Possibly, the most sweeping change to be introduced by the Tax Administration Act No 28 of 2011, as amended (the TAA) is the new, consolidated penalty regime. The new regime provides the South African Revenue Service (SARS) with an arsenal of hefty financial sanctions to punish aberrant taxpayers that understate their tax liabilities or otherwise fail to comply with administrative rules.
These financial sanctions comprise two categories of penalties:
- administrative non-compliance penalties, which may be either fixed amount or percentage-based
- understatement penalties.
Administrative non-compliance penalties
The fixed and percentage-based administrative non-compliance penalties are detailed in Chapter 15 of the TAA.
A fixed amount penalty is imposed for a failure to comply with a legal tax obligation that is listed in a public notice issued by SARS. The only public notice in this regard issued to date refers to a failure by an individual to submit an income tax return as and when required, where that individual has at least two outstanding income tax returns since the beginning of the 2007 tax year.
Should a taxpayer commit such an infraction, the taxpayer will be required to hand a fixed penalty over to SARS, the amount of which depends on that taxpayer’s assessed loss or taxable income for the preceding year. These penalties are set out in the table below:
|Assessed loss/taxable income for preceding year
|R0 - R250 000
|R250 001 - R500 000
|R500 001 - R1 000 000
|R1 000 001 - R5 000 000
This fixed penalty will increase automatically by the same amount for each month that the taxpayer fails to remedy the non-compliance within a specified time after the date that the penalty is assessed.
A percentage-based penalty, on the other hand, is imposed when tax is not paid when required under tax legislation. When this happens, SARS may issue the taxpayer with a penalty equal to a percentage of the unpaid tax amount. The exact percentage is not prescribed. Instead, the TAA leaves it to the relevant tax legislation to specify. This means that the percentage varies depending on the nature of the tax underpaid.
The understatement penalty is detailed in Chapter 16 of the TAA.
Essentially, it is imposed when there is a shortfall or difference between the amount of tax reported by a taxpayer and the amount of tax actually due. This arises because of:
- a default in rendering a return
- an omission of a return
- an incorrect statement in a return
- the failure to pay the correct amount of tax if no return is required.
As with the percentage-based administrative non-compliance penalties, the penalty comprises a percentage of the shortfall. Unlike the non-compliance penalties however, this percentage varies depending the behaviours displayed by the taxpayer. It may be as high as 200 percent where the taxpayer repeatedly and intentionally evaded tax, or it may be 0 percent in certain cases where the taxpayer alerts SARS to the shortfall prior to an audit.
The table below sets out the ways in which the percentage changes in different circumstances:
||If obstructive/ repeat case
||Voluntary disclosure after notification of audit
||Voluntary disclosure before notification of audit |
|Reasonable care not taken in completing return
|No reasonable grounds for tax position taken
|Intentional tax evasion
Remission of penalties
The grounds upon which SARS may remit each of the penalties listed above also differ considerably.
Fixed amount administrative non-compliance penalties may be remitted on the grounds that the taxpayer is a first-time offender, that the delay or tax involved was nominal or where exceptional circumstances, like a natural disaster, were the reason for the non-compliance.
Percentage-based administrative non-compliance penalties may be remitted on the same grounds unless there are specific grounds prescribed in the relevant tax legislation that triggered the imposition of the penalty in the first place.
Understatement penalties, lastly, may generally only be reduced where the taxpayer disclosed the infraction before being “caught out” by SARS. Interestingly, in the specific case of penalties imposed for “substantial understatement”, a penalty may be reduced when the arrangement that resulted in the shortfall was disclosed to SARS and the taxpayer had, within a prescribed time, received an opinion by a qualified tax practitioner justifying the tax position taken. Substantial understatement refers to a shortfall of R1 million in taxes or five percent of the tax payable, whichever is greater.
Complementing the grounds set out above, the TAA makes provision for a formal Voluntary Disclosure Programme (VDP). In terms of the VDP, taxpayers are encouraged to come forward to admit non-compliance or understatement of tax liabilities to SARS in return for which SARS will grant relief for some of the penalties discussed above. To qualify for VDP relief, full disclosure of the default in question must be made and rectification of the non-compliance will be necessary.
A brief comment
Generally, the new penalty regime has been praised as being more objective, easier to understand and less prone to arbitrary exercise of discretion by SARS officials that bedevilled the old system.
Nonetheless, one of the significant criticisms levelled against the new system is that it opens the door to the risk of overlapping penalties. To understand this risk, let us take the example of an individual taxpayer who does not file his provisional tax return in time, and who already has two outstanding returns since the 2007 tax year.
Firstly, the individual will face a fixed amount administrative non-compliance penalty as he has failed to comply with a legal obligation listed in a public notice. Secondly, because the individual has not paid his provisional tax when it was due, a 10 percent penalty on the amount of provisional tax not paid will be levied as a percentage-based administrative non-compliance penalty. Lastly, to add insult to injury, SARS may potentially impose an understatement penalty equal to a percentage of the shortfall in unpaid provisional tax that arises when there is a default in rendering a return.
Consequently, for a single infringement, the hapless taxpayer is issued with multiple penalties. Whether this would actually happen in practice is debatable, as SARS still has discretion in issuing penalties. However, the possibility that this could occur would appear to undermine the principle of fairness that is meant to underline the TAA.
Thus, although the restructured penalty regime is more transparent than the old system, it packs a considerable punch. Taxpayers would be best advised to get their tax affairs in order if they wish to escape its application.