Anyone can be subjected to a Sars lifestyle audit – here’s what to expect
- The SA government has threatened wide-spread implementation of lifestyle audits of public-sector workers in an attempt to crack down on fraud and corruption.
- But lifestyle audits aren't solely for politicians; the South African Revenue Service (Sars) has been using them on private individuals since 2007.
- Sars does not reveal exactly how it identifies candidates for audits, but they do encourage members of the public to report anyone living beyond their apparent means.
- For more stories go to www.BusinessInsider.co.za.
Lifestyle audits have been a part of the South African lexicon for several years. Recently, the government has threatened a wide-spread implementation of lifestyle audits for public-sector workers in an attempt to crack down on fraud and corruption. Eskom’s new CEO Andre de Ruyter, has also extended lifestyle audits - which have already been targeted at senior managers - to middle and lower level staff, in a renewed push to clean up graft at the electricity company.
But lifestyle audits aren’t reserved solely for politicians and public sector employees; the South African Revenue Service (Sars) has been using them for private individuals since 2007 – and they’ve used these to conduct thousands of criminal investigations.
Whether in the public or private sector, lifestyle audits aim to achieve one broad objective: to establish if an individual is living above his or her means illegally, with that lifestyle possibly funded by fraud or corruption.
Lifestyle audits are not dissimilar to the hundreds of thousands of audits that Sars conducts each year. But these traditional audits usually only require clarification and documentary support of certain tax-related claims.
Sars does not reveal exactly how it identifies candidates for lifestyle audits, but they do encourage members of the public to report anyone “living beyond his apparent financial means – displaying unusually high life-style patterns for a person with similar forms of known income”.
Sars also identifies these candidates via their own internal monitoring systems, and reporting institutions like banks, the deeds office, and vehicle registration authorities are required to submit information when requested.
They may also identify an increase in reported assets that aren’t reflected in income. And high-profile individuals who flaunt their wealth in public or on social media may also inadvertently flag themselves for a lifestyle audit.
In 2019, acting Sars commissioner at the time Mark Kingon said that religious leaders may be ideal candidates for lifestyle audits. Speaking to 702, he said cash donations in churches complicate traditional audits, forcing Sars to look elsewhere for evidence of abuse.
“If we are in doubt, we will probably do a capital reconciliation” he said. “In other words, a lifestyle audit. Those are the types of checks and balances we would have in place.”
The lifestyle questionnaire: tell us about all your assets
In cases where Sars suspects some trickery, they will likely ask the taxpayer to complete a “lifestyle questionnaire”. Sars will cross check the answers provided in this questionnaire to the evidence they collect using alternate sources.
There’s no option to decline this, either. In 2016, the Eastern Cape High Court found that Sars has a right to enforce the completion of its lifestyle questionnaire after an individual who was not registered as a taxpayer refused to do so.
Via the questionnaire, Sars had requested information relating to the man and his spouse’s financial situation, including details on their investments, properties, income, assets, and expenses.
The man labelled the request from Sars a “fishing expedition” – but the court ordered him to complete the questionnaire within two weeks or face a potential prison sentence.
A typical lifestyle questionnaire requests information on all assets, including details of people or entities connected to the taxpayer.
Nico Viljoen, a former director at Tax Shop, says you can expect to submit detailed living expenses, setting out how much you spend on groceries, insurance, holiday and other travelling costs, and related personal expenditure.
Sars uses this questionnaire to establish the taxpayer’s living expenses, which will play a central role in the “capital reconciliation” of a taxpayer’s affairs.
The lifestyle audit may go back several years, and one of the difficulties many face is that they have insufficient records to support their claims.
According to Viljoen, taxpayers should retain at least five years of records following any submission. “It is important that taxpayers retain the required records, otherwise it becomes difficult to satisfy Sars when questions are asked about the nature of amounts received in a bank account after many years have passed.”
If, during the course of the audit, the individual is unable to prove the source of funds or income, Sars may tax those as undisclosed income.
Poor record keeping can also delay the process. “Sars will issue revised assessments subjecting the taxpayer to income tax on unexplained increases in assets owned,” Viljoen said. “Challenging those revised assessments become difficult when the taxpayer’s records are poor, and explanations cannot be supplied of how the taxpayer acquired the assets”.
Although Sars does conduct search and seizure operations if there are grounds to suspect tax crimes or non-compliance, they will not do so in order to conduct a lifestyle audit. According to a statement following a spate of lifestyle audit scams, Sars said a search and seizure operation is a criminal investigations tool, “and is not used to conduct lifestyle audits”.
Lifestyle audits are unsettling and time consuming. It pays to consult with a tax expert - and definitely not to cover up any incorrect information submitted.
Tax consultants say it’s better to rectify any issues with Sars as soon as possible. It may also put you in better standing with the authority, and prevent additional penalties. Sars is empowered to charge up to an additional tax of up to 200% of the tax due on undisclosed income, plus interest, and may also refer you to the National Prosecuting Authority for investigation.
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