Africa-Press – South-Africa. The South African Revenue Service (SARS) has hit one businessman with a R30 million tax bill, treating his large loan account balances as undeclared income.
This follows a court ruling between the man and SARS, dealing with the question of whether the taxpayer had satisfactorily explained a large sum reflected as a loan account owing to him in one of his wholly owned companies.
According to tax experts at Tax Consulting SA, the dispute was factual in nature, relating to the source of the funds for the 2014 to 2017 tax years.
“The case revealed a staggering tax exposure,” the group said.
The taxpayer in question is a successful businessman who owns several companies. The structure of these companies is always the same and he is the sole shareholder and director.
According to court papers, the taxpayer earned income from his companies in the form of salaries, dividend income and interest on shareholder loan accounts.
The manner in which he operated the accounts of his companies gave rise to the case. Specifically, instances where he used the loan accounts to fund other companies in his group.
The court found that when the taxpayer did so, he would earn interest income from the company he loaned money to, which would then be credited to a loan account he had in the company.
“What added to the complexity was that he also, in his personal capacity, borrowed from some of his companies to fund another, whereafter he paid interest to his lending company,” Tax Consulting noted.
“Generally, he paid a lower interest rate when he borrowed compared to the higher interest rate he received when he was lending.”
SARS said the taxpayer gave inconsistent explanations for the cause of the unexplained increases in the balances of the loan accounts.
The amounts were also not supported by the income declared in his returns.
Ultimately, this led to the courts finding that this was undeclared income, which SARS assessed to the tune of R37 million.
In addition, the taxman assessed another R20 million in undeclared interest income linked to shareholder loan accounts. This resulted in a total assessed amount of R57 million.
Besides the tax obligation, the court ruled that the taxpayer also had to pay interest accrued, an understated penalty, and legal costs, including the cost of two counsel and an expert witness.
Warning to other businesses in South Africa
SARS Commissioner Edward Kieswetter is on the hunt for at least R20 billion in added tax collection, so taxpayers should expect more scrutiny.
Having found in SARS’ favour, Tax Consulting said the ruling also now serves as a major warning to directors and shareholders.
The group said that these individuals need to properly manage these types accounts, maintain accurate records, and be prepared to explain the origin of funds when SARS comes knocking.
Crucially, the ruling also reaffirmed that the burden of proof lies squarely with the taxpayer, as set out in section 102(1) of the Tax Administration Act, and showed that taxpayers can’t simply ignore a problem when it arises.
“In this case, not only did the taxpayer fail to discharge the burden of proof, but his failure to testify also suggests that if he did, his testimony would elicit facts unfavourable to his case,” Tax Consulting said.
“Therefore, the court also ruled that drawing an adverse inference was warranted.”
Tax Consulting said the case illustrates SARS’ readiness to assess both unexplained capital increases and accrued interest on shareholder loan accounts.
“Inadequate records, multiple accounts, or unclear audit trails can significantly increase tax exposure. Without clear, contemporaneous documentation, SARS may treat inflows as taxable income or impute interest,” it said.
“To mitigate these risks, business owners, directors and shareholders must ensure their loan accounts are consistently reconciled and reflect legitimate economic activity.”
Following the tabling of the 2025 budget this week, SARS has made it clear that it will leave no stone unturned as it seeks to raise an additional R20 billion to R50 billion in tax collections.
Additional funding from Treasury will be used to hire more staff, specialists and invest in the necessary technological advancements to sniff out even the smallest of violations, experts have warned.
“This taxpayer’s case serves as a warning to all. Had he taken the matter seriously from the outset, his liability could have been reduced by at least R7.5 million,” Tax Consulting said.
For More News And Analysis About South-Africa Follow Africa-Press
