A recent tax court ruling in favour of the South African Revenue Service (Sars), which treated large loan account balances as undeclared income, serves as a warning to directors and shareholders to properly manage these accounts, maintain accurate records, and be prepared to explain the origin of funds when Sars flags loans as unexplained.

The case of Taxpayer D vs 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.

Read: Is Sars’s ‘Project AmaBillions’ here to take your millions?

The case revealed a staggering tax exposure. Sars assessed the taxpayer on undeclared income of R37.1 million and R20 million in undeclared interest income linked to shareholder loan accounts, for a total assessed amount of R57.1 million. In addition to the tax obligation, the court ruled that Taxpayer D also had to pay accrued interest, 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: The 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].”

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The court reaffirmed that the burden of proof, as set out in section 102(1) of the Tax Administration Act, lies squarely with the taxpayer.

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’s expert witness, with 40 years’ experience, discredited the evidence from 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

In 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.

Read: New Sars unit targets crypto non-compliance

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.

Megan Langton is tax attorney at Tax Consulting South Africa; and Mornay Bornmann is attorney: cross-border taxation at Tax Consulting South Africa.

Balloons normally conjure up images of birthday parties, happy times, and harmless fun. A balloon payment, on the other hand, can potentially cost you a lot of money and destroy long-term wealth.

It is critically important to understand what a balloon payment is, how it works, and the potential consequences of taking one on your vehicle loan.

The aim of a balloon payment is to make the monthly repayments on a vehicle more affordable for consumers. You can think of a balloon payment as a lump sum that is payable at the end of your loan term.

Suppose two brothers – Smart and Lazy – buy identical cars, costing them R400 000 each*. Smart and Lazy both take out vehicle finance, but Lazy has decided to opt for a balloon payment of 20% (or R80 000). Smart’s monthly repayments over the five-year period will be R8 500, while Lazy only pays R7 500.

Lazy feels pretty chuffed with himself, as he has R1 000 extra to spend every month. At the end of the five-year term, however, Smart will owe nothing on his car, while Lazy will still owe the balloon payment of R80 000.

In summary, Lazy will have paid approximately R18 000 more for the exact same car as his brother:

There is more to consider when it comes to a balloon payment. Let’s assume Lazy does not have R80 000 available to settle his balloon payment at the end of the five-year term. His bank graciously offers to extend his loan for another three years. This will, however, cost him R2 700 per month – meaning he has paid almost R625 000 on a car that cost R400 000 eight years ago.

The real gut punch for Lazy, however, comes when he decides to sell his car after finally settling his debts. After eight years of depreciation, his car is now only worth R170 000, which means he effectively lost R455 000 over the eight-year period.

How to pop the balloon

There is, however, hope for Lazy and people who find themselves in a similar situation. If you currently have a balloon payment, the most effective ways of popping the balloon are to follow one of the following tactics:

• Use any surplus funds that you might have to settle your debts quicker.
• Open a savings account to save up for when the balloon payment becomes due.

If you are in the market for a new vehicle, avoid balloon payments as far as possible. It is also smart to try to save up for a healthy deposit.

It is crucial to only buy what you can afford. Generally, a vehicle is a depreciating asset. This effectively means you are borrowing money to fund something whose value goes down as soon as you drive it off the showroom floor.

To better understand vehicle finance and balloon payments, it is recommended that you talk to a certified financial planner who will be able to explain the different options available to you in a simple and clear manner. For more, visit us here.

References:

*Assumptions: Interest: 10% per annum, five-year term, Purchase price of R400 000