Dr Richard is a clinical psychologist with extensive experience in the areas of trauma, and anxiety disorders. He is the owner of the Anxiety and Trauma Clinic in Edenburg, Johannesburg. In 2008, Dr Richard inherited a beautiful river frontage 230 hectares guest farm from his father worth R11 000 000. The farm is located in the Grabouw area in Cape Town and has great mountain biking, hiking, game and bird watching, and fishing experience. The valley is very popular with tourists and the farm offers income from tourism and can sleep 30 people per night. In the first year of inheriting the farm, Dr Richard built an additional five guest cottages to attract more tourists expected to visit the country for the 2010 World Cup. His business made a considerable profit in 2010. Over the years, Dr Richard used his surplus income to add more amenities to the guest farm including a spa and wellness centre, and a fitness centre. Dr Richard turned 60 in 2017 and his dream is to retire at 65 and relocate to Miami in the United States. In the past four years, Dr Richard has been raising funds for his retirement and commissioned Italian Art Nouveau architect Ernesto Basile to restore the guest farm and turn it into 20 luxury independent villas fit for Hollywood elite and royalty. He demolished all the guest houses on the farm and replaced them with luxury villas. The construction was carefully planned so he could keep running the guest farm at 20% capacity and earn income until the project was complete. The luxury villas and a new golf course were completed in 2019. He sold the property for R72 million in 2020.

Dr Richard informs you that during 2020, he had taken on a lot of work between the clinic and the villa project and he asked his secretary to complete his tax returns for the 2022/2023 year of assessment without checking its accuracy. His secretary completed and submitted the returns for the 2022/2023 year of assessment. On 5 May 2022, Richard received a notice of audit from the South African Revenue Service (SARS) which states that it intends to audit him for the 2022/2023 year of assessment. On receipt of the notice of the audit, Richard checked his returns and notes that his secretary had omitted to include several sources of income in his gross income including his rental income and dividends received from some of his shares listed on the JSE. He notes that he was highly stressed and asked his secretary to do her best. Richard admits he did not take reasonable care and that he should have completed his own returns or sought professional assistance. Richard consults with you about the upcoming audit. He has heard that SARS can impose understatement penalties ranging from zero to 200%.

Richard also informs you about an additional assessment he recently received from SARS. He informs you that a SARS official visited his office in January to inspect his books of account and previous tax records. Richard is a registered taxpayer and has filed all his tax returns to date and in accordance with the required timeframes. He recently received an assessment from SARS, dated 7 May 2022, relating to his 2017 year of assessment. The date on the original assessment issued by SARS when

Richard filed his 2017 return is 3 December 2018. In the assessment dated 7 May 2022, SARS is disputing some of Richards dividends deducted in the amount of R500 000 and travel costs claimed to the amount R56 000. Richard admits that they may have been some errors but he is concerned that SARS may keep digging old assessments and issuing additional assessments who knows when they will stop. In addition,SARS issued an additional assessment for the 2020/2021 year of assessment in which the proceeds of the sale of the guest farm is included in gross income.

WHAT IS REQUIRED OF YOU:

Advise Dr Richard on the correctness of the additional assessment for the 2022/2023 year of assessment in which the proceeds of the sale of the guest farm is included in gross income; AND (10 marks)

With reference to the Tax Administration Act 28 of 2011 and relevant case law, advise Dr Richard about possibility of understatement penalties being levied under the circumstances; AND (10 marks)

With reference to the Tax Administration Act 28 of 2011, advise Dr Richard on the validity of the additional assessment issued in respect of the 2016/2017 year of assessment. (10 marks)