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Are you at risk? 14 typical cases that call for Capital Reconciliations

by , 08 January 2014
SARS conducts a Capital Reconciliation to determine how you use the funds at your disposal during a certain period. It takes into account all your income and expenditure. Read on to discover the 14 triggers of Capital Reconciliations so you know if SARS will target your company...

While you can't escape a Capital Reconciliation all together, there are instances that'll trigger this process.

And there's one thing you can be sure of, SARS will come knocking on your door.

Capital Reconciliations: SARS will request a statement of assets and liabilities in the following14 instances

#1: If you always declare a low level of income from a business that appears profitable.

#2: You're a director or member who always declares a low level of income.

For example, a director who commonly declares R100 000 per year over a number of years with no apparent increase in their earnings.

#3: If you accumulate assets (residential property, luxury vehicles) without an indication of any alternative legitimate source of income.

#4: If you're used to living an expensive lifestyle of frequent holidays, lavish entertainment and high living costs or support a large family.

#5: There's insufficient growth in your income so you can't maintain a certain standard of living, taking into account that the cost of living constantly increases and there's no evidence of loans, overdrafts or reduction in favourable bank balances.

#6: SARS is uncertain about how your capital has grown or how you financed your living expenses.

#7: SARS suspects you haven't declared all your income.

#8: SARS suspects you claimed private expenses in your financial statements.

#9: Your income decreases or you incur recurrent losses.

#10: You submit a lower estimate of your living expenses to SARS compared to any of your previous estimates.

#11: There's a high growth in your net assets but very little income declared.

#12: You've got a history of undeclared income in previous years.

#13: Comparison between drawings and basic living expenses. For example, your drawings are insufficient to cover your basic living expenses.

#14: You earn consistently low business income without any reduction in your assets (assets include cash and bank account values).

Is there a way to avoid triggering a Capital Reconciliation?

Yes, there may be away.

The Practical Tax Loose Leaf Service recommends you declare all income you receive or accrue on your tax return, whether it's taxable or not.

This means any increase or decrease in your net assets must match the income you declare on your tax returns.

If SARS can't reconcile this, it'll see it as an 'unexplained' increase or decrease and you'll have to account for it.

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