06 February 2013
Posted by: Erich Bell
Nobody likes punishment, whether it is in the form of criticism, a slap on the wrist, a fine or some other way. In the tax context, punishment for non-compliance comes in the form of a penalty, which raises one’s blood pressure for all sorts of reasons, not least of which is the financial cost which can sometimes be quite hefty.
The Tax Administration Act, 2011 (TAA) contains a number of provisions (stipulations) dealing with penalties for various types of non-compliance and transgressions (violation of laws). These provisions are grouped into three main categories, depending on the degree of severity of the transgression. We will discuss the administrative non-compliance penalties only, as space does not allow the discussion to extend to the other two categories.
As indicated by the name, administrative non-compliance penalties (administrative penalties) are levied in terms of certain sections of the TAA, which became effective on 1 October 2012. These penalties are levied by SARS when a person has failed to comply with certain requirements of the tax law. The administrative penalty provisions in the TAA are very similar to the penalty provisions that were introduced into the Income Tax Act by way of the regulations that were passed in 2009 but now that the TAA has become effective, the TAA provisions override the previous regulations.
The TAA allows for two types of administrative penalties: fixed amount penalties and percentage-based penalties. These penalties apply in different circumstances and are based on specific acts of non-compliance as listed in the TAA. The fixed amount penalties apply to an act of non-compliance as listed in a public notice issued by the Commissioner.
Whereas the acts of non-compliance listed in the 2009 regulations included failure to register as a taxpayer, not informing SARS of any change of address, failure to submit a tax return, failure by an employer to submit a monthly declaration of employees’ tax and many others. SARS has decided to phase in the new penalty system more gradually and the penalty provisions are not yet applied to all these acts of non-compliance.
At this stage, the Commissioner has issued one public notice relating to fixed amount penalties (refer Government Gazette No 35733 dated 1 October 2012) and this notice states that the only incidence of non-compliance subject to a fixed amount penalty in accordance with the TAA is – "Failure by a natural person to submit an income tax return as and when required under the Income Tax Act for years of assessment commencing on or after 1 March 2006 where that person has two or more outstanding income tax returns for such years of assessment.”
Fixed amount penalties
The fixed amount penalties are listed in s 211 of the TAA. The amount of the penalty depends on the size of the taxpayer’s taxable income and is determined according to the following table:
(i)Assessed loss R250
(ii)R0 – R250 000 R250
(iii)R250 001 – R500 000 R500
(iv)R500 001 – R1 000 000 R1 000
(v)R1 000 001 – R5 000 000 R2 000
(vi) R5 000 001 – R10 000 000 R4 000
(vii)R10 000 001 – R50 000 000 R8 000
Also included under item (vii) are the following persons, unless they fall under item (viii) or they did not trade during the year:
· all listed companies;
· companies whose gross receipts and accruals for the preceding year exceeded R500 million;
· a company in the same group of companiesas either of the aforementioned two types of companies; and
· a person or entity exempt from income tax but liable to any other type of tax and whose gross receipts and accruals exceed R30 million.
(viii)Above R50 000 000 R16 000
Thus, the first round of administrative penalties will focus on individual taxpayers who have two or more outstanding tax returns. This is a temporary relief as SARS has stated that penalties will be levied for all the previously listed acts of non-compliance. If there is an act of non-compliance, the penalty amount as determined with reference to the above table is levied by way of a penalty assessment. The assessment indicates a due date by which the taxpayer must correct the non-compliance, i.e. submit the outstanding return. Failure to remedy the non-compliance by the due date will result in SARS levying the determined penalty amount on a monthly basis until such time as the non-compliance is corrected, for up to –
• Thirty-five months where SARS is in possession of the taxpayer’s current address and able to deliver the penalty assessment; or
• Forty-seven months if SARS does not have the person’s current address.
Another form of fixed amount penalty is the reportable arrangement (RA) penalty, which is levied on a participant to the RA who fails to disclose the information in respect of the RA. The penalty is –
• R50 000 in the case of a participant other than the promoter; or
• R100 000 in the case of the promoter.
The respective amount is charged for each month that the failure continues, for up to12 months. The penalty is doubled if the amount of anticipated tax benefit for the participant as a result of the arrangement exceeds R5 million, and is tripled if that benefit exceeds R10 million.
Percentage -based penalties
The TAA provides that SARS must charge a percentage-based penalty when an amount of tax has not been paid by the due date. This provision is linked to the specific penalty provisions within the various tax acts. For example, a 10% penalty is charged on the late payment of provisional tax.
Similarly, a 10% penalty is charged on late payment of employees tax and a 10% penalty is charged on late payment of VAT.
The Fourth Schedule to the Income Tax Act provides for a penalty to be charged if an employer submits the employees’ tax reconciliation (EMP 501) late. Simultaneous to the implementation of the TAA, this provision has been amended to provide that an employer who fails to submit the return within the period specified (the date prescribed by the Commissioner by notice in the Government Gazette) will be charged a penalty at the rate of 1% of the total employees’ tax payable for the year, calculated for each month that the return is late. The maximum amount of the penalty will be 10%. As with the fixed amount penalty, this penalty is levied by way of a penalty assessment.
Remedies and corrections
The taxpayer has a right to request a reversal or correction of a penalty, but this must be done in accordance with the provisions of the TAA. The message conveyed by SARS is that compliance is paramount. Non-compliance will have expensive and time-consuming consequences for the offender.
Source: Professor Jackie Arendse