Beware the pitfalls of ‘opt in’ and ‘opt out’ provisions in SARS tax auto-assessments
Failure to ‘opt out’ and submit a return where the auto-assessment is incorrect can have severe consequences for the taxpayer if the auto-assessed amount is lower than the correct tax amount.
Beware the pitfalls of ‘opt in’ and ‘opt out’ provisions in SARS tax auto-assessments
The South African Revenue Service (SARS) has indicated that for the 2024 personal income tax filing season, starting in July 2024, it will once again make use of automatic assessments (commonly referred to as auto-assessments). SARS will issue these auto-assessments notices from 1 July 2024 to 14 July 2024 for taxpayers whose tax affairs are considered less complicated.
Like the 2023 filing season, if the taxpayer agrees with the auto-assessment, there is nothing the taxpayer would need to do. However, if the taxpayer disagrees with the auto-assessment, they need to “opt out” by submitting a tax return by 21 October 2024. When the auto-assessment indicates a refund due to the taxpayer, the taxpayer can expect the refund within 72 hours after receiving the auto-assessment.
SARS uses third-party generated returns, obtained from, for instance, employers, banks, financial institutions, some state-owned companies and medical aid schemes, to populate the auto-assessment.
Thus, SARS makes an estimation based on information readily available to it. However, as the court indicated in Commissioner for Inland Revenue v Di Ciccio 1985 47 SATC 199, the accuracy of an estimation “will inevitably be less than in an actual return”. This indicates that the auto-assessments may not be accurate.
Taxpayers remain responsible
Taxpayers should be aware that they remain responsible for ensuring that the auto-assessments are accurate reflections of their tax affairs. The schedule specifying who must submit income tax returns for the 2024 year of assessment indicates that a natural person who is auto-assessed and whose “gross income, exemptions, deductions and rebates” are correctly indicated in the auto-assessment does not need to file an income tax return.
Contrariwise, a taxpayer whose auto-assessment is incorrect must submit an income tax return. Failure to “opt out” and submit a return where the auto-assessment is incorrect can have severe consequences for the taxpayer if the auto-assessed amount is lower than the correct tax amount.
In such a situation, the taxpayer would be subject to an understatement penalty in terms of Chapter 16 of the Tax Administration Act 28 of 2011. For example, if SARS can prove intentional tax evasion, the penalty can be 200% of the difference between the amount indicated in the auto-assessment and the actual income tax liability.
Taxpayers should also be aware that an auto-assessment constitutes an “assessment” as it determines the taxpayer’s liability. This means that the consequences the Tax Administration Act attaches to an “assessment” apply to auto-assessments.
Therefore, when a taxpayer “opts out” of the auto-assessment by filing a return, SARS can proceed with enforcement actions even if the dispute is not finalised. This is because section 164 of the Tax Administration Act provides that a taxpayer’s obligation to pay taxes is not automatically suspended when a taxpayer disputes an assessment.
As such, a taxpayer engaging with SARS regarding their tax liability by submitting a return and providing documents for verification needs to request a suspension of the payment obligation while the dispute is being resolved. This request can be made on the e-filing profile of the taxpayer.
Estimated original assessment
SARS has indicated that the personal income tax auto-assessments are an estimated original assessment. Section 95 of the Tax Administration Act permits the issuing of an assessment based on an estimation only when a taxpayer does not submit a return; the taxpayer submitted a return or relevant material which is inaccurate; or the taxpayer has not adhered to a request to submit relevant material. These listed instances all point towards some failure by the taxpayer.
However, the current “opt out” income tax auto-assessment does not fall under these instances as there has not been any failure by the taxpayer at the time when the estimated auto-assessment is issued.
Thus, legislation does not provide a basis for SARS to issue these estimated auto-assessments. As SARS is a creature of statute, “it must operate within the four corners of the statutory provisions which empower it”. Consequently, SARS cannot simply create a new type of estimated assessment.
A way in which to ensure that SARS can embrace technology while making sure that it stays within the four corners of the law would be to return to the previous auto-assessment approach of “opt in”. In terms of this approach, followed prior to 2023, the information is pre-populated from third party returns, but the taxpayer needs to accept the return.
Accordingly, the process of filing an income return with the “opt in” approach is quick and convenient for taxpayers as they do not have to enter the information from scratch.
The fact that taxpayers need to “opt in” by approving/filing the return, highlights the taxpayer’s responsibility to ensure auto-assessment is an accurate reflection of their tax affairs. This can minimise the possibility of incurring a penalty. DM
Prof Carika Keulder is an associate professor at the School of Law at the University of Witwatersrand and lectures tax on undergraduate and postgraduate level.
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