High wealth individuals and SARS disclosure

SARS increases its focus on wealthy individuals and offshore holdings

The South African Revenue Service (SARS) is committed to its strategic intent to develop and administer a tax and customs system based on voluntary compliance. They believe that most taxpayers want to fulfil their legal obligations voluntarily. In this regard, SARS provides clarity and certainty to taxpayers to fulfil these obligations and works diligently to make it easy and seamless to transact with the organisation. Equally important for SARS is to make it difficult and costly for those taxpayers who do not comply.

For SARS to continue to provide a customized and seamless service to various categories of taxpayers, they have established a separate unit to focus on Individual Taxpayers with wealth and complex financial arrangements. The unit, which is known as the High Wealth Individual Taxpayer Segment (HWI) will initially be co-located with the Large Business & International Taxpayer Segment (LB&I).

This unit focuses on individual taxpayers with wealth and complex financial arrangements. SARS will offer a differentiated service, as with other tax types, to individuals with significant wealth, often derived from multiple sources other than a salary and who employ complex, and often offshore, financial arrangements.

SARS has been paying particular attention to taxpayers with undeclared offshore holdings to optimise compliance. As an early adopter of the international standard for the Automatic Exchange of Financial Account Information, SARS has at its disposal information relating to offshore account holdings of South African taxpayers, some of which seem not to have been declared.

In 2016/17, taxpayers were given the opportunity to regularise their tax affairs to account for their offshore holdings through the Special Voluntary Disclosure Programme (SVDP). Taxpayers also had the opportunity to do so through the ongoing Voluntary Disclosure Programme (VDP) under the Tax Administration Act, 2011. Some taxpayers took advantage of this. Despite the window of opportunity to regularise their tax affairs, some taxpayers chose not to do so. The information that SARS has received comes from 87 jurisdictions across the world, detailing the offshore financial holdings of South African taxpayers.

In the interests of fair and efficient administration of the system, SARS will be writing to affected taxpayers to request information about their offshore holdings. The request is for relevant material for risk assessment purposes that does not signal the commencement of an audit process but may inform future action.

Taxpayers who want to regularise their tax affairs are still able to do so through the ongoing VDP, which offers more favourable terms for an assessment (in terms of penalty amount). SARS encourages taxpayers with undisclosed assets to take advantage of the VDP process. Taxpayers are reminded that failure to do so may result in administrative or even criminal action being taken against them. A dedicated email address, HWI@SARS.gov.za has been set up to manage responses from affected taxpayers and adopt a consistent approach. Affected taxpayers who wish to make use of the ongoing VDP and taxpayers who have not yet been contacted are advised to contact the VDP Unit directly at VDP@SARS.gov.za.

The implementation of a dedicated HNWI Unit at SARS is evidence that the revenue authority is not investigating wealthy individuals in the short term but rather wishes to continue the project in the forthcoming years.

The unit serves to detect non-compliance from the wealthy and ultra-wealthy by assigning managers to assist with their tax compliance.

SARS has begun embracing the use of technology, specifically artificial intelligence, to ease the burden of detecting non-compliance amongst taxpayers, whilst simultaneously making full use of quick access to tax information from authorities across the globe,

Financial and other institutions are already legally bound to release taxpayer financial information to SARS, this being a significant enabler in the automated income tax assessment advancements at SARS. With the growing number of platforms accessible to SARS, it has the ability to cross-reference information disclosed by taxpayers in their returns, including:

Verification of NATIS details of luxury vehicles purchased.
Confirmation with Deeds office records of luxury property purchases.
And more, including the likes of personal aircraft and luxury yachts.

Whilst legislation such as the Protection of Personal Information Act prevents the unauthorised use (or misuse) of personal information, it does not prevent SARS from investigating errant taxpayers and has now advanced to reconciling 3rd party luxury transaction information, with that declared by the same taxpayers in their tax returns. Where errant declarations are identified, these taxpayers are being pursued by SARS.

As of the commencement of the 2023 Tax filing season, individuals holding assets valued at R50 million or more now need to provide a “high level” disclosure to SARS. Although below the threshold to get into SARS’ High Wealth Individual (HWI) club, this new requirement does mean an increased reporting and disclosure obligation on certain wealthy taxpayers. At the upper echelons of wealth, if you received the Welcome Notice from the HWI Unit from late 2021 onward, the requirement to complete this disclosure cannot be questioned.

The new R50-million disclosure does provide SARS with the perfect opportunity to strengthen tax treatment.

At a high level, this “disclosure” means:

Compulsory disclosure applicable to taxpayers who hold a cumulative asset value exceeding R50million;
This includes both local and foreign assets, and requires the declaration of specified assets, at cost and market value;
The disclosure requirement is effective immediately, meaning for the 2023 filing season, which opened 07 July 2023; and
The purpose is to assist SARS with the detection of non-compliance or fraud through the existence of unexplained wealth.

SARS will now have additional proof of the source of these specified assets and their values, allowing them to cross-check this with previously declared information, ensuring the identification and eradication of any non-compliance.

The HWI Unit has already sent out pre-audit questionnaires in the form of compliance verifications to targeted HNW taxpayers.

SARS is focusing on lifestyle and investment assets and is targeting the following areas:

Fixed properties, including when held in private companies, trusts or other structures;
Shares in private companies and close corporations;
Interests in trusts;
Complex financial arrangements, including loan accounts and financial instruments;
Vehicles and boats;
Farming interests; and
Offshore assets or holdings.

The request normally covers a three-year period, and SARS provides a standard format for the taxpayer’s response. This provides an easy reconciliation of what a taxpayer disclosed in previous tax filings with how the taxpayer’s assets have increased or decreased in value.

Taxpayers must provide SARS with the requested information within 21 days. The request reminds taxpayers that it is an offence to declare false information, and failure to provide information and/or answer questions is administratively and criminally sanctionable.

In closing, the reader should also browse through the OECD’s Taxation Working Papers No. 65, “The taxation of labour vs capital income: A focus on high earners” for further insights.