The deadline for the submission of up-to-date payroll information by employers on their employees is fast approaching, and non-compliance could cost them dearly.
The South African Revenue Service (Sars) has a powerful tool in the form of highly punitive administrative penalties to fight non-compliance in the timeous submission of tax returns and payments.
This year the annual reconciliation declaration (EMP501) submission period closes on May 31 and late submissions will attract a penalty equal to 1% of the year’s pay-as-you-earn (PAYE) tax liability. The penalty will increase each month by one percentage point up to 10% of the year’s PAYE liability.
According to a Sars spokesperson, the revenue service has seen a “definite” increase in compliance where penalties have been imposed. The fear of future penalties drives continued compliance.
Many taxpayers expressed frustration when their requests for the remission of penalties and interest were disallowed when there were reasonable grounds for such a request.
Nico Theron, founder of Unicus Tax Specialists SA, says it is not as though Sars has a choice whether to impose a penalty or not.
In terms of the Tax Administration Act, Sars is obliged to impose a penalty whether the submission or payment is one hour or one day late.
There is also a provision in the act that allows Sars to remit penalties if certain requirements are met, such as reasonable grounds for non-compliance.
“That is often times where the trouble comes in,” says Theron, who is also chair of the South African Institute for Taxation (Sait) tax administration and dispute management work group.
“In my experience Sars does sometimes remit a penalty if the circumstances allow it, but what I am also seeing in practice is that Sars does not seem entirely sure about its process.”
He says the legislation is clear, but often a remittance request is declared invalid for some obscure reason. Theron says in his opinion there are circumstances where a taxpayer does qualify for a remittance, but Sars disallows it.
The Sars spokesperson says the penalty remittance process as set out in the Tax Administration Act is very clear. “However, the law requires each request for remittance to be evaluated on its own merits. It is therefore possible that a taxpayer and Sars disagree on the law or the facts of a particular case,” he says.
Sars did not provide the number of penalties raised and the amount remitted during the previous tax year.
Types of penalties
There are in broad terms three types of penalties under the penalty regime:
- Fixed amount penalties,
- Percentage-based penalties, and
- Understatement penalties.
In the case of the late submission of a tax return, such as the employee declaration, Sars is entitled to levy a fixed amount.
The fixed amount ranges from R250 to R16 000 a month for taxpayers with annual taxable income of R250 00 and over R50 million respectively.
Delays with EFTs
Many taxpayers are aggrieved when they have met their obligations on time but their payments only reflected in Sars’s bank account after the deadline.
Ettiene Retief, chair of the national tax and Sars committee for the South African Institute of Professional Accountants, says although long clearing periods as with cheque payments is a thing of the past, there can still be delays with electronic funds transfer (EFT) payments.
He says when taxpayers could still pay with cheques there was considerable case law that supported payment timelines, particularly with bills and negotiable instruments like cheques.
The basic rule was that on presentation, as when payment was made in the form of a cheque, the date of payment was taken in good faith.
“If you took time depositing it, or there was a seven or 10-day clearing period, it did not alter the payment date,” says Retief. “The date still remained when you presented it in good faith.”
An EFT payment can reflect quickly, even instantly when made from one account to another at the same bank, but there are often delays and that is what causes the problems. Sars will not recognise the payment date other than the date on which it reflects in its bank account.
“We have been successful in remitting penalties where taxpayers have a compliant history with Sars,” says Retief.
“We have requested a remission where the bank statement shows that the money was physically out of the taxpayer’s account and the proof of payment reflects that the transaction was done during business hours on the day.”
Retief advises taxpayers to allow enough lead time for the release of the payment.
He adds that even if taxpayers have been successful in getting their penalties remitted, this is not always the case with interest – and that could still have a significant impact on the taxpayer.
Many taxpayers have described the penalty regime as a “revenue generator”.
Theron says the legislation may appear rigid. “However, if we build in leniency, where does one draw the line? Is one day or one week lenient?”
The question is perhaps whether the grounds on which Sars disallows the remittance of penalties are not too onerous to meet. In the meantime, taxpayers should understand the payment rules and how EFTs are recognised, advises Retief.
Taxpayers should engage with their banks to know if there are “close-off times” that may cause trouble on payment days.
Beatrie Gouws, head of strategic development and stakeholder management at Sait, adds that taxpayers should also bear their daily limits in mind when planning to make their tax payments.
“If they need to request approval for a limit increase, the approval may well cause a delay. While a taxpayer with a good compliance history will have an argument to get the resultant penalties remitted, repeated delays will damage the taxpayer’s arguments,” she warns.