PROVISIONAL TAX

PENALTIES AND INTEREST

The current problem

Provisional taxpayers find themselves on the receiving end of penalties and interest from SARS on a regular basis.

While they may attempt to dispute the penalties, they resign themselves to the payment of interest because, as many tax practitioners will tell you, that’s what you have to do.

“You cannot successfully challenge SARS on interest”.

Typically, a provisional taxpayer (assuming they are aware that they are a provisional taxpayer) fails to file their provisional return in February as required.

4 months down the line and the result is a deemed “zero return”.

The implication hereof is that the taxpayer then files an income tax return in tax season and is charged with an underestimation penalty of 20%.

20% of the liability is levied as a penalty and, as salt in the wound, 10% interest per annum, calculated pro-rata, is thrown in for good measure.

The result of failing to file a return and filing later is 25% additional liability.

Confusion

If I have confused you, don’t be alarmed. Most provisional taxpayers find themselves equally confused when solving the conundrum that is their tax affairs.

Long story short is, that most end up paying more tax than they should. In the form of penalties.

However, and this is where things become important, its not the late filing or failure to file that is the problem facing most provisional taxpayers. In fact, it’s solving the problem incorrectly that is causing the real issue. Bluntly, provisional taxpayers are settling their tax debt poorly.

Problem solving problematically

One method that taxpayers are utilising (whether on the advice of errant tax advisors or not) is to simply file their return and hope they can argue against penalties being imposed.

Others attempt a VDP (Voluntary Disclosure Program). While a VDP has its merits and does prevent criminal sanction, in most cases, the application is inappropriate for solving a provisional tax underestimation.

A difference in approach

The frustration for me is that these two methods are not, whether individually or collectively, the most appropriate means of resolving a failure in provisional tax compliance.

In fact, why pay penalties and interest when you don’t have to.

The correct engagement with SARS will ensure tax compliance, without the payment of interest and penalties. Fact. However, if you want to engage with a tax professional to make sure you don’t pay penalties and interest, do it before you file your next return.

For best results

There exists a mechanism for the successful avoidance of penalties and interest.

Yes, it carries with it, its own complexities and administrative difficulties. That’s why it’s best to contact someone who has dealt with it before.

Should you choose not to, be prepared to add 25% to your tax bill. Personally, I’m adverse to tipping SARS.

AUTHOR

Christopher Renwick
Senior Tax Attorney