Lifestyle audits – all bark with selective bites?

Jashwin Baijoo, Tax Consulting South Africa

By Jashwin Baijoo, Legal Manager: Africa Tax and Compliance at Tax Consulting SA

In addressing the National Tax Indaba on Monday 20 September, Commissioner of the South African Revenue Service (SARS), Edward Kieswetter, noted that their position as an organization is to focus on collecting the “lowest hanging fruit”, a statement that may be interpreted in numerous ways, including taxpayers asking themselves if SARS is simply opting for the route of least resistance.

This follows Kieswetter’s statement in April of this year, noting that SARS has profiled High-Net-Worth Individuals, who the revenue authority deems to be living beyond their means. He went on further to say that with the automatic exchange of information in place as a result of SARS’ Tech Upgrade, the revenue authority has access to databases which specifically track the movement of high-end items.

The Davis Commission – SARS’ Back-Up

With the support of the Davis Commission fully behind SARS’ “Lifestyle Audits”, and this type of assessment receiving some media traction throughout the year, the burning question is, aside from a means analysis, what is the criteria for selection? Furthermore, what is the criteria for prosecution?

As it stands, with the Davis Commission noting that the tax tables only showing between 5000 and 6000 South Africans who report a taxable income in excess of R 5 million per annum, should there not have by now been more prosecutions off the back of Lifestyle Audits? Or are some taxpayers so well protected that not even SARS can touch them?

Although SARS is well within its rights to require taxpayers to submit all material relevant to their respective financial positions, as empowered by the Tax Administration Act, No. 28 of 2011, is it also empowered to differentiate between which taxpayers it wishes to make an example of, and which will get away with a mere slap on the wrist?

More Bark, Less Bite

In its discussion titled “The Promise of Lifestyle Audits”, as facilitated by Jerry Botha, Managing Partner at Tax Consulting South Africa, leading experts in the field shared their views on both the interpretation and applicability of the term “Lifestyle Audit”, which assessments have been carried out in the shadows for years, by none other than SARS.

From Keith Engel, CEO of the South African Institute of Tax, to Mark Kingon, prior acting Commissioner of SARS, the consensus is that a lifestyle audit is in essence an asset check, comparing a taxpayer’s revenue stream, to their standard of living, assets, and wealth. This assessment can be used in both the public and private sectors, for risk management and investigations.

Another noteworthy point, as raised by Keith Engel, is that there are two types of lifestyle audits, being preventative and pro-active, which if given their ordinary meanings, are not dissimilar, but when contextualized, may be interpreted as one leading to compliance of the taxpayer before any criminal offence is committed, and the other leading to sanctions post-commission of the offence.

A sentiment that guided the discussion, and as voiced by Jacques van Wyk, CEO of JGL Forensic Services, is that there must be consequences, not only for fraud discovered from a lifestyle audit, but for non-compliance in general. With the current opinion being that SARS’ “bark is worse than its bite at this point in time”.

In recent months we have certainly seen SARS making good on its word of increasingly focusing on non-compliance, including tax mistakes, which enable the prosecution of taxpayers for offences committed “wilfully and without just cause”. With reference to a lifestyle audit, this would go one step further, and should any non-declaration or under-declaration be discovered, it will most likely enter the realm of “intentional tax evasion”.

A Level of Solution-Based Thinking

Taxpayers wishing to rectify historical non-compliance by means of a voluntary disclosure of information, or ensure their current compliance record remains unblemished, there are various solutions available from a legal standpoint.

The most proactive way to affect this disclosure, is by means of a Voluntary Disclosure Programme (VDP) application. The VDP application allows you to legally declare any undeclared assets, but not be subject to the penalties which would generally stem from such a non-disclosure.

This is the first prize from a compliance perspective and should be considered as a priority for all taxpayers who have not yet received any formal correspondence from SARS, pin-pointing a specific liability owed.

Should the revenue authority discover this non-disclosure prior to the VDP application being submitted, there is still one final Hail-Mary, by means of a Compromise of Tax Debt application (the Compromise).

The Compromise is aimed at aiding taxpayers, both individual and corporate, to reduce their tax liability by means of a Compromise Agreement (the Agreement), which is entered into with SARS.

The result of entering into the Agreement, is having your tax liability greatly reduced, to an amount which is affordable to the taxpayer, granting a much-needed reprieve and aiding the taxpayer on the road to recovery.

Once the agreement is duly executed, and payment is made as proposed by the taxpayer, and accepted by SARS’ Compromise Committee, the balance of the liability due to SARS is written-off by the revenue authority.

The Best Strategy to Remedying Non-Compliance

To protect yourself from possible jail-time, it remains the best strategy that you always ensure compliance.

Where you find yourself on the wrong side of SARS, there is a first mover advantage in seeking the appropriate tax advisory, ensuring the necessary steps are taken to protect both yourself and your unblemished record from paying the price for what could be the smallest of mistakes. However, where things do go wrong, SARS must be engaged legally, and we generally find them utmost agreeable where a correct tax strategy is followed.

As a rule of thumb, all correspondence received from SARS should be immediately addressed by a qualified tax specialist or tax attorney, which will not only serve to safeguard the taxpayer against SARS implementing collection measures, but also being specialists in their own right, the taxpayer will be correctly advised on the most appropriate solution to ensure the healing process is completed.

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