Authored by: Jean Du Toit, Head of tax technical at Tax Consulting SA 

Over the course of lockdown, pundits have shared some harrowing statistics regarding the increase in unemployment in South Africa. In general, our unemployment rates are moving in the wrong direction and the affected households have suffered great hardship as a result, but it is important to understand what this means for our tax base and our growing budget deficit.

The statistics
The University of Cape Town’s (“UCT”) Liberty Institute of Strategic Marketing has used the National Income Dynamics Survey (“NIDS”) to paint a picture of the number of adults living in households by income band (“the survey”). The survey uses six bands of income and compares the figures of 2017 with that of June 2020, per the below diagram: 
​
If we look at the three upper bands, which comprise the middle class and above, the statistics are almost unthinkable. Between 2017 and June this year, this segment of the adult population declined from 6 100 000 to 2 700 000 individuals, translating to a 55,73% reduction. On the other end of the spectrum, the number of ultra-poor individuals, earning below minimum wage, increased by 6 600 000 individuals (54%).

The reasons for the decline are manifold; many would attribute it to the brain drain, and the lockdown undoubtedly did not help our cause. In fact, if we turn to a different study, published by the Centre for the Study of African Economies of Oxford University, titled “The labor market and poverty impacts of covid-19 in South Africa” (“the study”), this further confirms the dire straits of the country. 

The study found there was a 40% decline in net active employment between February (pre-lockdown) and April (during lockdown) of 2020, half of which comprised shifts into unemployment, as opposed to paid leave or temporary layoffs. The upshot is that 20 – 33% of those who lost their jobs over the lockdown period fell into poverty.

Looking at the results of the survey and the study together, the lockdown dealt a mortal blow to an already grim situation, leaving us with the figures we see now.

Connecting the dots
It is a widely known fact that there are a handful of South Africans who actually contribute to the personal income tax pool; in terms of the 2020 Budget Review, roughly 90% of the income tax payable by individuals are paid by the middle-class and above (as defined in terms of the survey).

This puts the result of the survey into perspective; in a three-year period, our personal income tax base appears to have more or less halved and it is likely that a large chunk of that reduction occurred after February 2020.
Personal income tax is the largest contributor to total tax revenue, so what does this mean for SARS and those who can still contribute?

Prognosis for the taxman
In the ordinary course, National Treasury would ride to SARS’ aid and hike tax rates to increase revenue. But after many years of following this strategy, government admitted in the Medium Term Budget Policy Statement in October that it cannot impose any further tax increases because evidence suggests it may have large negative effects on GDP growth – it seems we have reached the peak of the Laffer Curve.

So, SARS has to make do with what it has, but with tax rates likely to remain stagnant and with the decimation of the middle-class, how on earth will it claw back the current budget deficit?

It means that SARS will have to change strategy to extract taxes where it is least comfortable. SARS will have to look at –

1. Offshore structures and target wealth accumulated abroad by South African taxpayers. In fact, we have already seen evidence (for the first time) that SARS is auditing these structures by finally making use of the automatic exchange of information regime.
2. Zero tolerance toward delinquent taxpayers. SARS prosecution and enforcement must improve and recent law changes have laid the groundwork for this, which allows for the criminal prosecution of taxpayers who are ignorant of their tax obligations. 
3. Deeply scrutinising companies to uncover non-compliance, especially from a payroll perspective. The Commissioner has noted his displeasure with the wide-spread practice where employers withhold employees’ tax without paying it over to SARS. To add to this, there is a lot to uncover where companies incorrectly applied Covid-19 tax relief. Payroll audits remain perhaps SARS’ strongest but underutilised strategy. Payrolls are a soft target because of its tendency to contain errors, which are magnified by the size of a company’s payroll. This makes for a fruitful target. 

Make no mistake, SARS may have a smaller target to aim at, but has shown resilience in the past and will no doubt be wise to the findings of the aforementioned studies and adapt accordingly.

ENDS
 
MEDIA CONTACT: Rosa-Mari Le Roux, 060 995 6277, rosa-mari@thatpoint.co.za, www.atthatpoint.co.za

ABOUT Tax Consulting SA:
Tax Consulting SA offers a streamlined service in the calculation and filing of individual income tax returns, provisional income tax returns or any other more complex individual tax relate matters. Our highly qualified team of Tax practitioners are registered with SARS under controlling body of the South African Institute of Tax Practitioners (SAIT). As tax specialists, we remove the burden from clients to keep their tax affairs in good order, achieving optimal tax savings while ensuring full compliance.

For more information on Tax Consulting please visit:
Website:  http://www.taxconsulting.co.za/
LinkedIn: Tax Consulting South Africa
Facebook:Tax Consulting South Africa

Authored by: Jean du Toit, Head of Tax Technical at Tax Consulting SA

The days where SARS shuts its eyes to taxpayers’ offshore holdings are thing of the past. SARS is finally utilising the Automatic Exchange of Information regime to pin down taxpayers who have not disclosed their offshore interests and numerous taxpayers have already received some alarming notices to this effect.

The notice
The notice informs the taxpayer that SARS intends to initiate a review of their tax affairs, based on information it received from 87 foreign jurisdictions through the Automatic Exchange of Information, regarding the offshore holdings of South African taxpayers.

After recovering from the shock of the introductory words of the notice, SARS extends an olive branch and states that it wishes to engage with the taxpayer first, in the interests of administrative justice. The consolation is short-lived though because SARS then proceeds to direct a detailed and onerous information request at the taxpayer.

This starts off with a request to confirm that you have offshore holdings and then requires detailed information regarding the amount invested, the nature of the investment and the location thereof. The final question asks the taxpayer to explain why this was not disclosed on their tax return.

As if SARS knows your next move, the notice asks the taxpayer to inform them in the response if they intend to file an application under the SARS Voluntary Disclosure Programme (“VDP”).

The notice signs off by reminding the taxpayer that they have 21 working days to respond to this Gordian knot of a request and reminds you that a failure to do so constitutes a criminal offence.

What to do next
It is perplexing that SARS almost invites taxpayers to do a VDP, even after they have received this notice. It is critical to note that a VDP application must be “voluntary”, otherwise it does not meet the requirements of a valid VDP application under section 227 of the Tax Administration Act.

Technically, if the SARS notice prompts the taxpayer to come forth and file a VDP application, it may not be considered “voluntary”. It is not clear if SARS is making a concession on this aspect, but it would be very interesting to see if the VDP Unit will accept an application if it was filed pursuant to this notice.

In any event, it is important to note that the SARS notice does not give you the option to either respond or to file a VDP; it just asks you to confirm your intention. You are still very much obliged to respond to SARS’ queries. If you have received such a notice, you would be well-advised to speak to a professional, before you respond, especially if you have not disclosed your offshore interests to SARS.

First-mover advantage
If you have undisclosed offshore interests and you have not yet received this notice, then you have a small window to file a VDP application in the ordinary course. A timeous VDP application may avoid the unpleasant information gathering process initiated in terms of this SARS notice and provides you with amnesty from criminal prosecution and understatement penalties.

If you have an ounce of wisdom, this will be your immediate course of action. Be warned though, the VDP process may be the path of lesser resistance in this instance, but it should not be undertaken without the help of a professional.

deally, you should speak to an attorney who offers legal professional privilege and who is well-versed in this process.

Take away
For those with undisclosed offshore holdings, this should serve as a wake-up call. SARS now has the means and the guile to uncover your interests and, with prevailing budget constraints, SARS has no choice but to turn to untapped pools of revenue. It is no longer a question of if SARS will come knocking, but when.

ENDS
 
MEDIA CONTACT: Rosa-Mari Le Roux, 060 995 6277, rosa-mari@thatpoint.co.za, www.atthatpoint.co.za

ABOUT Tax Consulting SA:
Tax Consulting SA offers a streamlined service in the calculation and filing of individual income tax returns, provisional income tax returns or any other more complex individual tax relate matters. Our highly qualified team of Tax practitioners are registered with SARS under controlling body of the South African Institute of Tax Practitioners (SAIT). As tax specialists, we remove the burden from clients to keep their tax affairs in good order, achieving optimal tax savings while ensuring full compliance.

For more information on Tax Consulting please visit:
Website:  http://www.taxconsulting.co.za/
LinkedIn: Tax Consulting South Africa
Facebook:Tax Consulting South Africa

Authored by: Jean du Toit, Attorney and Head of Tax Technical at Tax Consulting South Africa 
 
The Pretoria High Court has granted SARS’ application to preserve more than R4bn in state capture loot. SARS’ victory in these urgent court proceedings reveals the importance of the taxman’s involvement in recovering proceeds of state capture and bringing the beneficiaries to book.
 
With little to show from the State Capture Inquiry thus far, SARS’ intervention reminds us how powerful tax legislation can be in dealing with complex crimes. Lest we forget, it was the taxman who tripped up some of the most notorious and organised criminals of the twentieth century.
 
State of the Inquiry
The cost of the State Capture Inquiry is currently hovering at around R800m. This is not the only judicial investigation funded by the public in recent times, but it is by far the most expensive and the end is not yet in sight. But, even with some damning testimony by several witnesses, South Africans have not yet seen any bang for their buck.
 
The truth is, we are light years away from seeing any convictions on criminal charges such as corruption, bribery or fraud. The state’s onerous burden of proof, the complexity of these crimes and the resources required to investigate them are but a few factors that mean that it can take the National Prosecuting Authority (NPA) years to build a robust case. Even then, a conviction is by no means guaranteed.
 
Tax law v criminal law
There is a reason why federal prosecutors turned to tax law to get a conviction against individuals such as Al Capone. Tax evasion is not a crime that concerns itself with the legality of the receipt, the purpose thereof, by whom it was paid or what it was used for. The taxman simply needs to establish if the loot was in fact disclosed and disclosed correctly.
 
For this reason, tax evasion is a far more attainable conviction because proving the elements of the crime is plain sailing when compared with for example corruption or fraud. This case is no different; SARS’ application to preserve the funds is based on the fact that the funds were incorrectly claimed as a tax-deductible expense.
 
The testimony at the State Capture Inquiry has provided the smoking gun and if SARS deploys some of its finest investigative auditors, it will make life very difficult for those who shared in the loot.   
 
SARS holds the key
The Tax Administration Act bestows upon SARS wide powers to act swiftly and decisively, as demonstrated in this case. If the proceeds of state capture are to be recovered through the criminal justice system, chances are we may never see those funds again.
 
SARS on the other hand has a powerful arsenal to collect the money if it determines that it was not taxed as it should have been.
 
The NPA should team up with SARS, follow the money and obtain early convictions for tax evasion. That is not to say that the NPA should not eventually pursue other, perhaps more serious, charges. In fact, this will give the NPA time to build an unassailable case on other charges in the meantime.
 
This strategy ensures for a slam-dunk upfront and it is quite possible that it may lead others to join the likes of Angelo Agrizzi to come forward, to strike a deal that may lead to the bigger fish ending up behind bars.
 
ENDS
 
MEDIA CONTACT: Rosa-Mari le Roux , 060 995 6277, rosa-mari@thatpoint.co.za, www.atthatpoint.co.za
 
ABOUT Tax Consulting SA:
Tax Consulting SA offers a streamlined service in the calculation and filing of individual income tax returns, provisional income tax returns or any other more complex individual tax relate matters. Our highly qualified team of Tax practitioners are registered with SARS under controlling body of the South African Institute of Tax Practitioners (SAIT). As tax specialists, we remove the burden from clients to keep their tax affairs in good order, achieving optimal tax savings while ensuring full compliance.
 
For more information on Tax Consulting please visit:
Website:  http://www.taxconsulting.co.za/
LinkedIn: Tax Consulting South Africa
Facebook: Tax Consulting South Africa

Authored by: Thomas Lobban, Jean Du Toit & Jonty Leon from Tax Consulting SA
 
This week, on 26 November 2019, the National Assembly passed the latest tax bills, which is set to be promulgated by the President after it has been passed by the National Council of Provinces.
 
On the face of it, some concessions have been made for individual taxpayers, but these offer cold comfort in the bigger scheme.
 
Proposed Amendments
Before we get to the truly profound implications, it is important to note the following amendments:

• The tax exemption of excess contribution amounts paid by taxpayers in respect of retirement annuities received by them will now extend to annuities received from provident funds and provident preservation funds as well, from 1 March 2020;
• The ordinary rebates available to taxpayers who receive a pension in respect of a deceased spouse will no longer be taken into account when tax is withheld on these amounts, from 1 March 2021;
• Previously, the transfer of one’s retirement interest from a pension fund to provident fund or provident preservation fund was non-taxable from 1 March 2019, but will now be retrospectively treated as a taxable event, potentially placing these taxpayers in a non-compliant position; and
• Section 12J of the Income Tax Act provides a tax deduction to taxpayers, in proportion to their investment in qualifying venture capital companies, which is intended to promote economic growth. However, this will now be subject to a maximum allowable investment of R2,5 million for individuals, which means more cash-in-hand for government.
  
  

Tax Man Always Searching for His Pound of Flesh
At first glance, it appears that there are no profound amendments to the Income Tax Act or the Tax Administration Act that would raid the pockets of taxpayers, to generate additional revenue.
 
This is peculiar, since the prevailing budget deficit is a massive elephant in a room with grim economic prospects and a junk credit rating.
 
However, taxpayers must not be fooled. In the current economic climate and with SARS so far behind on collection, it is unlikely that the 2019 legislative cycle would not have been put to good use the drum up some more money.
 
Government is smart enough to understand that big changes cause controversy, as we have seen with the VAT rate increase or the amendment to the exemption on foreign employment income.
 
With no such amendments, were taxpayers truly given a tax break in light of the current economic landscape?
 
No Change Means More Revenue
In truth, the biggest change by far is not a change at all, nor is it actually found in the Income Tax Act or Tax Administration Act.
 
The Rates and Monetary Amounts and Amendment of Revenue Laws Act, 2019 proposes no amendment to the tax brackets which prescribe the rates of tax applicable to individual taxpayers.
 
In a country with a relatively high inflation rate, this is a problem, since the salaries of employees generally increase in line with inflation. Where the tax brackets do not increase correspondingly, this results in so-called “bracket creep”.
 
In real terms, while this means that individuals are technically earning more, they are actually taking home less pay each month as compared to the previous year. In fact, in many cases taxpayers may be pushed into a higher tax bracket. The upshot is the taxpayer’s pay increase is wiped out by additional taxes.
 
It should also be mentioned that this is the second year in a row that the tax brackets have not been increased, which means that taxpayers will need to further reduce their cost of living for another year, in order to make ends meet.
 
While this will not necessarily affect lower income earners, it will certainly have a significant impact on the already overburdened taxpayers in the middle- and higher-income brackets.
 
This also affects those who will be withdrawing lump sum benefits from their pension interest. In this case, the special tax rates applicable to these amounts also remain unchanged.
 
This means that these persons will be forced to enter into retirement with less cash available to defray their cost of living – an unfortunate consequence of bracket creep.
 
Say Good-Bye to South Africa’s High Earners
The long-term effect of these changes (or lack thereof) can only realistically be determined over time.
 
This is an effective measure to generate revenue over the short term, but the question must be asked; how much financial constraint taxpayers are willing take before it becomes unsustainable and individuals simply decide to leave South Africa?
 
We have already seen a massive jump in South Africans deciding to leave the tax net by formally noting their non-resident status by financially emigrating from South Africa.
 
As it stands, National Treasury is already relying heavily on the higher earning segment of the individual tax base and measures like these forces the hand of taxpayers who are already contemplating their departure.
 
Ultimately, we lose important taxpayers and their descendants to the tax base permanently, which leads to less revenue for government.
 
Cunning as it may be, it would seem that government’s band aid is a temporary fix that will exacerbate a far larger problem. 

ENDS

MEDIA CONTACT: Rosa-Mari Le Roux, 060 995 6277, rosa-mari@thatpoint.co.za, www.atthatpoint.co.za
 
ABOUT Tax Consulting SA:
Tax Consulting SA offers a streamlined service in the calculation and filing of individual income tax returns, provisional income tax returns or any other more complex individual tax relate matters. Our highly qualified team of Tax practitioners are registered with SARS under controlling body of the South African Institute of Tax Practitioners (SAIT). As tax specialists, we remove the burden from clients to keep their tax affairs in good order, achieving optimal tax savings while ensuring full compliance.
 
For more information on Tax Consulting please visit:
Website:  http://www.taxconsulting.co.za/
LinkedIn: Tax Consulting South Africa
Facebook: Tax Consulting South Africa