During a recent panel discussion at the 2021 South African Institute of Taxation (SAIT) Tax Indaba, crypto assets, and the taxation thereof, once again came up as a sensitive topic among industry professionals. The five members present for the virtual discussion were Mark Kingon (former acting South African Revenue Service commissioner), Keith Engel (CEO of SAIT), Creag Sudding (associate director at KPMG), Jacques van Wyk (CEO of JGL Forensic Services) and Jerry Botha (managing partner at Tax Consulting South Africa).

In discussing the intricacies of investigating tax offenders through lifestyle audits, Van Wyk was quick to note that, at a forensic level, the introduction of crypto assets has complicated the investigative process because it challenges tax jurisdictions, which is like policing a borderless world.

While Van Wyk is pro crypto taxation, he believes that people are not taking heed of Sars’s warnings. He urged Sars to utilise its data and to set the necessary examples, which in turn would nudge those who are purposely non-compliant, to re-evaluate their position on the matter.

The introduction of the digital age has made it clear that we live in a data-rich environment. While everything can be traced, it is also easy for information to disappear. Tax evaders and career criminals alike have worked hard at finding ways to thwart revenue authorities.

With ample third-party data at its disposal, Sars can view the yacht and aircraft base, and track credit card transactions and foreign investments. Through mutual information-sharing agreements with other countries, it can gain access to an individual’s offshore transactions.

However, crypto asset analysis goes beyond third-party data analysis. The digital information around crypto is layered, complex and requires loads of manpower to examine and rework. Sars is aware of the demand, and the subsequent workforce shortage, to cull through all the data.

Great enabler

Kingon revealed that Sars has gone on a recruitment drive, with a specific focus on employing forensic auditors and veterans who can assist with upskilling the younger specialists.

Technology is a great enabler because financial investigators can utilise it to gather masses of information, develop profiles or patterns, and then take a closer look at the outliers — the things that are not explained. Even social media is an incredibly rich source of information, which means it’s not advisable to show off your new sports car (or crypto gains) while owing money to Sars.

If you are one of the elusive crypto millionaires who cashed in on the global crypto wave, you might have to reconsider the safety of your hiding spot. A surefire way for Sars to gauge that something is amiss is to look at someone’s lifestyle and to see if what they are spending is in line with what they are earning. The burden of proof ultimately falls on the taxpayer to explain any discrepancies.

In the discussion, Kingon mentioned Sars’s presentation on strategic intent for 2020 – 2024, in which commissioner Edward Kieswetter set out nine strategic objectives from the perspective of taxpayer experience. Kingon drew attention to objective number 5, which states that Sars will:

Increase and expand the use of data within a comprehensive knowledge management framework to ensure integrity, drive insight and improve outcomes.

In the official presentation, Sars vows that it is its intent to first pursue voluntary compliance. Where simplifying the processes using data, analytics and artificial intelligence fails to encourage compliance, Sars will employ its comprehensive system of knowledge management to investigate and police non-compliance.

According to Thomas Lobban, head of crypto-asset taxation at Crypto Tax Consulting, local investors are often not open to voluntary compliance. He cautions traders who boast about their crypto gains on social media platforms that it could land them in hot water if Sars were to take note of their feeds.

“Non-compliance is still proving to be an issue in the crypto asset space among South Africans,” says Lobban. “This stem largely from a misunderstanding of the tax laws applicable, paired with the overarching sentiment that Sars is not entitled to tax them on their gains. It is understandable why Sars would embark on a compliance enforcement exercise. In cases where a taxpayer is not able to prove the source of their income used to fund their lifestyles, Sars is forced to dig deeper.”

In an interview after the event, Engel further expressed his concerns about taxpayers who believe they are playing a game with Sars by seeing how long they will get away without paying their taxes.

“Whatever your profits, you are legally obligated to report them. If you don’t report them, it is tax evasion,” Engel reiterated.

“Sars is committed to getting third-party data from the more prominent crypto-trading platforms. While Sars is getting this done, people think they can continue to get away with it, but they will get caught two or three years down the road. If those individuals didn’t report the income, Sars can go back forever.

“When they get you, they will want the tax, plus interest and penalties. Then you’re really in trouble.”

The consequences of a lifestyle audit can severely impact your relationship with Sars if irregularities come to light. If you suspect you are not fully compliant, it is wise to disclose your earnings and, if necessary, seek relief through the voluntary disclosure programme (VDP). If Sars decides to audit your lifestyle, the VDP window is no longer an option – even after being notified of a possible audit.