The taxman is coming for your rent

Tax dodgers beware. The taxman is coming for you.

The 2019 tax filing season kicked off on Monday and South African Revenue Service (Sars) commissioner Edward Kieswetter made it clear that it is time for taxpayers to render unto Caesar what is due to Caesar.

Kieswetter says Sars noticed some disturbing trends among taxpayers who try to manipulate the system, including not fully disclosing the taxable income they receive, such as rental money.

The commissioner told Moneyweb that Sars is expanding its data set so that it is able to correlate the information it has on its system with what it is receiving from taxpayers.

One way this will be done is by matching the information that Sars has on a taxpayer with information held by the deeds office. This will also allow the revenue service to catch noncompliance among people who do not declare capital gains tax.

Sars has a sophisticated case selection methodology that takes the information supplied by taxpayers and verifies it through the Sars risk profiling system, which highlights whether there is enough evidence to submit a taxpayer for an audit.

“This is the bulwark that we use to try and detect incorrect or fraudulent declarations,” says Kieswetter.

Old and new issues on rental income tax

FNB property economist Siphamandla Mkhwanazi says the practice of not disclosing rental income is not new, particularly in rural and township areas where it is not viewed as a form of income.

“One of the biggest forms of business in townships is backroom rentals, and that income generally does not get declared.”

Mkhwanazi says this matter will only be exacerbated now with household incomes under a lot of pressure.

He points out that many of the structures that are rented out are informal and won’t be easy for tax officials to trace, but acknowledges Sars’s efforts in collaborating with the deeds office, saying this signals a start, especially for the formal sector.

Mkhwanazi notes that the global rental market has become complex with the emergence of electronic rental platforms such as Airbnb which has seen people convert their homes into rental stock.

“It’s something that won’t be easy to track and you will find [it] in affluent markets such as your coastal areas.”

Sluggish rentals equal sluggish returns 

Data from rental payment platform PayProp shows that property prices are increasing at a slower rate than the sector has been accustomed to. The last quarter of 2018 saw the first uptick in the national rental growth rate after a downward trend that lasted two years.

At the same time, a report by property consultants Rode & Associates found a trend of landlords or managers accepting lower rental increases to retain tenants and keep vacancy rates from rising. Desperate efforts to draw tenants have seen some landlords providing costly incentives, such as a month of free rent.

In order to estimate the amount of rental income Sars expects to get it needs to consider various variables such as the number of rental properties it receives tax on, the tax rate, and the level of rent.

“If Sars uses historic growth rates to estimate the level of rent, it might be in for a bit of a surprise because the growth rate has been declining,” says PayProp data and analytics head Johette Smuts, adding that this holds true for any other variable affected by the economy.

“The extent of the surprise will depend on how far reality is from their assumptions on a variety of parameters,” she adds.

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