I recently had the unpleasant experience of SARS having issued additional assessments to a Sole Proprietor who made losses for a few of the past 8 years. SARS did not acknowledge any of his trade expenses but they did include the trade income on his tax calculation. I called SARS and they responded that business losses have been claimed for a few years without the business being verified.
The client is a professional and earns extra income using his expertise and qualifications to advise clients. Deductions against his trade income were trade expenses such as Professional membership fees, bank charges, entertainment, home office expenses etc. that qualifies as trade expenses against earning income. The client does also earn a salary which is unrelated to his trade income. His income other than his trade income has never been in the maximum marginal rate bracket prior to the losses incurred. Therefore he cannot be ringfenced.
So the net effect is that the taxpayer gets taxes on his trade turnover added to his salary. No expenses were allowed as deductions against this trade income. Almost like double taxation.
My questions are:
1. Can SARS issue additional assessments going back 8 years without proper verification/investigations from their side at first? I think the Tax Administration Act limits this to 3 years.
2. Is SARS ignoring Section 11 and 23 of the Income Tax Act with regards to allowable deductions against trade income?
3. Is SARS Ignoring Section 20 of the Income Tax Act that allows trade losses to be set off against other income? Are they trying to limit this by bypassing the law?
4. Is SARS trying to ringfence trade losses for individuals that earn below the Ringfencing Threshold as per Section 20A?
5. How do we verify the business to SARS? I cant find anything in the Act that refers to business verification. Isn't it proof enough that the business exists due to the fact that it earned income?
It seems like SARS might be coming after these small businesses now.