• Posted on Jan 14, 2021

Lifestyle audits of high-net-worth individuals should be undertaken as one of the immediate steps to close the yawning gap between what the revenue authority can realistically expect to collect from taxes and what it in fact collects, judge Dennis Davis says.

Source: Business Day – Linda Ensor, Parliamentary Writer

Davis calls for lifestyle audits for the wealthy

Lifestyle audits of high-net-worth individuals should be undertaken as one of the immediate steps to close the yawning gap between what the revenue authority can realistically expect to collect from taxes and what it in fact collects, judge Dennis Davis says.

The tax gap is estimated to be between R50bn and more than R100bn annually. With the SA Revenue Service (Sars) facing a revenue shortfall of over R300bn this year due to the sluggish economy and the devastating effects of Covid-19, it needs to seek every legitimate means possible to extract the money rightfully due to it.

This shortfall could be even bigger when finance minister Tito Mboweni tables the 2021/2022 budget in February.

One of the findings of the Davis tax committee, which has been examining ways to close the tax gap, was that more attention should be paid to the non-payment of the right amount of tax by wealthy people who own luxurious vehicles and upmarket properties. A “comprehensive analysis” of individuals living in luxurious circumstances was required, Davis said in an interview, to determine whether they had been paying the right amount of tax over many years. “We know from the figures that there are thousands of them.”

Davis said that addressing the tax gap linked to wealthy individuals was low-hanging fruit that could yield Sars a significant sum of money. It was “perfectly obvious” that more attention had to be given to high-net-worth individuals if the figures and the unexplained amounts of money held offshore were taken into account. Huge sums were being held in trusts, he said.

The committee submitted a number of reports on the tax gap to Mboweni and Sars commissioner Edward Kieswetter in December. Its mandate when its term of office was extended by Mboweni in February 2019 was to examine the tax gap and come up with proposals to close it.

The four documents submitted related to the tax gap linked to corporates and the VAT gap, which Davis said mainly arose from VAT scams. A shorter document dealt with the tax gap related to high-net-worth individuals, and a covering letter was included containing urgent recommendations on how the tax gap could be addressed.

THE COMMITTEE SUBMITTED A NUMBER OF REPORTS ON THE TAX GAP TO MBOWENI AND EDWARD KIESWETTER IN DECEMBER

Some of the recommendations related to far better co-operation between Sars, the Reserve Bank, the Financial Intelligence Centre and the banks to keep track of the illicit flow of funds overseas, among other things.

The tax committee still has to finalise outstanding work on enforcement, Davis said. He hoped this report which would focus on the relationship between the National Prosecuting Authority and Sars would be submitted by the end of January or early February.

Davis said the committee’s reports and recommendations did not touch on changes to tax rates but had more to do with the beefing up of tax administration and capacity which were decimated during the reign of former commissioner Tom Moyane.

Kieswetter, Moyane’s replacement, has embarked on a project to strengthen Sars’s capacity by re-establishing units such as the large-business centre and recruiting more technical staff. Davis said the committee’s work had been undertaken in close collaboration with Sars, something that was denied under the Moyane regime.

THE TAX GAP IS… ABOUT EFFECTIVELY TRYING TO WORK OUT WHY YOU ARE NOT COLLECTING WHAT YOU EXPECT TO COLLECT, HE SAID

Davis said Sars was already beginning to tackle the tax gap issues raised in the committee’s reports, for example by investigating VAT scams.

“We are not talking about tax rates,” says Davis, though in his personal view tax rate increases were probably needed for the government to pay for the Covid-19 vaccine.

“The tax gap is not about changing tax rates, it’s about effectively trying to work out why you are not collecting what you expect to collect,” he said.

The judge fully supported Kieswettter’s view that Sars should be treated by the Treasury as an investment centre rather than a cost centre, and that it should get more funding to beef up its capacity.