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Statement of Assets and Capital Reconciliation

For certain taxpayers, the completion of the assets and liabilities section of the tax return is mandatory.
The statement of assets and liabilities must be completed if the taxpayer:
 
·         is a director of a company or a member of a close corporation
·         receives income from business, trading or professional activities (including rental)
·         receives farming income
·         receives foreign income that excludes foreign investment income.
 
Local assets and liabilities must be individually listed, e.g. fixed properties, shares in private companies, mortgage bonds and bank overdrafts. The local assets and liabilities must be reflected at cost. The foreign assets and liabilities are translated to rand using the exchange rate as at the end of the year of assessment.
 
Why is it important to submit an accurate statement of assets and liabilities? Taxpayers must ensure that a full and accurate disclosure is made of all relevant information as required in the income tax return. Misrepresentation, neglect or omission of information may expose the taxpayer to additional tax and interest in the event of the South African Revenue Service (SARS) undertaking an audit. In fact this could open the tax return forever as the tax return will never prescribe.
 
SARS can use the information in the statement of assets and liabilities to identify potential non-declaration of capital gains/losses, eg where the cost of fixed property has reduced in a year of assessment in the statement of asset and liabilities, it may indicate that fixed property has been disposed of. The next step would be to identify whether the capital gain/loss has been reflected in the tax return. The same principle would apply to other classes of assets which would be subject to capital gains tax (CGT).
 
A capital reconciliation is a method employed by SARS to determine whether a taxpayer has accurately declared their income. This method applies a simple concept on identifying the growth in the taxpayers net assets over a period of tax years. A living expenditure schedule must be completed by the taxpayer if the capital reconciliation goes out of sink. The living expenditure is an estimated expenditure schedule which encompasses items such as household groceries, school fees and holiday costs. The growth in the taxpayers assets plus the living expenditure is compared to the income declared in the tax returns. Where the income declared cannot justify the growth in assets and the living expenses, SARS may raise an assessment for the under declaration of income. The taxpayer then has exposure to understatement penalties, tax and interest.  
 
It is therefore important to ensure that tax returns are complete and accurate, and that special attention is given to the statement of assets and liabilities.
 
·         In community of property – the total will be entered for both the wife and husband.
·         South African Rands must be used – foreign currencies must be converted at exchange rate at end of year or at the time the SA rand goes out.
·         Assets must not be changed for foreign exchange fluctuations.
If there are 2 businesses a wife and husband a business can be excluded in terms of an agreement.
·         Historic cost - everything must be at historic cost. Shares – cost of the shares acquired.
·         Companies and CC – cost of investment.
·         Loans amount owing or receivable
·         Capital account in a partnership or sole proprietor
 
March 2021