The penalty regime introduced in the Tax Administration Act, 2011 (TAA) has caused confusion. This article seeks to clarify the position and eliminate the confusion.
The TAA sets out the penalties that can affect taxpayers. This contrasts with the former situation where the provisions for penalties were scattered all over the tax Acts. The TAA sets out and explains the impact of the three penalty categories: general fixed amount penalties; specific percentage-based penalties and understatement penalties. The first two of these are called administrative non-compliance penalties and the third is in a category of its own.
Administrative penalties
The TAA provides for two categories of administrative offence:
- general non-compliance eg failure to submit a return on time or at all; and
- specific percentage-based penalties
General non-compliance
The non-compliance penalty fines the taxpayer for the late submission of a return or the failure to submit a return. If a taxpayer fails to submit a return by the due date, the TAA provides for a so-called “fixed amount” penalty on a sliding scale, ranging from R250 to R16 000 per month, based on the tax liability for the preceding year of assessment. If the taxpayer in the preceding year had an assessed loss or a taxable income not exceeding R250 000, the penalty is R250 per month. The penalty increases in steps until the R16 000 maximum applies where the taxable income for the preceding year exceeded R50 million.
But it doesn’t end there. The penalty will increase by the same amount for every month that the return is overdue up to a maximum of 35 months. Interestingly, if SARS is not in possession of the address of the offender the penalty period extends to 47 months. In addition to the burden of being faced with a fixed amount penalty, the taxpayer will also be subject to interest on the outstanding penalty, currently at a rate of 9%.
Relief is available in the form of a reduced penalty for several categories of persons: companies listed on a recognised stock exchange; companies whose gross receipts or accruals for the preceding year exceeded R500 million; members of any group of companies that includes a company in either of the above two categories; and institutions that are exempt from income tax (but liable to tax under another tax Act) with receipts or accruals in excess of R30 million.
To add injury to injury, a taxpayer who has failed to submit a return may also have failed to pay the tax which would have been payable in respect of the return. This is where the percentage based penalty comes into the picture. The percentage based penalty penalises the taxpayer according to the amount of tax not paid when required under the Act. The TAA imposes the penalty but doesn’t specify the actual percentages at which the fines are levied; these have to be obtained from the relevant tax Acts. For example, penalties relating to provisional tax payments are determined by the Fourth Schedule to the Income Tax Act and are as follows:
- 10% on the late or non-payment of provisional tax;
- 20% if the taxpayer fails to file an estimate; or
- 20% if the taxpayer understates a provisional tax estimate by a particular percentage of the taxable income.
Without going into detail that is beyond the scope of this article, in broad terms the severity for underestimating taxable income is greater where the taxable income turns out to exceed R1 million, and the leeway for error is less for such taxpayers as well.
SARS may remit a penalty in the case of first offenders if reasonable grounds for the non-compliance exist and if the non-compliance has since been remedied. The taxpayer must apply to SARS to remit the penalty before the date on which the payment of the penalty is due.
How does the taxpayer know that SARS has imposed an administrative penalty?
All fixed amount and percentage based penalties will be reflected in a penalty assessment provided for in the TAA. However, there is a practical problem with penalty assessments, because SARS does not automatically inform the taxpayer that a penalty assessment has been issued. The taxpayer has to find this out by going to the SARS website. SARS may appoint an agent, such as the taxpayer’s employer, to collect the unpaid penalties on their behalf. In all other circumstances, payments made by the taxpayer to SARS will firstly be allocated to penalties and interest before the tax liability is reduced.
Understatement penalties
The most controversial of the penalties is the understatement penalty. The understatement penalty fines a taxpayer who makes an error, deliberately or otherwise, in submitting a return.
Before the advent of the TAA, the Income Tax Act, for example, provided for what we now call the understatement penalty. The default rate was 200% which SARS had the discretion to reduce. However there was no fixed scheme which guided SARS in exercising its decision.
Under the new penalty regime, understatement penalties are disclosed in a decision matrix, sometimes referred to as a ”behaviour grid”. These range from 0%, if the taxpayer voluntarily discloses a substantial understatement before an audit or an investigation, to 200% for an obstructive or repeat case of intentional tax evasion, and each possible scenario in between.
The penalty is levied on the amount of the shortfall to the fiscus. Described in broad terms, this is calculated as the difference between the tax that is properly chargeable and the amount that would have been charged had the taxpayer’s declaration been accepted.
The intentions with the new understatement penalty regime are good because the TAA seeks to provide a formal decision matrix for SARS to use in determining the extent of the penalty.
The decision matrix lists the following five behaviours which SARS must consider. These are:
- substantial understatement;
- reasonable care not taken;
- no reasonable grounds for tax position taken;
- gross negligence; or
- intentional tax evasion.
A substantial understatement usually means that the prejudice to SARS exceeds the greater of 5% of the tax properly chargeable or R1 million.
Interestingly, SARS must remit a penalty for substantial understatement if the taxpayer, by no later than the return due date:
- made full disclosure of the facts and circumstances surrounding the understatement penalty; and
- obtained an opinion issued by an independent registered tax practitioner who confirmed the taxpayer’s position, having regard to all the facts and circumstances.
For each of the behaviours described above, there are four possible levels of offence. These are:
- standard case;
- obstructive or repeat case;
- voluntary disclosure after notification of audit; or
- voluntary disclosure before notification of audit.
On one hand, taxpayers now know where they stand where penalties are concerned, compared with the previous situation where SARS had unregulated discretion. On the other hand, however, the new penalty regime can be severe and taxpayers and SARS are already arguing about which categories of understatement a particular offence falls into.
One likely consequence of particularly the new understatement penalty regime is that taxpayers will be more eager to get opinions from tax practitioners to support the argument that they took reasonable care and as such are eligible for a reduced penalty rate.
All penalties
The taxpayer is entitled to object to any of the penalties described in this article.
With acknowledgments to Elana Ross, tax associate at Norton Rose Fulbright
