Away with the IT14SD and Hello to the New Risk-Specific Letter

On 16 September 2022, SARS announced that the supplementary (IT14SD) declaration for companies and close corporations was to be removed. In its place, SARS has introduced a new risk-specific letter for corporate taxpayers requesting relevant information and documentation, based on the reason the taxpayer was selected for verification.

The IT14SD required a detailed reconciliation between income tax, VAT, PAYE and customs declarations (if applicable). The new risk-specific letters do not require such a reconciliation.

Since the discontinuation of the IT14SD, we have received numerous risk-specific letters on behalf of clients and have established a trend of the typical information that is requested by SARS. Below is a summary of the most commonly encountered queries.

In all cases, SARS requires the signed annual financial statements, which must include a detailed income statement, as well as the detailed tax computation and the underlying supporting documentation/tax schedules (for example, a ‘taxpack’). This is a standard request and applies to all taxpayers that are selected for verification.

  • For taxpayers in a loss situation, SARS requires detailed reasons for the loss that was incurred.
  • For taxpayers in a refund situation, SARS requires:
    • Reasons for the overpayment of provisional tax; and
    • If a 3rd provisional tax payment was made, reasons why there is a discrepancy between the estimated taxable income and the actual final taxable income.
  • In relation to the total expenses incurred by the taxpayer, SARS requires:
    • A detailed income statement together with comparative figures;
    • In respect of the three largest expenses in the income statement, or where expenses exceed income by 50% or more, SARS requires an explanation for the incurral of the expense and reason/s why the expense is considered to be tax deductible.
  • Where the taxpayer has submitted a claim in relation to future expenditure (i.e. a section 24C allowance), SARS requires:
    • Confirmation that the income received in advance was included in taxable income;
    • The actual section 24C calculation; and
    • Copies of the applicable contracts in respect of which the section 24C allowance was claimed.
  • Where a taxpayer has submitted a foreign tax rebate or foreign tax deduction claim, SARS requires:
    • All supporting foreign tax certificates; and
    • A breakdown between local and foreign taxable income together with associated tax computation adjustments.
  • Where the taxpayer has an interest in a controlled foreign company (‘CFC’), SARS requires:
    • A calculation of the imputed taxable income;
    • A list of all CFCs;
    • Where there is no imputation of foreign income, proof that the CFC did not realise income for the current year; and
    • A completed IT10B for each CFC of the taxpayer.
  • If any donations were claimed as a tax deduction, SARS requires all supporting section 18A tax certificates for each donation claimed.
  • Where the tax computation includes any recoupment of wear and tear, SARS requires:
    • A detailed asset register;
    • An historical schedule since the date of acquisition of the asset to the date of disposal of the asset reflecting both the depreciation and wear and tear claimed on the asset; and
    • A detailed calculation of the recoupment.
  • Where the taxpayer has submitted a claim for wear and tear, SARS requires:
    • A detailed asset register; and
    • A detailed calculation of the wear and tear claimed.

SARS allows 30 days for the response to the letter to be submitted. A further extension can be applied for, subject to a maximum of 90 days (i.e. 120 days in total).

If the response is not submitted timeously to SARS, we have seen SARS raising additional assessments and simply disallowing expenses claimed. The additional assessments will, in most cases, also include a penalty for under-estimation of provisional tax, as well as interest on the underpayment of provisional tax.

Should this occur, the taxpayer will be required to object against the additional assessment and in most cases, also submit a request for the suspension of the payment of tax, pending the outcome of the objection lodged.

Taxpayers are therefore well advised to ensure that as a minimum, they have the standard information on hand at the time of submitting their annual income tax return in the event that they are selected for verification by SARS. Taxpayers are also well advised to ensure that the response to the SARS verification letter is submitted timeously in order to prevent entering into the dispute resolution process with SARS.

In some instances, we have received risk-specific letters with questions which cannot be correctly answered, based on the trade carried on by the taxpayer or questions which appear to be non-sensical and almost unrelated to the taxpayer under verification.

BDO has brought this to the attention of SARS’ senior management, and we are currently awaiting clarification and feedback from SARS.

Read more BDO Insights