirements are indeed, objective truths and either one led to the incorrect assessment of tax, Sars may, after the lapsing of a period of three years, lift the veil of prescription to issue an additional assessment.
The delicacy of the party bearing the onus of proof is often overlooked. Taxpayers often find themselves at the mercy of Sars, attempting to discharge the burden of proof which at times does not rest on them. A case in point refers to instances where Sars raises an additional assessment post-prescription. In these instances, Sars carries the burden of proving the objective existence of fraud, misrepresentation, and non-disclosure of material facts.
At the time Sars seeks to lift the veil of prescription, they ought to have a factual and legal basis for doing so. Realistically speaking, no objective test is available to the taxpayer to determine Sars’s satisfaction of such requirements. Typically, only after the taxpayer has reached litigation can the courts, an unbiased third party, decide on the matter.
The nuances required to lift the veil of a prescription cannot be stressed enough and any deficiencies on Sars’s part to this effect can be used by taxpayers as a defence to their assessments. The assistance of an expert to this effect is always recommended.
* This article was originally published in the TaxTalk magazine by the South African Institute of Taxation.
* Theron is a chartered tax adviser and Mollo is a tax consultant at the South African Institute of Taxation.
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