A tax debt compromise doesn't happen overnight. Here are six tests SARS will do on your finances
If you're battling with tax debt, a tax debt compromise is your lifeline.
It's basically a request to SARS asking it to 'park' any outstanding tax debt, if you're in financial distress.
By parking the debt, SARS will agree not to demand payment. It will treat your debt as no longer due and payable. Whether it will park all or only part of your tax debt depends on your financial circumstances and how much it can realistically recover.
You see, SARS would rather consider compromising an outstanding tax debt than shutting down your business and liquidating or sequestrating it.
But, a tax debt compromise doesn't happen overnight. It's a long process that includes endless meetings and SARS scrutinising each and every detail of your company's books.
In fact, when you apply for a tax compromise, SARS will perform six tests on your finances.
Read on to find out what they are so you can weigh up your chances of success when dealing with the debt you owe SARS.
Before we get to the tests, let's take a look at who can apply for a tax compromise?
Any taxpayer with an outstanding tax debt can apply for a tax compromise
if they can't pay, says the Practical Tax Loose Leaf Service.
This means individuals, companies, close corporations, trusts, partnerships, cooperatives and non-profit organisations can apply.
It's important to note that a tax compromise is only for taxpayers who legitimately can't pay their tax debt. And who have no prospect of paying their tax debt in the near future (within 12 months). It isn't for taxpayers to use when they just don't have money in the bank now. Or need to spend money they do have on other things, like paying staff.
Now that it's clear who can apply, take a look at the tests SARS will perform…
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SARS will perform these six tests on your financial information when you apply for a tax debt compromise
Solvency assessment test – SARS wants your total assets to be more than your total liabilities.
Liquidity assessment test – SARS wants your current assets to be more than your current liabilities.
Responsible third party test – SARS wants anyone else it can hold liable who is able to pay your tax debt.
Obtaining a loan test – SARS wants you to raise the money through a loan to pay your tax debt.
Future prospect of taxable income test – SARS wants no future tax earnings.
Abandonment of tax benefits test – SARS wants no previous or future tax benefits.
According to the Practical Tax Loose Leaf Service
, you have to ask yourself a question under each of these tests. If the answer is 'yes', then your chances of getting a successful tax compromise is easier.
So what kind of questions should you ask?
When it comes to these six tests, you must ask yourself these questions to weigh up your chances of success – if you answer 'yes' to all of them you're on track
Solvency assessment test question: Is my business insolvent or almost insolvent?
Liquidity assessment test question: Do I have any assets I can convert quickly into cash?
Responsible third party test question: Is there anyone else who is liable and can pay my tax debt?
Obtaining a loan test question: Can I get anyone to loan me money?
Future prospect of taxable income test question: Will my business be liable for tax (and able to pay) in future years?
Abandonment of tax benefits test question: Do I have an assessed loss or tax allowances or deductions I can give up as part of the compromise?
Knowing the six tests SARS will perform when you apply for a tax compromise will help you weigh up your chances of success so you can get some room to breathe when it comes to your debt.
PS: Having SARS perform these tests is just one part of the process you have to go through when you apply for a tax compromise. That's why we recommend you check out the Practical Tax Loose Leaf Service
to discover the other things that are involved in the compromise process.
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