SARS has hit one businessman with a R30m tax bill, treating his large loan account balances as undeclared income.

This follows a court ruling 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.

BusinessTech reports that 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. Ultimately, this led to the courts finding that this was undeclared income, which SARS assessed to be R37m.

In addition, the taxman assessed another R20m in undeclared interest income linked to shareholder loan accounts. This resulted in a total assessed amount of R57m. 

BusinessTech notes that 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.

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