We have all heard about tax practitioners having to go to a SARS branch office in a van stacked with invoices. Tax professionals are acutely aware that unless you can present the relevant supporting documents to SARS it is impossible to prove that expenses are deductible or input VAT is claimable.
In the tax world supporting documents are a precious commodity. However, this creates another burden – namely space. It is noticeable how many companies have sprung up all over South Africa’s major cities, offering storage space to rent.
According to some, a good rule to follow when you are trying to use space optimally is to ask yourself if you are likely to ever need the document in question again. The theory goes that if your answer is probably not, then you are free to throw it away.
But the question is: Is this a good rule to follow in tax?
Our experience at SAIT is that many tax practitioners know about the so-called five year rule where one only needs to keep a document for five years. The “five year rule” is found in section 29(3) of the Tax Administration Act (TAA) and states: “Records, books of account or documents need not be retained by the person described in—
- subsection (2)(a), after a period of five years from the date of the submission of the return; and
- subsection (2)(c), after a period of five years from the end of the relevant tax period.”
The first point to note is that the five years begins from the date of submission of a return. This is a crucial point because we have noticed that some of our members believe one must only have had the document for five years. This view is wrong.
For example: If a client approaches you in 2015 to submit a 2009 return, and you submit the return in November 2015, the five years starts running from November 2015, not 2009.
Secondly, you will notice that section 29(3) refers to persons described in subsection (a) and (c). Strangely, subsections (a) and (c) are mentioned, but not (b). Before we look further at this, let’s take a closer look at section 29(2):
“The requirements of this Act to keep records, books of account or documents for a tax period apply to a person who-
a) has submitted a return for the tax period;
b) is required to submit a return for the tax period and has not submitted a return for the tax period; or
c) is not required to submit a return but has, during the tax period, received income, has a capital gain or capital loss, or engaged in any other activity that is subject to tax or would be subject to tax but for the application of a threshold or exemption.”
Section 29(2)(b) refers to a person who should have submitted a return, but did not. The million dollar question then is, “does the five year rule apply to persons who should have submitted returns but didn’t?” The answer is a resounding no [look at s29(3) again and you’ll see why].
The implication for all this is that if one was required to submit a return but did not such a person must keep the documents indefinitely; or at the very least, for five years after they have submitted the return.
In a perfect world it makes sense to discard records once five years have passed and you have submitted the return. If you cannot foresee having to use a document in the future, then you should avoid keeping it (storage space is a commodity, remember). But in the real world, this is not a good idea.
I would concede that I am being over-zealous in my caution, but we have seen enough to know that this is for the best. There are quite a number of horror stories about taxpayers who were convinced that they submitted a return from, say ten years ago (and they truthfully did), yet SARS refused to grant them a tax clearance certificate because all of a sudden their system indicates that the return is outstanding.
Herein lies a dilemma. The taxpayer discarded the records five years ago and would seek to rely on section 29(3)(a) of the TAA, yet SARS would argue that the provision is not applicable because the return was never submitted in the first place. This is a terrible position to be in. While there are some ways that a taxpayer can try to get around this, they are very time-consuming and costly. I would suggest that you should just save yourself all that unnecessary frustration and simply never destroy records.
It is simply too great of a risk to do so, given the fact that returns submitted to SARS could magically disappear.
Lesedi Seforo, (2016). Supporting documents: onus to keep documents remains on the taxpayer, Taxtalk, (56), pp 24-25, South African Institute of Tax Professionals.