This article was first published in the fourth-quarter 2014 edition of Personal Finance magazine.
Note: Some of the penalties that apply to provisional tax have been adjusted in terms of amendments promulgated after this article was published in 2014.
The Tax Administration Act (TAA), which became effective in 2012, consolidates the administrative aspects of the various tax laws that the South African Revenue Service (SARS) administers, including the Income Tax Act, VAT Act, Transfer Duty Act and Estate Duty Act. It also consolidates the penalty provisions, which have been tightened up considerably over the past few years.
Failure to register as a taxpayer, failure to submit tax returns, understatement of taxes and late payment of taxes are treated very seriously. The penalties can be onerous and SARS is intolerant of non-compliance. What is more, penalties are applied automatically in accordance with set tables for various categories of non-compliance, and these penalties escalate depending on seriousness and frequency.
It is important to be aware of your obligations under the various tax laws and ensure that you meet the deadlines. It is a good idea to check your “statements of account” with SARS (via eFiling, the SARS call centre or your tax practitioner) to ensure that payments have been made on time, received by SARS and allocated to the correct taxes. This preventative action can save you time and money.
Even if you think you are making all your payments correctly and timeously, you need to check that your assessments reflect this. If SARS has levied a penalty sometime in the past of which you are not aware, any payments you make subsequently will be allocated first to those penalties, not to your tax. So you can end up with unpaid tax on which interest will be levied.
The new penalty system is divided into two main categories, namely:
* Administrative non-compliance penalties, which are further divided into fixed-amount penalties and percentage-based penalties; and
* Understatement penalties.
The different categories have different rules for imposition and, perhaps more importantly, different rules for reversal.
Administrative non-compliance
Fixed-amount penalties
Administrative non-compliance penalties are levied in terms of Chapter 15 of the TAA and are intended to force taxpayers to be fully compliant and ensure effective administration of the various tax laws.
At the moment, failure by an individual to submit an income tax return is the only transgression that results in a fixed-amount penalty. Specifically, this type of penalty applies to income tax returns since the 2007 tax year where the taxpayer has two or more outstanding tax returns since 2007. The penalty applies automatically in accordance with Table 1 (see link at the end of this article).
The penalty increases depending on the level of taxable income. It applies for each month, or part thereof, that the person fails to remedy the non-compliance, up to 35 or 47 months, depending on whether SARS has the correct address of the taxpayer.
In future, SARS is likely to introduce other categories of non-compliance that are subject to the fixed-amount penalty – for example, failure to register as a taxpayer, failure to inform SARS of a change of address, and so on. Even at a moderate monthly penalty of R500, a taxpayer could end up paying up to R23 500. And this could be even higher if there are multiple offences.
Percentage-based penalties
The percentage-based penalty is imposed mainly when tax is not paid on time. The relevant percentage is set out in the Act to which the late-paid tax applies. For example, late-paid provisional tax is subject to a penalty of 10 percent. Late-paid VAT has a similar penalty.
In addition to the 10-percent penalty in respect of late-paid provisional tax, the Income Tax Act has other penalty provisions that may apply.
* Provisional tax is a payment of tax in advance of the submission of the taxpayer’s income tax return and often requires you to estimate the tax due, because you may not have all the relevant information at your disposal at that time. The Income Tax Act sets out special rules so you do not underestimate the provisional tax due. Where the second provisional tax payment is underestimated (this is the payment due at the end of the tax year, February 28 for individuals), a penalty of 20 percent of the underestimated amount can be levied.
* Where the second provisional tax return is not submitted, a penalty of 20 percent can be levied on any tax that should have been paid. There is potential for an overlap of penalties. SARS has recognised this, and the draft Taxation Laws Amendment Bill for 2014 corrects this. However, it is indicated that the corrections will apply in respect of periods only after March 1, 2015.
Remittance (reversal)
Penalties for failure to register can be reversed if the taxpayer voluntarily discloses the non-compliance to SARS and files all the required returns.
For “first offenders”, SARS can reverse the fixed-amount penalty up to R2 000 if there were valid reasons for non-compliance and the non-compliance has been remedied. A further category for reversal in “exceptional circumstances” is provided for where non-compliance was due to:
* Natural or human-made disasters, or civil disturbance;
* Serious illness, accident, emotional or mental stress;
* An error on the part of SARS, such as a capturing error, a processing delay, an incorrect media release issued by SARS, a delay by SARS to provide information, or a failure by SARS to give the taxpayer sufficient time to respond.
You are regarded as a first offender if you have a clean record for the previous 36 months – in other words, no administrative non-compliance penalties applied to you during that time. Regular offenders beware! Only an “exceptional circumstance” remittance gives you a clean slate, otherwise you have to wait out the time.
For percentage-based penalties, SARS is more lenient with first offenders, provided reasonable grounds exist for the non-compliance and the non-compliance is remedied.
Depending on the type of penalty imposed, you may be able to obtain relief in terms of the directly applicable Act. For example, with the provisional tax underestimation and non-submission penalties (see percentage-based penalties above), SARS has the discretion to reverse all or part of the penalty if satisfied that the taxpayer did not intend to evade or postpone the payment of tax.
Clearly, it is important to comply with your tax obligations. And sometimes you may think that the amount of a penalty is not worth objecting to, because of the time and effort involved. But you should also consider the future consequences, because a relatively innocent error or omission on your part in future could be exacerbated if you are regarded as a regular offender.
Understatement penalties
These penalties are levied in terms of Chapter 16 of the TAA and, as the name implies, are imposed when tax is understated. However, these penalties should not be confused with the percentage-based penalties, even though some percentage-based penalties may arise because of understatement (for example, underestimation of provisional tax). The imposition and remittance rules are different for the two types of penalties.
The understatement penalty is applied in accordance with a table (see link at the end of this article), and the penalties vary between zero, in the most favourable case, to 200 percent in the most severe circumstances. This penalty takes the place of the discretionary penalty of up to 200 percent (two times the tax) that SARS could levy under the previous penalty regime. The previous understatement penalty could be applied inconsistently, so this table attempts to remedy the situation by specifying various categories of behaviour and the percentage penalty applicable to it.
The percentage is applied to the tax shortfall that might arise as a result of:
* Not submitting a return;
* Omitting information from a return;
* Making an incorrect statement in a return; or
* Failing to pay the correct tax (if no return is required).
“Substantial understatement” applies where the prejudice to SARS exceeds the greater of:
* Five percent of the actual tax payable; or
* R1 million.
“Prejudice to SARS” can arise from circumstances other than just understating the tax you owe. If you receive a refund that exceeds the amount you would have received if the tax had been calculated correctly, or if your assessed loss carried forward to the next tax year is in excess of the amount that should have been carried forward, you have caused prejudice to SARS, according to the definition.
A “repeat case” refers to a further incidence of non-compliance under the understatement penalty table within five years of the previous case. So you need five incident-free years, or the higher penalty rate in the “obstructive/repeat case” column will apply.
Voluntary disclosure
The TAA allows you to disclose tax non-compliance voluntarily to SARS, in which case relief is granted in accordance with the table. Interest is still payable, however.
Bona fide inadvertent error
A recent change to the TAA provides relief where the understatement of tax arose as a result of a genuine unintended error. This is likely to be considered in relation to the care you took when completing the tax return, taking your knowledge, experience, education and skill into account, plus the complexity of the relevant legislation and whether you made reasonable enquiries.
Reversal of the penalty
If a penalty is levied under the “Substantial understatement” category, it can be reversed if:
* The taxpayer made full disclosure to SARS on or before the date for submission of the return; and
* Relied on an opinion by an independent registered tax practitioner issued on or before the date for submission of the return, which considered all the relevant facts and confirmed that the taxpayer’s position would likely be upheld in court.
Any other reversal would depend on convincing SARS that the behaviour did not fall into any of the various categories as set out in the table, namely:
* Reasonable care not taken;
* No reasonable grounds for the taxpayer’s stance;
* Gross negligence; or
* Intention to evade tax.
Last word
SARS has potent weapons at its disposal to ensure that non-compliant taxpayers pay up. Unfortunately, these penalties apply to run-of-the-mill late-filers and inadvertent late-payers, as well as to tax fraudsters. The best advice is to be aware of your obligations and ensure that filing and tax payments take place on time and are based on the best advice and knowledge at your disposal.
* Kari Lagler is an independent tax consultant and registered tax practitioner.