From R440k Debt to R145k Refund
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Turning Around Disallowed Deductions And S179 Bank Recoveries
- Client: Confidential - owner of several rental properties in Sandton
- Matter: Disallowed deductions, S179 bank recoveries and outstanding debt of R440k, 2022 to 2024 tax years
- Duration: Resolved - R145k refund paid into the taxpayer’s bank account
- Provision: Income Tax Act & Tax Administration Act - Section 20 ring-fencing, Section 167, Section 179 and Section 200
The Challenge
The taxpayer owns several rental properties in Sandton. He is taxed as an independent contractor outside of a company structure or small business, claiming expenses based on local business, trade and professional income.
Up to the 2022 tax year, he had no issues with SARS. However, in 2022, due to the negligence of his then accountant, SARS disallowed all deductions claimed as no supporting documents on verification were submitted.
The problems continued in 2023 and 2024 with most expenses disallowed, despite some documentation submitted. Outstanding debt increased to R440k. At this stage SARS commenced deducting amounts from his bank account in terms of S179, at one point amounting to R100k, causing severe financial constraints on his business activities.
The taxpayer then employed a new bookkeeper/accountant who approached MM Tax Services for assistance.
The Solution
The first important step in such a situation is to get the taxpayer to be compliant with the most recent tax years. It is usually easier to do as documentation is more readily available while the legal timeframes for objections or appeals remain in place. It also serves as a ground for improving interaction with SARS, because once you are in their bad books, they tend to be more relentless.
- As the taxpayer became more compliant the legacy debt could be addressed.
- He did not accept the outstanding debt as valid. Therefore, a S200 compromise could not be initiated. An instalment payment arrangement in terms of S167 was also inopportune as the taxpayer was advised that the problem could be adequately resolved by submitting the required documentation.
- 2022 fell outside the timeframe for lodging an objection or submitting documents. A request for extension was made, which was granted. All the required documentation was then submitted. Yet, on two occasions SARS indicated they were still not satisfied. This necessitated an in-person visit to a SARS branch to provide further documentation.
- SARS indicated they had a problem with the way cost of sales (COS) was calculated. COS, entailing direct labour and material costs resulting in sales, is an important item as all subsequent expenses are deducted from this amount to establish eventual profit/loss. The calculation was shown to result in a loss for 2022 as maximum expenses were claimed with the necessary documentary evidence provided.
- Eventually it was accepted by SARS.
- The next issue related to ring-fencing of this loss in terms of S20, with SARS indicating the amount needed to be ring-fenced from deductions as the taxpayer fell within the highest marginal tax rate of 45% (now 39%). It was then pointed out there were assessed losses in only two years of the stated 5-year time-period, thereby escaping the S20 requirements of three years whereby the taxpayer could not claim any assessed losses for that tax year, per definition.
The Results
SARS then conceded that the system showed the taxpayer did not qualify for any assessed loss limitations. And to everyone’s surprise, SARS even conceded that COS was understated, eventually resulting in a refund of R145k paid into the bank account of a very satisfied taxpayer.
- Compliance restored for the most recent tax years, improving interaction with SARS
- S20 ring-fencing and cost of sales issues resolved in the taxpayer’s favour
- R145k refund paid into the taxpayer’s bank account