There is a problem with Sars’ penalties

2018-11-07 23:53

The SA Revenue Service (Sars) will impose new administrative penalties for non-submission of corporate income tax returns from December 7, but much more serious penalties loom for corporates, as well as individuals and trusts.

The relevant Government Gazette will be issued to “trigger” these administrative penalties, which are allowed in terms of the Tax Administration Act, provided the penalties are appropriately gazetted.

The administrative penalty for late submission of a tax return ranges between R250 and R16 000, depending on the “size” of the company, measured by its taxable income or by being part of a group of companies in which there is a listed company or a “high-turnover” company, normally R500 million a year.

There is an initial penalty which, for every month the tax return is still not submitted, increases by the same amount.

Given Sars’ recent admissions regarding substantial irrecoverability of its debt book, this type of effort to get taxpayers to submit returns should be welcomed.

Since an income tax liability is assessed only when the return is submitted, failure to submit income tax returns can easily lead to tax debts “piling up” and being irrecoverable by the time Sars finally takes action.

Under the circumstances, getting tax return submissions up to date is an important function to protect the fiscus.

Of course, the imminent penalties mean that a lot of work will need to be done by a lot of people: Sars has indicated that there are currently more than 300 000 overdue corporate income tax returns.

Although many people are in a flurry about these new penalties and the work that will be needed, there are, in fact, far bigger issues lurking beneath the surface.

Sars is publicly alerting taxpayers to the new administrative penalties and undertaking to issue letters to the affected taxpayers, followed by final-demand letters, before issuing these administrative penalties.

In contrast, no specific warning or publicity campaign is under way for the much more serious penalty provisions Sars is introducing for non-submission of returns in the current legislative cycle.

The Tax Administration Laws Amendment Act 2018 should be promulgated in December 2018 or January 2019.

The draft bill, as published in July this year, introduces amendments to the understatement penalties for failure to submit a return, so that penalties of between 25% and 100% of the entire tax bill for the whole tax year may be imposed by Sars (depending on whether the lateness of the return is considered negligent or grossly negligent).

This alarming issue was identified in written submissions made to Treasury and Sars in the draft bill and in verbal submissions during public workshops.

It was highlighted that administrative penalties are already envisaged for this type of omission and that further penalisation, particularly of such a severe potential extent, is not fair and reasonable.

It was argued there is a critical difference in blameworthiness when a return is filed late, versus a return simply not being filed at any stage (potentially because a person intends to evade tax through not registering and not filing returns).

Thus, the argument went, there should be some form of specified time period or process before a late submission can be considered a “failure to submit a return” as envisaged in the understatement penalty regime.

For example, in the case of a taxpayer already registered for the relevant tax, the requirement could be that Sars must have already imposed the fixed amount administrative non-compliance penalty for the late submission and that this default has continued unrectified for a minimum period of three months thereafter, before levying the very large understatement penalties for “failure to submit a return”.

However, these submissions were unsympathetically received by Sars.

Under the circumstances, the forewarned and “gentler” introduction of small administrative penalties for non-submission of corporate tax returns is by no means the current problem.

The real problem is the harsh penalty regime, skewed against ordinary taxpayers.

If a tax return is not submitted on time it (for the company, individual or trust) could result in up to double taxes.

Williams is a partner in Bowmans tax practice

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May 19 2019