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income tax

What is a Dormant Company?

While considered a generic phase, a dormant company is typically classified as a registered business on SARS’s radar that is no longer on yours. Official deregistration might not have been followed or completed, which can lead to serious income tax implications for taxpayers, as their responsibilities as a public officer or director for this “forgotten business” have not been met. There is no specific timeline to classify a company as dormant, but the primary indication is if the company is inactive.

The Potential Penalties

The negative implications associated with ignoring tax responsibilities for dormant companies have been outlined within the Income Tax Act since 2012. However, it was not until recently that SARS announced its intention to correctly execute these penalty rules – leaving the owners and directors of dormant companies far more vulnerable to penalties.

Since these consequences have been lenient in the last few years, with SARS only now buckling down, many taxpayers involved with dormant companies that have remained non-compliant for years will now feel the brunt of these actions.

What to Expect for Non-compliance

The penalties associated with an outstanding tax return can be relatively small, with the lowest charge currently sitting at R250 per overdue month, though these totals can be deceptive. For example, a business only two years behind on its tax returns suddenly faces a minimum of R6000 – which is a significant penalty to pay for a company that is not earning revenue.

As it currently stands, the maximum penalty is R16 000 per month and is determined by assessing the company’s historical profitability (despite its current dormancy). It is also important to note that these penalties are not associated with whether or not the company is earning an income; it has to do with its compliance status.

How To Rectify Your Compliance

If you are a director or public officer for a dormant company, you still have the duty to ensure it remains tax compliant. Being proactive about potential non-compliance is the best course of action to ensure minimal disruption. To determine what you may be liable for, taxpayers can approach the CIPC and request a “spider report” which details every company they are associated with. If there are non-compliant companies on this list, taxpayers are urged to approach SARS with the matter. Once the returns have been brought up to date, company directors or public officers can apply for a remittance of any penalties incurred.

The tax experts at MMS Group are familiar with the intricacies of tax administration and have the necessary skills to assist you with maintaining income tax compliance. For professional guidance to mitigate the possible consequences associated with dormant companies, please contact our team.