By Jashwin Baijoo
In 2022, the South African Revenue Service (SARS) demonstrated its increased focus on revenue collection and compliance, specifically pertaining to High-Net-Worth Individuals (HNWIs). Their purview extends to wealthy South Africans abroad who remain tax residents of South Africa as well as those in the process of financially emigrating whilst retaining assets and interests in South Africa.
Although this may be a point of concern for a number of HNWIs, especially those with generational wealth, it is not an avenue unexpected from the taxman, and has been on the cards for years now. This targeted strategy encompasses lifestyle audits, which were initiated by SARS back in 2007, however actual action earnestly began only a few years ago with the arrival of SARS Commissioner Edward Kieswetter.
Corrections, or Collections – SARS’ veiled Strategic Objectives
Statistically speaking, SARS has upped its collection powers, and efforts, with the 2023 Year of Assessment (01 March 2022 to 28 February 2023) having seen more than 186 691 Final Demand Notices being issued to taxpayer amidst the almost one million tax debt cases which yielded in excess of R35 billion being collected.
Over and above this, the implementation of a dedicated HNWI Unit at SARS, headed up by Ms Natasha Singh, evidences that this is not just some passing phase for the revenue authority, but rather a long game to be built on in the forthcoming years. This unit will serve to detect non-compliance from the wealthy and ultra-wealthy, having full access to global assets and investments for South African tax residents, under the veil of assigning designated relationship managers to assist these individuals with their tax compliance.
This aligns with SARS’ strategic objective of making compliance as easy and seamless as possible for non-compliant taxpayers who come forth voluntarily, whilst making it hard and costly for taxpayers who remain non-compliant. Unfortunately, and in light of South Africa’s shrinking tax base, the middle to HNWI classes are taking the largest tax hit.
AI and Third-Party Data Afflicting Offshore Interests
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 the multi-jurisdictional automatic exchange of information. This development has made it near impossible for taxpayers to hold undisclosed offshore interests, where if caught, opens the taxpayer up to a dual audit with the active participation of both SARS and the revenue authority in which the assets / investments are situated.
The on-going investigations into South African taxpayers’ offshore interests has long been on the cards with SARS, with foreign asset/income disclosure notices being issued as far back as 2020, entailing a blanket disclosure of offshore assets. The knock-on effect of this, as was seen last year with Airbnb Hosts, whereby SARS imputed a legal obligation on the Irish Revenue Authority to share taxpayer financial information. This was made possible by virtue of the provisions contained in the Multilateral Convention on Mutual Administrative Assistance in Tax Matters.
What is noteworthy with the exchange of information requests, is that HNWI have historically opted for a jurisdiction such as Ireland, Mauritius, or even the Virgin Islands to hold offshore investments and bank accounts, in light of the favourable tax treatment. This jurisdiction choice included a number of not only investments, but also trusts, held by South African tax resident HNWIs, thinking they were sheltered from tax consequences in South Africa.
This mindset should have shifted when Commissioner Kieswetter began pushing the agenda of joint audits, to the point where they are now a reality, leaving nowhere to hide. This cements SARS’ vision of “aiming to become a smart, modern revenue service”.
Paying for Past Sins
When it comes to compliance with the revenue authority, SARS is ever eager to delve into the historic affairs of any individual, company, or trust, unearthing any past transgression, regardless of its impact, and using it as leverage in the present day. In order to mitigate this, taxpayers should, as a first prize, engage experts in the field, for the correct tax planning from the get-go. What we often see in practice, is where taxpayers make decisions based on poor, or outdated advisory, necessitating that corrective measures be taken to remedy historic non-compliance, voluntarily.
An increased focus on HNWIs, regardless of what is declared in which jurisdiction, means there is a target placed on these taxpayers, with every move being scrutinised. It is essential to ensure both historic and current compliance, leaving no room for error, and raising no red flags, which would give the taxman a basis to rip apart everything you have built, just on a hunch.
Planning Your Financial Freedom
In order to protect yourself from falling victim to SARS’ increased scrutiny, it remains the best strategy that you always ensure compliance, historically and currently, following a tried and tested strategy, and tax planning ahead.
Where you find yourself on the wrong side of SARS and its foreign counterparts, there is a first mover advantage in seeking a remedial roadmap to ease your woes and ensure the necessary steps are taken to protect both yourself and your hard-earned wealth from paying the price for what could be the smallest of mistakes.
However, where things do go wrong, SARS must be engaged legally, and we generally find them to be agreeable to the utmost where a correct tax planning strategy is followed.
Jashwin Baijoo is the Head of Strategic Engagement & Compliance at Tax Consulting SA