Tax returns: SA taxpayers at a disadvantage

South African taxpayers are at a disadvantage regarding their tax returns as they could be prejudiced by contradictions between the law and the reality of how their returns are assessed.

"Unfortunately, there is very little that individuals or companies can do about the situation," says Ernest Mazansky, director of Werksmans Tax.

"When it comes to the assessment of tax returns, South African taxpayers have the worst of both worlds.

"They don't have the legislative checks and balances usually found in a self-assessment system and, in practice, are denied important protections inherent in the alternative," he says.

The reason is that SA has a de facto self-assessment system for income tax, but that is not what the law provides. "Legally speaking, what SA Revenue Service [SARS] staff members are supposed to be doing is carefully examining each tax return, together with supporting documents and financial statements."

However, in practice, Mazansky says, SARS does not have enough people to individually review each return (and it would be unrealistic to expect it); nor are taxpayers allowed to submit supporting documents.

"The size of the tax returns for both individuals and companies has shrunk to a few pages, requiring the submission of minimal information," Mazansky adds.  

"The taxpayers are instructed not to submit supporting documentation, but to retain this in the event of an audit."

This, he says is typical of a self-assessment system. "For the many taxpayers who choose to submit their returns by e-filing, it is impossible to submit supporting documentation anyway."

The dilemma for taxpayers is that, without supporting documentation, they cannot properly disclose how and why they have interpreted the tax rules.   

Mazansky points out that taxpayers are legally allowed to interpret the rules as they see fit and cannot be penalised as a result - provided that they make full disclosure about what was done and why.

"The crux of the problem is this: how do you protect yourself by making full disclosure if you are prohibited from submitting the supporting documentation, explanations and submissions?"

It is not clear what plans the authorities have to remedy the situation but, until they do, there is cold comfort for taxpayers. "Without the option of submitting documentation with their tax returns, the best route is probably to write SARS a letter after the fact.

"Then at least you have made your disclosure and explained what you have done and why ... other than that, the taxpayer has very little recourse."     

Mazansky emphasises that he is not arguing for a return to the days where every tax return was individually examined and every taxpayer was at liberty to submit reams of documentation.

"Of course it is impossible in practice for each and every tax return to be carefully reviewed - the manpower at the SARS simply does not exist for this to happen."

Precisely because of the practical impossibility of assessing every return, many countries have adopted self-assessment systems.

"Such a system is inevitable and there is no real alternative to it because the practicalities of modern business life demand it. However, it is to the prejudice of South African taxpayers that the legal framework does not support what happens in practice."

Clearly, the time has come for SA to formalise self-assessment by amending the legal framework to comply with the current practice. "Until then, one effectively has a de facto self-assessment system without the legal back-up, and one has the legal protections of the alternative system, often without the ability to take advantage of them," Mazansky says.