Good news for (late) provisional taxpayers
21 January 2015
Posted by: Author: Joon Chong (Webber Wentzel)
Author: Joon Chong (Webber Wentzel)
The Tax Administration Laws Amendment Act 44 of 2014 was published in the Government Gazette on 20 January 2015 ("TALAA 2014"). It is unusual that tax amendment statutes bring good news to taxpayers but there is some good news in the TALAA 2014 for provisional taxpayers.
All references to "para" in this article are to paragraphs in the Fourth Schedule of the Income Tax Act 58 of 1962 ("the Income Tax Act").
Prior to the amendments taking effect, the Fourth Schedule of the Income Tax Act provided for three types of penalties relevant to the submission of the second provisional tax return-
- a 20% year-end inadequate estimate penalty (para 20) ("Inadequate Estimate Penalty");
- a 20% late submission penalty (para 20A) ("Late Submission Penalty"); and
- a 10% late payment penalty (para 27) ("Late Payment Penalty").
All these penalties are percentage based penalties imposed in terms of Chapter 15 of the Tax Administration Act 28 of 2011 ("TAA").
A company with more than R1 million in taxable income that submitted its second provisional tax return late (i.e. after the last day of its year of assessment) using an inadequate estimate of taxable income (i.e. less than 80% of its actual taxable income) could potentially suffer all three penalties in the following manner:
1. Inadequate Estimate Penalty, which is 20% of the difference between
(i) the normal tax payable on 80% of its actual taxable income; and
(ii) provisional tax payments for the year of assessment paid before the end of that year.
2. Late Submission Penalty, which is 20% of the difference between
(i) the normal tax on its estimated taxable income for the year of assessment; and
(ii) the first provisional tax payment for that year.
3. Late Payment Penalty, which is 10% of the second provisional tax amount not paid by the last day of the year of assessment.
Amendments to the Late Submission Penalty
The TALAA 2014 provides that the Late Submission Penalty is to be repealed with effect from years of assessment commencing on or after 1 March 2015.
Amendments to the Inadequate Estimate Penalty
The TALAA 2014 provides for the following amendments to the Inadequate Estimate Penalty. These amendments take effect from years of assessment commencing on or after 1 March 2014.
The Inadequate Estimate Penalty is to be reduced by any Late Payment Penalty imposed for the same provisional tax period.
The Inadequate Estimate Penalty is to be calculated using the net normal tax payable on actual taxable income, i.e. the normal tax amount after deducting any applicable rebates.
The TALAA 2014 provides that para 20(3) is to be deleted. Prior to the deletion, when the Commissioner increases the final or last estimate in terms of para 19(3), para 20(3) provided that the Inadequate Estimate Penalty would not apply in relation to any such increased final or last estimate. With the deletion, any calculation of the Inadequate Estimate Penalty must take into account the increased final or last estimate made by the Commissioner. This means that although the taxpayer would be liable for increased provisional tax, this increased estimate could potentially reduce its Inadequate Estimate Penalty or result in no such penalty.
With the insertion of para 20(2A), a taxpayer that did not submit a second provisional tax return will be deemed to have made a nil submission. This prevents any argument by the taxpayer that no Inadequate Estimate Penalty can be imposed when no estimate is submitted as no penalty can be calculated.
There is also an insertion in para 20(2C) (which originally was in para 20A(2)) that provides for the Commissioner to remit the whole or any part of the Inadequate Estimate Penalty imposed if the failure to submit the second provisional tax return timeously was not due to an intent to evade or postpone the payment of provisional tax or normal tax. This insertion takes effect from years of assessment commencing on or after 1 March 2015.
Notably, this no-intent ground to request for remission of the Inadequate Estimate Penalty is in addition to the existing grounds in para 20(2) and section 217(3) of the TAA.
Purpose of the amendments
The purpose for the above amendments is set out in paragraph 2.11 of the Memorandum on the objects of the Tax Administration Laws Amendment Bill, 2014, which provides as follows:
"An underestimation contemplated in paragraph 20 of the Fourth Schedule may result in a penalty under both paragraphs 20(1) and 20A(1) for the same action and may be regarded as too onerous. Also, paragraph 20 has been amended to allow a reduction of a penalty under paragraph 20(1) by the amount of any penalty under paragraph 27 for the late payment of provisional tax. This approach is thus aligned with the Tax Administration Act, 2011 scheme under which a default may not be subjected to both an administrative non-compliance penalty and an understatement penalty." (My emphasis.)
Good news for the taxpayer indeed!
What this means for the taxpayer going forward
A taxpayer that submits a late second provisional tax return which has an estimated taxable income which is less than 80% of its actual taxable income will have an Inadequate Estimate Penalty and a Late Payment Penalty for that provisional tax period. The taxpayer's Inadequate Estimate Penalty should be reduced by the Late Payment Penalty for that period. There should not be a third penalty in the form of a Late Submission Penalty.
The taxpayer should request for remission of the Inadequate Estimate Penalty on the basis that there was no intent to evade or postpone the payment of tax by the late submission, and that the estimate was seriously calculated with due regard to the relevant factors and not deliberately or negligently understated. Further grounds to request remission are in section 217(3) of the TAA - that this was a "first incidence" of non-compliance, reasonable grounds for the non-compliance exist and the non-compliance has been remedied.
The taxpayer should request for remission of the Late Payment Penalty in terms of the grounds in section 217(3) of the TAA.