When a taxpayer files a tax return, SARS may send a request for verification or “audit request” in which it seeks clarification and/or supporting documentation from a taxpayer.
The information sought by SARS is inevitably linked to the disclosures made by the taxpayer in that return. This is a preliminary step taken by SARS in audit proceedings, and it is crucial that taxpayers prepare themselves accordingly for this ahead of time.
Specialist firm Tax Consulting South Africa says it has recently been approached by taxpayers who were presented with a SARS audit request. These requests posed standard questions as would be expected on the taxpayers’ returns, but also went further to request the following:
“This would have been reasonably expected by the taxpayers, if they had made any disclosure of cryptocurrency-linked trading amounts in their returns, along with the rental amounts and certain investments that were indeed disclosed to SARS.
“However, in this case, we had explicitly confirmed that the taxpayers had not, to their knowledge, ever effected a cryptocurrency-related transaction,” said Thomas Lobban, legal manager for Cross-Border Taxation at Tax Consulting SA.
While this is certainly a first, it is certainly the kind of approach by SARS that taxpayers should expect moving forward, Lobban said.
Playing by the rules
Lobban said that taxpayers should already know that it is a criminal offence for a taxpayer to wilfully fail to submit a document or information as requested by SARS, or make a false statement to SARS.
It is no longer material whether the taxpayer concerned had justification for such non-disclosure or false statement made, he said.
“This means that a taxpayer who fails to correctly disclose their cryptocurrency-related income or comply with an audit request by SARS to this effect may be convicted for an offence and be liable to a fine or imprisonment for up to two years.
“In light of this recent change to our tax laws, it is feasible to understand that SARS is in the process of ensnaring culpable taxpayers who have not disclosed their cryptocurrency-related trading profits and/or losses.”
While further cryptocurrency regulation is certainly on its way, and with the international Common Reporting Standards now in full swing, Lobban said that audit requests are still a primary weapon in SARS’ arsenal and the walls are closing in on non-compliant cryptocurrency traders.
So, when is SARS disclosure required?
A misconception often harboured by taxpayers is that they do not owe any tax liability on their cryptocurrency-related income and do not need to make any disclosure to SARS to this effect.
This is, unfortunately, not the case, said Lobban.
“From the outset, it should be known that all cryptocurrency transactions will bring tax consequences for a taxpayer.
“A tax disclosure obligation does not only arise where a cash balance is withdrawn from a trading platform – all transactions that have been made (whether a transaction of cryptocurrency for money or cryptocurrency for other cryptocurrency) must be disclosed to SARS.”
Taxpayers should take the time to consider and understand the tax consequences when dealing with cryptocurrency, to prevent being caught off guard upon a SARS inquiry to this effect, he said.
“Any taxpayer who has not disclosed cryptocurrency held or traded should immediately seek professional guidance in getting their tax affairs in order. Alternatively, where you have never bought or sold cryptocurrency previously, it is important to proceed with caution when responding to an audit request.”
Lobban said that SARS is well within its rights to compel a taxpayer to respond to an audit request. Failing to disclose any relevant amounts or respond to an audit request correctly could well result in substantial penalties or harsh criminal sanctions.
“There is little doubt that SARS is pursuing non-compliant cryptocurrency traders, so it is best for these taxpayers to stay ahead of the curve and ensure that their tax affairs in order beforehand.”