Tax penalties in overdrive: A tactical response for the tax profession
The South African Revenue Service (SARS) has imposed penalties totalling R381 million on 690,000 taxpayers for outstanding tax returns .
Summary:
An amendment to the Tax Administration Act now allows SARS to penalise tax payers with just one outstanding return.
Approximately 609,000 taxpayers were penalised today for having a single outstanding return.
The penalties for single outstanding returns have already generated R243 million for SARS in a short period, surpassing the penalties imposed for multiple outstanding returns.
As a representative body for tax practitioners and professionals in South Africa, The Chartered Institute for Business Accountants (CIBA) acknowledge SARS’ commitment to uphold tax compliance, but would strongly advise a balance between the stringent enforcement of regulations and the promotion of compliant behaviours.
The new approach, which sees penalties imposed on taxpayers with just one return outstanding, marks a departure from the previous policy where penalties were only levied on taxpayers with multiple outstanding returns.
This development has not only increased the total penalties collected by SARS but also has wide-ranging implications for taxpayers and tax practitioners alike.
The new harsh penalty regime will undeniably generated significant revenue for SARS, with an estimated collection of around R381 million from 609 000 taxpayers, many of whom do not owe SARS any taxes. This surge in penalties follows the amendment to the Tax Administration Act, which made it possible for SARS to penalise those with just one return outstanding.
This approach raises concerns regarding the potential cost of compliance to taxpayers, not to mention the ethical implications of relying heavily on penalties as a significant revenue source.
The cost of compliance versus revenue generation
If taxpayers decide to seek professional assistance to circumvent these penalties, the cost of compliance could potentially escalate to a staggering R828 million. This figure is based on the average cost of R1,200 per tax return filed, and this is a conservative estimate if one considers the work load and expertise required, including:
Reviewing previous tax returns: The tax practitioner needs to review prior year tax returns to understand the overall tax position of the client, what led to the outstanding returns, and to ensure previous returns were completed accurately.
Communicating with SARS: Depending on the situation, the tax practitioner might need to contact SARS to discuss the client’s case, negotiate penalties, or clarify any matters relating to the outstanding return(s).
Preparing and filing outstanding returns: The tax practitioner must prepare and file the outstanding return(s), ensuring they are complete and accurate to avoid further complications.
Appealing penalties (if applicable): If the taxpayer qualifies for an appeal or condonation for late submission, the tax practitioner might need to prepare and submit an appeal or request for penalty remission.
This stark difference between the amount SARS seeks to collect and the cost of collection, raises questions about the economic logic of the policy, especially considering South Africa’s current economic challenges due to years of mismanagement and corruption at various state-owned entities and the ravages of the government’s lockdown policies during Covid.
Many of those now facing penalties are individuals and SMEs just trying to recover from these events. Moreover, using penalties as a key revenue-generating tool poses questions about the fairness and equity in our tax system.
In times of economic hardship, like a recession or the recovery from a pandemic, it may be necessary to consider measures to ease the burden on taxpayers, such as extended deadlines, payment plans, or temporary reductions in penalties. It’s also crucial to ensure that penalties are not disproportionately impacting lower-income taxpayers or creating barriers to compliance.
A reward-based approach
In response to these issues, CIBA proposes an alternative approach: a system that rewards taxpayers for consistent and timely compliance. It’s believed that such a system will not only encourage proactive compliance but also mitigate the administrative and financial strain linked with penalties.
More specifically, CIBA proposes an amendment to the Income Tax Act to include incentives for punctual filing. These incentives could take the form of lower tax rates or tax credits for taxpayers who consistently file their returns on time for several consecutive years. The rewards could increase incrementally for each subsequent year of timely filing, up to a set limit.
Creating an equitable tax system
This approach, focused on rewards rather than penalties, can foster sustained compliance and promote a more positive interaction between SARS and taxpayers. However, implementing this provision requires careful consideration to ensure fairness and avoid misuse. For instance, the policy should take into account varying income levels to ensure that the benefits don’t disproportionately favour higher-income taxpayers.
Further, there needs to be robust mechanisms in place to confirm compliance and administer the rewards. Despite the challenges, we believe that this policy could mark a significant shift in promoting tax compliance, transitioning from a punitive model towards one that acknowledges and rewards positive behaviour.
CIBA is a registered RCB for Tax Practitioners. Read more about how CIBA is encouraging its members to act and CIBA’s submission to SARS.
Taxpayers take note:
Taxpayers need to be aware of filing deadlines and comply with their tax obligations to avoid penalties.
Taxpayers with legitimate reasons for not filing an outstanding return should submit it as soon as possible and request penalty remission.
Taxpayers who have not filed final tax returns stating they are no longer South African residents may also face penalties.
Taxpayers earning income from freelancing, side hustles, or rental properties are required to file tax returns.
Misconceptions about the need to file returns have led to penalties for individuals who mistakenly believed they were exempt, such as retirees and those earning passive income.
Tax practitioners take note:
Tax practitioners can expect an increased demand for their services as taxpayers seek assistance in meeting their tax obligations and avoiding penalties.
Tax practitioners should stay updated on changes in tax laws and regulations to provide accurate guidance to taxpayers.
