From R1.35 Million to Zero
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- Case Study
Reversing a R1.35 Million Assessment on "Movements in a Bank Account"
- Client: Clinton Warren, CAW Developments - construction industry, two business accounts plus a private account
- Matter: SARS estimated assessment on private bank account movements, 2023 tax year
- Duration: Resolved - assessment reduced to R0.00, with a R15,000 refund The Challenge
- Provision: Income Tax Act & Tax Administration Act - definitions of gross income and estimated assessments
The Challenge
Taxpayer is in the construction industry and manages two business accounts. He also has a private account. Out of the blue the taxpayer was assessed for R1.35m in his private account for the 2023 tax year. That is despite being compliant with zero returns in all the preceding and subsequent tax years. His then accountant lodged a notice of objection (NOO), which was rejected by SARS as being “too vague”. The matter was then escalated to auditor level, who indicated that the assessment was based on “movements in his bank account”. It was also done in terms of certain sections of the Income Tax Act (ITA) and the Tax Administration Act (TAA), more specifically the definitions of gross income and estimated assessments. Because no progress was made with the matter the taxpayer turned to MM Tax Services for help.
The Solution
It became clear that the money transferred from the taxpayer’s business account to the private account did not constitute gross income, as it included repayments from shareholder loans and a repaid deposit from a failed business transaction.
- SARS was further in error in that the amounts were identified under code 4214, desigated as "other accruals and receipts - profit."
- This was also confirmed by the taxpayer who indicated that the amounts deposited into his private account was equity from a home loan account, thus debt and not income or profit.
- It was then pointed out to SARS that the amounts were not transfers of profit. An assessment can never be made on "movements in a bank account" and is patently wrong. An assessment cannot even be made based on gross income. An assessment can only be made in terms of taxable income, as defined.
- The income identified in the taxpayer's bank account was based on debt, which does not fit the definition of gross income, which was also confirmed in the now almost legendary Brummeria case in the Appeal Court in 2007.
- All the necessary evidence was provided to SARS, including statements of the relevant bank accounts, which provided details of the payouts to the taxpayer. There was no evidence that he ever had access to the attorney's bank accounts or opened them in his name.
To SARS’s credit, the deficiencies in the assessment were immediately acknowledged. More specifically, the issue of the deposit was addressed in that the first payment to another business partner already constituted income for him on which he was or needed to be taxed. The repayment cannot therefore be income to the original issuer of the deposit, as it would mean double taxation. That is under the dubious view that a deposit could under certain circumstances be viewed as income, which was proven to be incorrect in any case.
The Results
MM Tax Services requested a reduced assessment of 0.00. To everyone’s surprise, the taxapayer’s assessment was not only reduced to 0.00, but on further calculation included a refund of R15k, resulting in a very happy taxpayer.
- Assessment reduced from R1.35 million to R0.00
- Assessment reduced from R1.35 million to R0.00
- Compliance history (zero returns in all other years) preserved throughout