New penalty regime welcomed as 'more predictable'

Individuals and companies would escape any penalties if they disclosed non-compliance before being "caught out" by the South African Revenue Service (SARS).

Johan van der Walt‚ a tax director at law firm Cliffe Dekker Hofmeyr‚ said the new system introduced more predictability‚ transparency and consistency in applying penalties.

Under the old regime‚ SARS had a discretionary power in terms of the Income Tax Act to levy additional tax of up to 200%.

"It was not inconceivable that a taxpayer could get a penalty of 50% at one tax office‚ yet with the same set of facts would have received a penalty of 100% at another office.

"This new regime places the taxpayer's case in a matrix and the scope for variation is much smaller‚ as the criteria for the behaviour associated with the penalties are described in the act‚" Van der Walt said.

Once a taxpayer's conduct has been identified in terms of a new table in the act‚ the onus is on SARS to prove that the conduct has been correctly identified.

SARS explained in its guide to the Tax Administration Act that the "open ended" discretion to impose additional tax of up to 200% was replaced with the "under-statement penalty framework that is aimed at ensuring consistent treatment of taxpayers in comparable circumstances". The act applies to all taxes administered by SARS.

The highest penalty in a "standard case" under the under-statement regime will be 150% and is reserved for intentional tax evasion.

It could be reduced to as little as 10% if the taxpayer disclosed any non-compliance before being subjected to an audit by SARS.

According to the guide‚ the penalty will be determined by locating each case within the table that assigns a percentage to objective criteria.

The table sets out five different types of behaviour and distinguishes between a standard case‚ an obstructive or repeat case‚ voluntary disclosure of an under-statement after the beginning of an audit‚ and voluntary disclosure before the beginning of an audit.

The range of penalties in a standard case is between 25% and 150% and in an obstructive or repeat case between 50% and 200%‚ whereas a substantial understatement carries a lower penalty‚ and intentional tax evasion the highest penalty.

Ruaan van Eeden‚ a senior associate in the tax division of Cliff Dekker Hofmeyr‚ said the framework now allowed for an objective test based on prescribed criteria.

Disputes would still arise as a taxpayer might argue that he was not guilty of the behaviour identified by SARS‚ he said.

The individual might argue that he or she merely did not take reasonable care in the completion of the return and SARS might argue that this was grossly negligent. The difference in the penalty is 50%.

In terms of intentional tax evasion the penalty in a standard case will be 150%‚ but increases to 200% when the taxpayer is "obstructive" or it is a repeat case.

The penalty reduces to 75% if the taxpayer makes a voluntary disclosure of the understatement even if an audit had been initiated by SARS. If the disclosure is made in the absence of an audit‚ the penalty will be 10%.

According to Anton Kriel‚ a tax director at Grant Thornton‚ the penalty regime will cover three categories: administrative non-compliance‚ under-estimation of tax payable and criminal offences.

SARS was now empowered to publicise the names of taxpayers found guilty of committing a criminal tax offence.