The case of Taxpayer D v CSARS (IT 35476, 25 February 2025) dealt with the question of whether the taxpayer had satisfactorily explained a large sum reflected as a loan account owing to him in one of his wholly owned companies. The dispute was factual in nature, relating to the source of the funds for the 2014 to 2017 tax years.
The case revealed a staggering tax exposure. SARS assessed the taxpayer on undeclared income of R37.1 million, as well as R20 million in undeclared interest income linked to shareholder loan accounts. This resulted in a total assessed amount of R57.1 million. Besides the tax obligation, the Court ruled that Taxpayer D also had to pay interest accrued, an understated penalty, and legal costs, including the cost of two counsel and an expert witness.
Taxpayer D is a successful businessman who owns several companies. The structure is always the same and he is the sole shareholder and director. According to Court papers, he earns income from his companies in the form of salaries, dividend income and interest on shareholder loan accounts. Judge J. Manoim said in his judgment that the subject matter is the taxpayer’s personal affairs, which are a product of how he used and accounted for his loan accounts in one of his companies.
The manner in which the taxpayer operated the accounts of his companies gave rise to the case. The taxpayer used these loan accounts to fund other companies in his group. It was noted in the judgment that: “When he did so he would earn interest income from the company he lent the money to which would then be credited to a loan account he had in the company. What added to the complexity was that he also, in his personal capacity borrowed from some of his companies to fund another, whereafter he paid interest to his lending company. Generally, he paid a lower interest rate when he borrowed compared to the higher interest rate he received when he was lending.”
SARS said Taxpayer D gave inconsistent explanations for the cause of the unexplained increases in the balances of the loan accounts. The amounts were not supported by the income declared in Taxpayer D’s returns.
Key Legal Principle: Burden of Proof Rests with the Taxpayer
Referring to these amounts, the judgment reads: “The amounts are large. It called for an explanation from the taxpayer, but he did not come to give one [in the Tax Court].”
The Court reaffirmed that the burden of proof lies squarely with the taxpayer, as set out in section 102(1) of the Tax Administration Act.
In this case, not only did the taxpayer fail to discharge the burden of proof, but his failure to testify also suggests that if he did, his testimony would elicit facts unfavourable to his case. Therefore, the Court also ruled that drawing an adverse inference was warranted.
The Court further held that it was not enough for Taxpayer D to rely on reconstructed figures or second-hand explanations – such as from his accountant who testified. SARS’ expert witness with 40 years’ experience discredited the evidence by Taxpayer D’s accountant as “guesswork”, and described the reconstructed financial records as methodologically flawed. Without credible, firsthand explanations, SARS’s assessments stood.
What This Means for Business Owners and Shareholders
This case illustrates SARS’s readiness to assess both unexplained capital increases and accrued interest on shareholder loan accounts. Inadequate records, multiple accounts, or unclear audit trails can significantly increase tax exposure. Without clear, contemporaneous documentation, SARS may treat inflows as taxable income or impute interest.
To mitigate these risks, business owners, directors and shareholders must ensure their loan accounts are consistently reconciled and reflect legitimate economic activity.
Take Proactive Steps Before SARS Flags Your Account
Following the Budget Speech on 21 May 2025, SARS announced that the 2025/26 financial year revenue estimate of R1.986 trillion, as outlined by the Minister of Finance, places a responsibility on the agency to implement revenue-raising initiatives.
“By dutifully implementing its compliance programme, SARS is well positioned to collect all revenue due to the fiscus. SARS will specifically accelerate work on collecting all debt, with a specific focus on undisputed debt”, SARS said in a statement.
This sends a clear message that taxpayers can expect intensified scrutiny from SARS, which aligns with its Project AmaBillions, a special initiative focused on tax debt collection over the next three years.
Taxpayer D’s case serves as a warning to all. Had he taken the matter seriously from the outset, his liability could have been reduced by at least R7.5 million.
Any taxpayer who does not understand their loan accounts or is uncertain about the accuracy of their accounting records should consult a tax attorney to proactively engage with SARS and secure the best possible outcome.
