Knock knock! Who’s there? SARS! SARS who? Oh….SARS!!!!
SARS regularly conducts random “reviews” or “requests for additional information”, as they call it, but it really feels like an audit.
Do you own a second property? Do you rent it out? SARS may have a question (or twenty) for you.
Recent questions relating to rental properties from SARS’s pen in a “request of additional information” letter include:
- Explain why the gross rental income is so low in comparison to the fixed property value.
- Supply the physical address of the property.
- Are the rentals charged market related, please explain in detail?
- Was the property let for the full tax year? If not provide reasons.
- State whether the property is a holiday home of flat.
- Is there any relationship between you and the present or previous tenants? Provide the names & identity numbers of the tenants.
- Submit the lease agreements.
- Reasons why you consider it to be carrying on a bona fide trade.
- What is the nature of the repairs expenses claim of R XXX XXX,00? Submit a detailed schedule reflecting each repair with the documentary proof.
In another request from SARS (“Operations Audit”) relating to investment properties, some of the questions were:
- Date of purchase and purchase price.
- Provide a copy of the deed of sale.
- State the method and source of finance, if by means of a mortgage bond or loan, indicate whether the full amount was utilized in the acquisition of the property.
- State your intention when acquiring the property and explain how this was realized.
- What prompted you to purchase the property and how did you become aware of its availability?
- If your intention has since changed please elaborate on the factors which influenced this change.
- Was a feasibility study conducted at the time you decided to make the property available for letting? If so, what was the result of the study? Provide copies of the relevant documents in support of your statements.
- What factors convinced you that a profit could be realized?
- Does the lease contract stipulate an escalation in rentals charged?
- Are the rentals charged market related and how do they compare with similar properties in the same neighbourhood?
- When did the property initially become available for letting?
- If the property was unlet for any period during tax year, please state the periods and the reasons as well as what steps were taken to find a suitable tenant.
- If any of the expenses claimed in the tax year relate to a period prior to letting the property submit particulars of such periods and the relevant expenses.
- If any of the rental expenses claimed in the tax return relate to a period prior to letting or to a period when it was not available for letting, submit particulars of such periods and the relevant expenses incurred.
- Was the bond or loan increased subsequent to your purchase of the property and how was such capital utilised?
- Proof of the interest paid on borrowed funds utilised to finance the property. Provide monthly bond statements for the full period, showing interest and capital redeemed separately.
- Please advise of your past, present and future plans concerning development, re-development, sub-division, sale in respect of this property.
- Have you entrusted the letting of the property to an agent?
- Are you the owner of the house you are now living in?
- Kindly submit full particulars of all property transactions (purchases and sales) concluded by or on behalf of yourself, you wife and minor children during the past 5 years.
Further questions carry on in the same vein. Furthermore, SARS required proof of almost ALL the expenses before allowing it as a tax deductible expense.
Guessing why SARS asks these specific questions, the following comes to mind:
- SARS wants the schedule of repairs to ensure that the expenses are truly repairs that are claimed in the production of taxable income, and not improvements which are non-deductible capital expenditure.
- If the property was not available for letting throughout the entire tax year, the expenses for the months the property was not rented out may not be deductible.
- As far as the interest on the bond is concerned, SARS wants to ensure that taxpayers claim only the interest incurred in respect of the rental property and related income. They also want to make sure that the bond registered over the rental property is not used to finance other assets or expenses, for example to purchase a motor vehicle.
- SARS wants to establish if the taxpayer a carrying on a bona fade trade, especially if there is a rental loss. Some taxpayers rent the property to a friend of family member, or for a monthly rental that is not market related in order to create a rental loss for tax purposes. When the taxpayer’s income tax return is submitted, this loss is set off against other taxable income. This reduce the taxpayer’s total liability for tax. SARS may in certain circumstances disallow such a set-off.
If you have a rental or investment property, you can expect SARS to knock at your door sooner or later. Don’t let them take you by surprise. Be sure to keep the necessary supporting documentation and information, bearing in mind the kind of questions SARS loves to ask.
Petro van Deventer