It sounds crazy, but it happens more often than one would think…
Many a taxpayer has experienced the wrath of SARS when failing to declare all of their income. The penalties for non-declaration of income are severe—up to 200% of the tax evaded as a consequence of not declaring an amount that is taxable.
But declaring too much income? Is such a thing possible? My first thought when considering this topic was along the lines of “what kind of an idiot would declare too much income to SARS,” but then I realised that I was being a bit harsh. After all, we are all human, and anyone can make a mistake.
If you have made a genuine error on your tax return, which you then pick up once you get a bill from SARS for more tax than your annual salary, it is fairly simple to request a correction.
In the old days, this would entail requesting a fresh blank form from SARS, completing it with the correct details, and attaching all the supporting documentation together with a grovelling covering letter confessing that you are a complete imbecile, and would the kind folks at SARS please re-assess your return?
On SARS e-filing, it is far easier, since you are able to submit a corrected return online by clicking on the “Submit Correction” hyperlink appearing on the same page as your IT34 assessment.
But what happens if you declared income correctly on your return, in the genuine belief that you would receive such income, only to find out afterwards that you are, in fact, not going to get that money? Will SARS be willing to accept a resubmission from you?
The general rule is that as soon as an amount has “accrued” to you, such amount is liable to be taxed.
In the Lategan v CIR (1926) CPD 203 court case, the principal of accrual was defined as “when you become unconditionally entitled to an amount” (my emphasis), and this principle was affirmed in CIR v People’s Stores (Walvis Bay) (Pty) Ltd (1990) (2) SA 353 (A), SATC 9.
A case dealing with the issue of accrual came before the Pretoria Tax Court—ITC 1824 (2008) 70 SATC 27. The taxpayer in this case had entered into an agreement in 2000 to provide certain risk management consulting services to its client, subsequently invoicing the client two amounts of R19 million and R13 million, respectively.
The client had paid the R13 million but not the R19 million, and subsequently disputed its liability to the taxpayer for both amounts.
When the matter eventually went to arbitration in 2004, the arbitrator found in favour of the client, ruling that the taxpayer was indeed not entitled to these amounts, and ordering the taxpayer to repay the R13 million received from its client.
However, the taxpayer had included these two receipts in their 2001 tax return in good faith, having invoiced the two amounts in the genuine belief that it was entitled to receive such amounts, being for services rendered.
SARS, in turn, correctly assessed the 2001 return, which included such amounts based on the taxpayer’s declaration, and accordingly, the taxpayer would not have submitted any objection to the assessment.
When the arbitration award went against the taxpayer, they were in a dilemma. Because legally the arbitration award meant that the taxpayer had effectively never been entitled to the amounts in the first place, from a tax point of view, no accrual had taken place.
In order to claim a bad debt in a subsequent period, the amount that has been claimed as a bad debt must have previously accrued to the taxpayer, so this avenue was closed.
Thankfully for the taxpayer, the court found that the arbitration did not cancel any existing rights of the taxpayer but instead confirmed that such rights had not, in fact, existed in the first place. Accordingly, the court ordered SARS to issue a revised assessment for the 2001 year of assessment, excluding the amounts in question.
As a result of this case, Treasury realised that this type of situation happens more often than was previously realised, and the 2008 Taxation Laws Amendment Act introduced a new Section 23(m)(iiA) into the Income Tax Act to specifically address issues such as this.
This section provides for a deduction in the event of a taxpayer being required to refund an amount previously paid, to which it is subsequently determined that such taxpayer was never entitled to.
Written by Steven Jones
Steven Jones is a retired tax practitioner and member of the South African Institute of Professional Accountants.
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