Capital reconciliations


​​In its annual report for the year ending 31 March 2022 SARS indicated that it had undertaken 25 lifestyle audits with a value of R474,7 million. These audits involve mainly using capital reconciliations and third-party data and focus mainly on individuals who have access to luxury assets and extensive business relations. During the 2023 financial year, SARS aims to conduct more integrated cases that may include trusts.​​​​​​​

In its annual report for the year ending 31 March 2022 SARS indicated that it had undertaken 25 lifestyle audits with a value of R474,7 million. These audits involve mainly using capital reconciliations and third-party data and focus mainly on individuals who have access to luxury assets and extensive business relations. During the 2023 financial year, SARS aims to conduct more integrated cases that may include trusts.

On my first day at the offices of the Receiver of Revenue in Durban (now SARS) in 1985 my supervisor took me to my dusty office with windows so dirty you could hardly see through them. The office contained a scruffy carpet and battered wooden two-drawer desk which he jokingly informed me were status symbols befitting of my rank of senior taxation officer. Along the one wall was a desk with a rack containing various roneo-produced forms that were yellow with age. Among them were capital reconciliation forms and schedules of living expenses, which I found quite intriguing as I had never heard of a 'capital recon' during my previous seven years in the auditing profession. I would later learn that it was an important weapon in the SARS auditor's arsenal.

Now, 25 lifestyle audits may not sound like much to anyone who has not had to perform or contend with one, but it is an extremely time-consuming task.

At the heart of a lifestyle audit is the capital reconciliation. In simple terms it can be reduced to an equation: Taxable income after adjustments = increase or decrease in net assets + living expenses

In other words, if John had assets of R1 000 at the beginning of the year, declared income of R500 and expenses of R300, his assets at the end of the year should be R1 000 + R500 − R300 = R1 200. If his assets are actually R1 600 at the end of the year, he has some explaining to do. Where did the extra R400 come from?

This is the problem all tax evaders face: What do you do with the hot money? It's dangerous keeping it under the mattress or as has become fashionable of late, stuffing it in the sofa. But as soon as you spend it on an asset, it ends up on your statement of assets and liabilities. And if you blow it, it ends up as a living expense. If the taxpayer omits the asset from the statement of assets and liabilities, and SARS discovers it, the taxpayer will be in hot water. Expensive supercars are like a magnet for any SARS auditor. All it takes is a quick photo of the number plate with a cell phone, a search on the vehicle registration system and the taxpayer will be identified. A deeds registry search will quickly reveal that expensive holiday home and every now and again there is a huge exposé such as the Gupta Leaks and Panama Papers which should serve as a strong warning to anyone contemplating concealing their assets.

Living expenses ​can be determined in a variety of ways, including from utility bills, fees paid to schools or universities, medical fund contributions, and identifying overseas travel dates from Home Affairs with details and costs substantiated from passports and credit card statements. Typically, when taxpayers become the subject of a lifestyle audit, SARS will send them a schedule of living expenses to complete. The temptation would be to understate the living expenses but if SARS discovers more expenses, it will not do much for the taxpayer's credibility. When it comes to hot money, taxpayers often like to flaunt it with lavish splurges at night clubs and restaurants, and invariably this will attract the attention of SARS when it ends up in the media or a jilted spouse or disgruntled employee blows the whistle.

Statements of assets and liabilities

The SARS Comprehensive Guide to the ITR12 for Individuals sets out who must submit statements of assets and liabilities, namely,

  • persons receiving foreign income (including remuneration) apart from foreign interest and foreign dividend income and excluding foreign capital gain ​​transactions
  • persons receivin​g income from local Business, Trade and Profession, including rental income;
  • persons receiving farming income; and
  • directors of companies and members of close corporations.

​​I am told that SARS does not require the statement of assets and liabilities from persons who are directors of share block companies and bodies corporate when they own a flat in the building run by such entities and receive no income or nominal income for, say, writing up the books. The same is true for directors of dormant companies. ​

According to the guide, the statement of assets and liabilities is optional for persons deriving local rental income.

Separate statements of assets and liabilities for local and foreign activities are required.

The tax return requires the assets and liabilities to be grouped together under the following categories:


Fixed Properties and all Improvements to Properties

Shares in Private Company or Member's Interest in Close Corporation

Loan Accounts

Financial Instruments Listed (shares, unit trusts, etc.) – excluding crypto asset(s)

Financial Instruments – crypto asset(s)

Net Capital of Business, Trade, Profession or Farming

Equipment, Machinery, Implements

Motor Vehicles, Caravans, Boats



Livestock - elected value(s)

Cash on Hand, in Bank and Other Similar Institutions

Personal Effects (jewellery, paintings, furniture, etc.)

Other Assets


Mortgage Bonds

Loan Accounts


Bank Overdraft

Other Liabilities

In the statement of foreign assets and liabilities, only the total foreign assets and total foreign liabilities are required to be disclosed in the return. The return states that the foreign currency value at cost must be translated to Rand using the exchange rate as at the end of the tax year when the asset was acquired.

When preparing the reconciliation, adjustments will be required if foreign assets have been disposed of, because the cost used in the statement does not align with the translation rules in section 24I, section 25D and paragraph 43 of the Eighth Schedule to the Income Tax Act.

It will be necessary when compiling the statement of assets and liabilities to list all the assets and liabilities making up the total of each line item in the event of a SARS enquiry. I have found it convenient to do this on an Excel spreadsheet with Sheet 1 containing the statement of assets and liabilities and the subsequent sheets containing the breakdown of each line item. Importantly, the assets must be recorded at cost price and not at market value. Showing assets at market value from year to year will result in unrealized gains and losses which are not reflected in taxable income. The result will be unexplained increases or decreases in net assets.

When doing this exercise for the first time, it may happen that a taxpayer will not have a record of the cost price of all assets, particularly those acquired before valuation date or personal-use assets accumulated over many years. SARS does not provide guidance in this regard, but an estimate may be required. With shares and unit trusts, for example, it should be acceptable to use the weighted-average base cost applicable for CGT purposes according to information from a stockbroker or financial service provider. Determining the cost of shares without using the weighted-average method can be particularly difficult when they have been held for many years and been the subject of numerous corporate actions.

Identifying debtors for income which has accrued but not been paid at year end is also necessary to avoid an unexplained decrease in assets. Conversely, including liabilities for expenses claimed as deductions in determining taxable income will prevent an unexplained increase in net assets.

Depreciable assets used for business purposes such as computers and cell phones should be shown at tax value, since the decrease in value of such assets would be matched by the reduction in taxable income caused by the capital allowances.

Amounts contributed to retirement funds are not shown on the statement of assets and liabilities because the contributions belong to the fund until the time comes to withdraw or retire from the fund. Such payments will either be reflected as a decrease in taxable income or as a living expense if not allowed as a deduction. Contributions to endowment policies should be reflected at cost in the statement of assets and liabilities.

Inherited assets, it is submitted should be shown at the deemed expenditure determined under section 25(3)(b) of the Income Tax Act (ITA) (the market value on date of death plus any further expenditure incurred by the executor). Assets acquired by donation should similarly be shown at market value under paragraph 38 of the Eighth Schedule to the ITA. This treatment will ensure alignment when determining a capital gain or loss.

If you have the time to reconcile your own assets and liabilities, it can be a rewarding exercise. It ensures that you have disclosed everything to SARS and reveals how you have spent your money. The latter could be useful for budgeting.

One way to go about this is to draw up a personal cash book for each bank account. This makes it a simple matter to identify extraneous receipts such as tax refunds, short-term insurance bonuses, inter-bank transfers and the various living expenses such as rates, water and electricity, groceries, telephone and cellular phone accounts, internet service provider fees, security expenses, provisional tax and assessed tax payments, stockbroker fees and so on.

I have heard horror stories of SARS simply adding up all the receipts on a bank account and comparing it to the VAT turnover declared on the VAT 201 forms. Invariably, this exercise results in huge discrepancies because of inter-bank transfers and other reconciling items. If you have a personal cash book for each account, it will be a simple matter to eliminate transfers between bank accounts.

Adjustments to taxable income

In order to match any increase in net assets, taxable income needs to be increased by the following:

  • ​​​​Exempt income (for example, amounts derived from tax-free investments, local dividends and foreign dividends from shares listed on a South African exchange)
  • Non-taxable receipts (for example, donations, inheritances and tax refunds); ensure that such amounts are disclosed in the tax return under 'Receipts and accruals you consider not taxable
  • The interest exemption
  • The exempt portion of foreign dividends
  • Retirement fund contributions allowed as a deduction that were brought forward from the previous year
  • The annual exclusion and excluded portion of capital gains as a result of the inclusion rate.

​​In computing living expenses, the following should be included:

  • Employees & tax
  • Provisional tax and assessed tax paid during the year of assessment
  • Retirement fund contributions not allowed in the current year
  • Portfolio management fees not allowed as a deduction
  • The portion of expenses added back for private use
  • Medical expenses
  • Other household expenses


The next time you complete the statement of assets and liabilities, take care. SARS is watching, and rest assured, the last thing you want is a lifestyle audit.

This article was first published in ASA June 2023 . ​

The next time you complete the statement of assets and liabilities, take care. SARS is watching, and rest assured, the last thing you want is a lifestyle audit

This article was first published in <a href=";i=793291&amp;view=articleBrowser&amp;article_id=4588837&amp;ver=html5">
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<em>ASA June 2023​​

Webber Wentzel > News > Capital reconciliations
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