AUTHOR: Ziyaad Moosa – PKF Octagon (Johannesburg)
With effect from 16 September 2022, The South African Revenue Services (SARS) discontinued the use of the IT14SD return. This return was previously used by SARS where a taxpayer was selected for verification (which is a high level review of the taxpayer’s income tax return). The IT14SD return required the taxpayer to perform a three-way comparison, between Value-Added Tax, employees’ tax and income tax.
Over the last 2 weeks, SARS has now begun to issue a series of new verification letters to taxpayers in what appears to be the replacement of the old IT14SD process. These letters are system generated and are issued if a taxpayer’s tax return is selected for review by SARS internal risk model.
These verification letters appear to be system generated and call for, at a minimum, the following information:
- A copy of the taxpayer’s signed annual financial statements;
- A detailed tax computation together with the supporting documentation and schedules making up the tax computation.
In addition to the above, specific information is also requested from taxpayers that have claimed certain deductions or made certain disclosures on their tax returns. These include, but are not limited to:
- copies of S18A certificates confirming donations made;
- an explanation as to why the taxpayer incurred a loss for the financial year (if applicable);
- an explanation and proof as to why the taxpayer’s 3 largest expenses are considered deductible for tax purposes;
- where any assets sold: a detailed fixed asset register reflecting the depreciation rate and rand value, previous allowances claimed and supporting documentation justifying the recoupment (or lack thereof) adjustment on the tax computation;
- any other expenditure claimed that SARS may deem as abnormal;
- workings and supporting documents where special allowances/incentives are claimed (e.g., the section 24C deduction on future expenditure the relevant contracts may be requested).
At face value, the new requests are less administratively cumbersome to attend to than the old IT14SD requests. The information requested by SARS (financial statements and tax computations) are available at the time of completion of the tax returns and should be readily available for upload by taxpayers.
However, the new risk-based approach adopted by SARS may pose challenges for taxpayers whose documentation is not in order or have not retained the necessary supporting documentation justifying adjustments made to their income tax returns.
In particular, requests relating to historical asset information may pose a challenge if inadequate documentation has been retained by the taxpayer. This is particularly relevant where assets may have been purchased several years prior. The retention of documents may also be beyond the taxpayer’s control where, for example, the taxpayer has had a change in information systems in recent years or the information has been destroyed/lost due to the recent floods and unrest experienced in KwaZulu-Natal and/or parts of Gauteng.
Reviews of the taxpayer’s tax computation by SARS could also lead to further follow up queries by SARS calling for additional documentation or adjustments to the taxpayer’s assessments.
We would therefore recommend that all corporate taxpayers prepare the above information prior to submitting their tax returns. This way, the documentation is readily available in the event of a review and any potential inconsistencies or areas of concern can be identified and corrected prior to the submission of the taxpayer’s tax return.