31 January 2013
Posted by: Author: Professor Jackie Arendse
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 dealing with penalties for various types of non-compliance and transgressions. These provisions are grouped into three main categories, depending on the degree of severity of the transgression.
We will discuss the administrative noncompliance penalties only as space does not allow the discussion to extend to the other two categories. I will therefore discuss understatement penalties and criminal offences in subsequent articles.As indicated by the name, administrative non-compliance penalties (administrative penalties) are levied in terms of ss 208 to 220 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, which apply in different circumstances and are based on specific acts of non-compliance as listed in the legislation. The fixed amount penalties apply to an act of non-compliance as listed in a public notice issued by the Commissioner (s 210(2) of the TAA). Whereas the range of 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 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 ss 210 and 211 of 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.”
Thus, the first round of administrative penalties will focus on individual taxpayers who have two or more outstanding tax returns. This is a temporary reprieve as SARS has stated that eventually, 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 (AP 34) which indicates a due date by which the taxpayer must remedy 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 remedied, for up to –Thirty-five months where SARS is in possession of the taxpayer’s current address and able to deliver the AP 34; orForty-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 a RA. The penalty is –R50 000 in the case of a participant other than the promoter; orR100 000 in the case of the promoter. The respective amount is charged for each month that the failure continues, for up to 12 months. The penalty is doubled if the amount of anticipated tax benefit for the participant as a result of the arrangement exceeds R5million, and is trebled if that benefit exceeds R10 million.
The TAA provides that SARS must charge a percentage-based penalty when an amount of tax has not been paid by due date (s 213(1)). This provision is linked to the specific penalty provisions within the various tax acts. For example, a 10% penalty is charged on a late payment of provisional tax (para 27 of the Fourth Schedule to the Income Tax Act, which provides that the penalty is imposed under Chapter 15 of the TAA). Similarly, a 10% penalty is charged on late payment of employees’ tax (para 6 of the Fourth Schedule to the Income Tax Act, which also provides that the penalty is imposed under Chapter 15 of the TAA) and a 10% penalty is charged on late payment of VAT (s 39 of the VAT Act, which also provides that the penalty is imposed under Chapter 15 of the TAA).
Paragraph 14(6) of 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. Concurrent with the implementation of the TAA, this provision has been amended to provide that an employer who fails to submit the return with the period specified (the date prescribed by the Commissioner by notice in the Gazette) will be chargeda 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 (AP 34).
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. This will be discussed in a subsequent article.
The message conveyed by SARS is that compliance is paramount. Non-compliance will have expensive and time-consuming consequences for the offender.
Source: By Professor Jackie Arendse University of the Witwatersrand (TaxTalk)