Interest on unpaid taxes under the Tax Administration Act
29 September 2012
Posted by: SAIT Technical
By Andrew Seaber (DLA Cliffe Dekker Hofmeyr Tax Alert)
The Tax Administration Act, No 28 of 2011 (TAA) introduces a new interest regime where as the levying of interest on unpaid taxes is concerned.
The relevant provisions are contained in chapter 12 of the TAA, only part of which will come into operation on 1 October 2012, with the balance of the provisions coming into effect at a later stage. In this regard, it is understood that SARS's accounting system, specifically devised for the implementation of the new interest regime, will not be fully functional by the general commencement date of the TAA, being 1 October 2012.
Generally, in terms of s187 of the TAA, if a tax debt is not paid in full by the 'effective date', interest will accrue on the outstanding balance of the tax debt at the prescribed rate for the period from the effective date to the date that the tax is paid.
The term 'effective date' bears a specific meaning, depending on the nature of the tax. Where income tax for any year of assessment is concerned, the effective date is defined as the date falling seven months after the last day of that year if the taxpayer has a year of assessment ending on the last day of February, and six months after the last day of that year in any other case. With regard to the calculation of interest in relation to estate duty, the effective date is the earlier of the date of assessment or 12 months after the date of death.
In the case of any other taxes, the effective date is the date by which the tax for the tax period is due and payable under any tax Act. For example, in terms of s3(1) of the Transfer Duty Act, No 40 of 1949, transfer duty is payable within six months of the date of acquisition of the immovable property and interest will therefore be charged from the day after the six month period if such duty is not paid.
It is also noted that the effective date in relation to
a fixed amount penalty, is the date of assessment of the penalty
a percentage based penalty, is the date by which the tax for the tax period should have been paid
an understatement penalty, is the effective date for the tax understated.
The term 'effective date' also bears a specific meaning depending on the type of assessment raised. In relation to an additional assessment or reduced assessment, it means the effective date in relation to the tax payable under the original assessment. In respect of a jeopardy assessment, the effective date is the date for payment specified in the jeopardy assessment.
Insofar as where an amount refundable by SARS is concerned, interest will, unless otherwise provided in any tax Act, accrue from the later of the effective date or the date that the excess was received by SARS to the date the refunded tax is paid. In other words, if the overpayment giving rise to the refund only occurred after the effective date, interest will be calculated from the 'out-of-pocket' date and not the earlier effective date.
Where a refund is offset against an existing tax liability of the taxpayer, the date on which the offset is effected is considered to be the date of payment by SARS of the refund, unless any tax Act provides otherwise.
Regarding the first payment of provisional tax, interest is imposed from the effective date for the first payment of provisional tax until the earlier of the date on which payment is made or the effective date for the second payment of provisional tax. In relation to the second payment of provisional tax, interest will run from the effective date for the second payment of provisional tax until the earlier of the date on which payment is made or the effective date for income tax for the relevant year of assessment (ie seven or six months after the last day of the tax year).
For the most part, interest is levied at the prescribed rate, which is the rate as determined by the Minister of Finance from time to time by notice in the Government Gazette. Any new rate will come into operation of the first day of the second month following the month in which the new rate becomes effective for purposes of the Public Finance Management Act, No 1 of 1999. However, in relation to interest payable in respect of refunds on assessment of provisional tax and employee's tax, the rate payable by SARS is calculated at four percentage points below the prescribed rate. To the extent that different rates of interest apply in respect of a tax debt as a result of a change of the prescribed rate, the different rates will need to be applied in relation to the respective portions of the tax period.
On the upside, taxpayers are afforded a measure of relief in that the TAA provides for interest to be remitted in circumstances where a senior official of SARS is satisfied that the interest is payable as a result of circumstances beyond the taxpayer's control. However, these circumstances are expressly limited to a natural or human-made disaster, a civil disturbance or disruption in services, or a serious illness or accident. Further, the designated SARS senior official is only empowered to direct that so much of the interest that is attributable to such circumstances is not payable by the taxpayer. This discretion is also limited to the extent that the SARS official is not prohibited from remitting the interest in terms of any tax Act.
It should be appreciated that from the date prescribed by SARS by public notice any interest payable will be calculated on the daily balance owing and will be compounded monthly. According to SARS, this will introduce the commercially acceptable method of calculating interest across all tax types and gives effect to the principle that interest is compensation for the loss of use of money.
Overall, the provisions contained in chapter 12 of the TAA provide a framework for the alignment of the levying of interest across all taxes. It remains to be seen by when SARS will have its systems up and ready to fully implement the new interest regime.