For certain taxpayers, the completion of the assets and liabilities section of the tax return is mandatory. The statement of assets and liabilities must be completed if the taxpayer:
- is a director of a company or a member of a close corporation
- receives income from business, trading or professional activities (including rental)
- receives farming income
- receives foreign income that excludes foreign investment income.
Local assets and liabilities must be individually listed, eg fixed properties, shares in private companies, mortgage bonds and bank overdrafts. The local assets and liabilities must be reflected at cost. The foreign assets and liabilities are translated to rand using the exchange rate as at the end of the year of assessment.
Why is it important to submit an accurate statement of assets and liabilities? Taxpayers must ensure that a full and accurate disclosure is made of all relevant information as required in the income tax return. Misrepresentation, neglect or omission of information may expose the taxpayer to additional tax and interest in the event of the South African Revenue Service (SARS) undertaking an audit.
SARS can use the information in the statement of assets and liabilities to identify potential non-declaration of capital gains/losses, eg where the cost of fixed property has reduced in a year of assessment in the statement of asset and liabilities, it may indicate that fixed property has been disposed of. The next step would be to identify whether the capital gain/loss has been reflected in the tax return. The same principle would apply to other classes of assets which would be subject to capital gains tax (CGT).
A capital reconciliation is a method employed by SARS to determine whether a taxpayer has accurately declared their income. This method applies a simple concept on identifying the growth in the taxpayer’s net assets over a period of tax years. A living expenditure schedule must be completed by the taxpayer. The living expenditure is an estimated expenditure schedule which encompasses items such as household groceries, school fees and holiday costs. The growth in the taxpayer’s assets plus the living expenditure is compared to the income declared in the tax returns. Where the income declared cannot justify the growth in assets and the living expenses, SARS may raise an assessment for the under-declaration of income. The taxpayer then has exposure to 200 percent additional tax and interest.
It is therefore important to ensure that tax returns are complete and accurate, and that special attention is given to the statement of assets and liabilities.