Defined in layman’s terms tax avoidance is defined as any legal methods used by a taxpayer to reduce their tax liability.
While on the other hand tax evasion is an illegal practice a taxpayer does to intentionally reduce their tax liability.
SARS is making it more onerous for the taxpayer to prove their intentions are not use illegal or misleading practices to reduce tax amounts payable. The tax system is also improving with AI and gathering third party information to use as a balance check to what information is being submitted in returns.
The tightening of SARS processes can be evidenced in (amongst others) their recent rigorous processes for new VAT registrations for companies, where SARS previously welcomed companies to voluntarily register for VAT but have now taken a different stance after what they considered was an alarming increase in company VAT registrations in the recent times.
Another way that SARS has recently tightened processes is through the thorough reviews and audits of the returns submitted to them; these reviews are for all kinds of tax types (i.e. individual annual tax returns, company tax returns, EMP501 returns, VAT returns, dividends tax, etc.).
SARS now requires extensive and multiple supporting documentation from taxpayers to verify that all information declared in returns submitted is accurate and complete. It is in all taxpayers’ interest to familiarize themselves with the processes that SARS continues to implement and improve to avoid finding themselves in any legal woes with SARS as tax evasion is a serious offense which is often penalized monetarily and, in some cases, even punishable through jail time.
Some of the ways in which taxpayers can legally reduce their tax liability would include the following:
- Submitting their tax returns when due to avoid incurring penalties and interest which of course would result in increased tax liability and non-compliance statuses.
- Companies who install rooftop solar panels can now make use of the section 12B tax incentives, which allows taxpayers to claim a 25% rebate up to a maximum of R15000, ultimately reducing your tax liability.
- Individual taxpayers who invest in tax-free investments, can enjoy this incentive as the name of the investment is self-explanatory in that unlike other investment income (interest, taxable dividends) these investments are not taxable.
- Small business Corporations (micro businesses) are often encouraged to register for turnover tax as a means to reduce their liability and burdens.
- From the 2025 fiscal year, non-resident taxpayers can also enjoy tax benefits that all income received by or accrued to them from a resident trust will now be taxed in the trust and not the individual (i.e. the trust will be treated as a fiscally opaque entity). This may be beneficial to the individual’s tax but can result in more tax being paid overall by the trust.
- Individuals can also enjoy foreign tax reliefs as well as an exemption of up to R 1 250 000 of foreign employment income for all qualifying individuals as per section 10 (1) of the Income Tax Act.
- Individual taxpayers who are the main member of a registered medical aid scheme or are the individual who is responsible for making payments towards a medical aid scheme even when that individual may not be a member of the medical aid scheme but is making payments on behalf of someone who is considered their dependent are also granted medical aid tax credits/rebates (as per Section 6A of the Income Tax Act). A rebate is granted for every dependent registered under the medical aid and claimable by the taxpayer who is making the monthly medical contribution, these medical aid tax credits/rebates per individual are reviewed each tax year. Further medical tax credits are granted to individuals for any qualifying medical expenses over & above the monthly medical aid contributions (further detailed in Section 6B of the income tax Act).
- Individual taxpayers who make contributions towards a retirement annuity during any year of assessment are entitled to a tax relief on the contributions made. This relief is however limited to a maximum rate of the lower of 27.5% of the greater of an individuals’ taxable income or remuneration and R350 000, the excess of which will be carried forward to the next tax year. This tax relief is detailed and explained further in Section 11(f) of the Income Tax Act.
- The aforementioned incentives are just to mention a few of all incentives that taxpayers both individual and companies can apply in their tax affairs to legally reduce their tax liability, over and above the set exemptions, special deductions, and rebates available to the taxpayers.
Tax evasion methods on the other hand would include the following, to mention a few:
- A VAT registered company charging VAT on goods and services provided to consumers and not paying the VAT amounts over to SARS when declaring their income or intentionally claiming VAT on deductions that are normally not vatable, this can be done through fictitious invoices.
- Failing to adhere to SARS submission deadlines for various returns and remaining non-compliant with SARS.
- Under-declaring your income or overstating your expenses when filing a tax return to SARS.
- Claiming disability medical aid tax credits when filing an individual tax return when the dependents on a medical aid scheme are not registered as disabled members.