No More Non-Compliance!
The South African Revenue Service (SARS) has released a new alert informing taxpayers about its approach to penalties for non-compliance in the coming income tax season. Termed as Interpretation Note 129 (INR129), this alert aims to clarify the meaning of “maximum tax rate applicable to the taxpayer,” as referenced in the Tax Administration Act.
The note addresses situations in which taxpayers have underreported their tax obligations. The clarification on this penalty system strives to encourage and maintain uniform and fair treatment of taxpayers while discouraging actions that lead to non-compliance.
What To Know About INR129
The INR129 explicitly deals with cases in which a taxpayer’s tax rate is established under subsections (3) and (4) of the Tax Administration Act. It offers clear guidance on imposing penalties for non-compliance, complete with comprehensive calculations and examples, demonstrating SARS’ commitment to making non-compliance both challenging and expensive.
In cases where taxpayers have neglected to report income, SARS has the authority to levy penalties as high as 200% of the principal tax liability. To circumvent these consequences, non-compliant taxpayers should disclose any previously unreported income via the ongoing Voluntary Disclosure Programme (VDP).
Avoiding The Penalties
Under Section 222(1) of the Tax Administration Act, an understatement penalty is imposed on taxpayers who under-declare their income. This penalty is typically paid in addition to the tax due for the period in question, unless the understatement occurred due to a genuine inadvertent error.
An “understatement” refers to any harm caused to SARS or the fiscus as a result of:
- Failing to submit a tax return
- An omission in a tax return
- Providing incorrect information in a tax return
- Not paying the correct amount of tax due
- Engaging in an “impermissible avoidance arrangement.”
To calculate the understatement penalty, the highest applicable percentage is applied to each shortfall. The “shortfall” depends on the taxpayer’s specific circumstances for the relevant tax period. The “maximum tax rate applicable to the taxpayer” must be considered to determine the tax shortfall. This is done by disregarding any assessed loss or benefits carried forward from previous tax periods to the period in which the understatement occurred.
For taxpayers subject to a flat rate, this rate represents the “maximum rate applicable to that taxpayer”. For taxpayers with a progressive tax rate, the maximum tax rate applicable to the shortfall is the marginal rate for taxable income or turnover. This is established by disregarding assessed losses and other benefits carried forward from previous tax periods to the period in question.
What Does This Mean for Taxpayers?
The recent interpretation note demonstrates SARS’ commitment to pursuing non-compliant taxpayers, proving that no one is above the law. SARS is making no exceptions and will investigate everyone to ensure compliance. Penalties, including a maximum of 200% in specific cases, will be applied where necessary.
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