Getting To Grips With Penalties And additional Tax
05 April 2008
Posted by: Author: Pieter E Lombard
Getting To Grips With Penalties And additional Tax
One of the major challenges facing SARS is consistency in levying is consistency in levying penalties and additional tax–and, more specifically, the percentages or quantums levied by different revenue offices.
Penalties and additional tax feature in several sections of the Income Tax Act: amongst others, in sections 75, 76 and 80; in paragraph 20A of the Fourth Schedule; as well as in sections 39, 59 and 60 of the VAT Act.In the context of tax law, penalties or fines usually refer to specific transgressions of legislation: for example, the non-rendering of a tax return or the failure to pay tax on time.Two examples can be cited in this regard:
The non-rendering of an income tax return will result in a taxpayer, once convicted, to pay a prescribed fine, the quantum of which varies from time to time; and The late payment of VAT is punishable by a 10% penalty.Those examples are quite straight forward.However, the concept of additional tax is far more subjective and not cast in stone - as the revenue official or office concerned can decide on additional tax at his/her discretion.As such, the SARS official concerned is obliged to invite the taxpayer to submit extenuating circumstances and will then make a recommendation for consideration to a committee, formed specifically for that purpose.
That step is required in terms of the principles of natural justice as embodied in the Promotion of Administrative Justice Act.Whilst section 76(1) of the Income Tax Act provides for imposing additional tax which in effect amounts to an extra mandatory 200% - section 76(2)(a) provides that the Commissioner may remit that or any part of it as he may deem fit.The effect of the proviso to section 76(2)(a) is that the additional tax shall not be remitted if the Commissioner is satisfied that any act or omission was done with the intent to evade tax, unless he is of the opinion that there were extenuating circumstances.Section 76(2)(b) provides that, in the event of the Commissioner deciding not to remit the entire penalty, such decision shall be subject to objection and appeal.
In respect of additional tax the following table is used in some Revenue offices, but the same (or at least a similar one) should, in the writer’s opinion, in fact be used by all SARS offices.Contrary to the South African Institute of Tax Practitioners (SAIT)’s opinion it is submitted that the maximum of 200% should not be reduced, due to the fact that South Africa is a developing country in which tax evasion remains rife and should appropriately be addressed.
Additional tax percentage guidelines based on all relevant factors
The scale of additional ta x to be imposed on a taxpayer is basically a function inter alia of the nature of omission or understatement of income; or fictitious claiming or overstatement of deductions; the degree of cooperation received; and/or on the level or category of disclosure made and the nature thereof, as well as the length of the offence period.On that basis, the following guidelines are suggested to auditors, with the ranges "normal" to "maximum" in each category indicating the extent, or lack of, both mitigating and aggravating factors.
Some of the extenuating circumstances or factors that can be taken into account in the remission of additional tax include the taxpayer's ability to pay the full penalties and the taxpayer's ability to earn. Then there is also the role played by the taxpayer in omit ting income, over claiming expenditure (blameworthiness of taxpayer) and the role played by the taxpayer's accountant (blameworthiness of accountant) or collusion between the bookkeeper and taxpayer.When it comes to cooperation, the taxpayer may pretend to be cooperative but glaring omissions and mistakes are detected.And then there is also the measure of cooperation given by the taxpayer, such as undisclosed income, hidden assets, incorrect book entries brought to the attention of the inspector, the taxpayer’s attitude, approach and more.
Other extenuating circumstances include the taxpayer's age, combined with other factors.If full or severe penalties were to be imposed what means would be left to the taxpayer to live on? The effect of penalty on the taxpayer's ability to continue with his business is also taken into consideration: will a closure of business have an effect on the country or on its employees?
The modus operandi followed by the taxpayer to avoid tax also plays a role, as well as his/her previous record in terms of omissions, penalties and warnings.When it comes to deceased estates two court cases have found that the beneficiaries should not be punished.Then there is the notional loss of interest, the cumulative effect of all the omissions, the additional tax agreed upon between the Commissioner and the taxpayer, the probability that the penalty will be reduced by a Court and the nature of the amount (income) omitted, such as profit on sale of an isolated immovable property transaction.
Although there are no hard and fast rules an old SARS circular provided guidelines to ensure that, as far as possible, a uniform practice was established when it comes to imposing additional tax. Additional tax should be imposed in such a manner as to act not only as a punishment but also as a deterrent to discourage taxpayers from all forms of tax evasion.Due to SARS’s assessors/auditors refraining from or not effectively imposing additional tax in cases where income was omitted - or for other defaults by the taxpayer - vast amounts are annually lost to the fiscus.That encourages taxpayers to continue to evade the payment of their rightful share of tax, either deliberately or through nonchalance.
Category of disclosure and cooperation
Nature of offence Percentage to be / remain imposed
Normal Max Normal Max Normal Max Normal Max
Group A 20 60 25 75 30 90 50 200
Group B 10 40 15 50 20 60 25 100
Group C 5 20 10 25 15 30 20 50
Group A-Serious Intent :Cases where the taxpayer shows intentional disregard of the law and adopts deliberate cover-up tactics involving the preparation of false sets of books, fictitious entries or multiple omissions over a long period of time.
Group B-Intent And Gross Negligence :Cases with slightly less serious acts of omission or intentional overstatement, resulting from recklessness or gross negligence.
Group C-Negligence And Inadvertence :Cases where the taxpayer fails to exercise reasonable care, is ignorant of the law, has made inadvertent errors or is at most merely negligent (and NO finding of intentional conduct can be proven).
ADAPTED: Hong Kong Special Administrative Region Inland Revenue Department. Policies: Penalty Policy
Source: By Pieter E Lombard (TaxTALK)