Most taxpayers know of or have experienced the 10% penalty that SARS imposes for the late payment of VAT, employees’ tax or provisional tax. These percentage-based penalties are imposed under section 213 of the Tax Administration Act 28 of 2011 (‘the TAA’). From time to time, taxpayers instruct me to assist taxpayers with requests for remittance of these penalties. In my experience, these, often material, penalties are more difficult than taxpayers expect to get remitted. The TAA is prescriptive about the grounds on which SARS may remit them. In this article, I consider these penalties and the grounds for their remittance.
Percentage-based penalties
Chapter 15 of the TAA deals with administrative non-compliance penalties. It distinguishes between fixed amount penalties and percentage-based penalties. Section 213 provides that, if a taxpayer does not pay tax when required to do so, SARS must impose a percentage-based penalty as prescribed in the relevant tax Act. Section 213 therefore establishes the basis for other tax Acts to impose the penalties. The other tax Acts set the percentage and the base to which it applies.
Section 39 of the Value-Added Tax Act 89 of 1991 (the VAT Act) imposes the penalty for VAT paid late. Paragraph 6 of the Fourth Schedule to the Income Tax Act 58 of 1962 (the ITA) imposes it for employees’ tax paid late. The Fourth Schedule also imposes the penalty for provisional tax paid late and deems the underestimation penalty to be a percentage-based penalty. Section 6A of the Securities Transfer Tax Administration Act 26 of 2007 imposes one for securities transfer tax paid late. The common feature is that the penalty is a percentage of the late payment or of a specified base.
Limited grounds for remittance
Section 215 of the TAA prescribes the process and the period for a remittance request. The substantive question is whether one of the limited grounds in the TAA applies to the taxpayer’s facts. For percentage-based penalties there are three grounds, and a fourth that other tax Acts may provide. All four are fact-specific, and the request stands or falls on how the facts are established and presented.
Grounds one and two: a first incidence, or an amount below R2 000
The first two grounds share two requirements. Reasonable grounds for the non-compliance must exist, and the non-compliance must have been remedied. Whether the reason for a late payment amounts to reasonable grounds is a judgment on the facts. This is sometimes the point on which these requests turn. If both requirements are met, SARS may remit the penalty under section 217 of the TAA where it was imposed for a first incidence of non-compliance, or where the penalty amount is less than R2 000.
The definition of a first incidence is different than its name may suggest. It is an incidence of non-compliance by a person where no penalty assessment under chapter 15 was issued during the preceding 36 months, whether the earlier non-compliance was of the same or a different kind. The test applies to the taxpayer as a person and to any chapter 15 penalty. A small chapter 15 penalty of any kind in the preceding 36 months could therefore means that a later material late payment is not a first incidence. It is irrelevant whether remittance of the earlier penalty was requested or obtained. Similarly, it does not matter whether the non-compliance related to the same type of tax or not. Penalties fully remitted under section 218 can be disregarded. A taxpayer’s penalty history over the preceding 36 months is therefore the first thing to establish when dealing with these penalties. The second ground, a penalty amount below R2 000.
Ground three: exceptional circumstances under section 218
Section 218 of the TAA provides that SARS must, on receipt of a remittance request, remit the penalty or a portion of it if satisfied that one or more of the circumstances listed in section 218(2) occurred. This is a closed list. A taxpayer cannot rely on its own view of what is exceptional and must bring the facts within one of the listed items.
The second requirement is the threshold that a request often fails to meet. The listed circumstance should render the person subject to the penalty incapable of complying with the relevant obligation. For example, serious illness alone is therefore not enough. The taxpayer must show that the illness made it incapable of paying the tax on time, and must prove that causal link. In my view this is a high threshold. The evidence and framing thereof therefore affects the remittance decision.
Ground four: remittance grounds in other tax Acts
Other tax Acts may provide their own grounds for remittance of a penalty that the TAA deems to be a percentage-based penalty. The underestimation penalty for provisional tax is an example. The Fourth Schedule allows the Commissioner to remit a the penalty or portion of it for estimate seriously calculated with due regard to the factors having a bearing on it and not deliberately or negligently understated. It is a matter of evidence and reasoning to demonstrate that an estimate meets these requirements, rather than mere assertion.
Take-home message
Chapter 15 of the TAA governs percentage-based penalties. Section 213 provides the structure fopr these penalties. Each tax Act then sets the percentage, usually 10% of the late payment. The TAA prescribes when SARS may remit a percentage-based penalty. Requests for remittance must be grounded in one of the limited statutory grounds and supported by the facts. The first incidence definition and the section 218 incapability threshold are where many requests fail.
