Watch out for penalties as tax return deadlines come and go

Sticking your head in the sand when problems arise is never a good practice but doing it when tax deadlines come and go can prove very costly.

This is especially the case as formal employment shrinks with the economy making more South Africans enter the gig economy and become responsible for complying with tax requirements.

When you work for a South African employer, they register you for income tax and pay tax on your behalf, Darren Britz, head of legal at Tax Consulting South Africa, the country’s largest independent tax practice, says.

If you are, however, self-employed, working as a freelancer, consultant, contractor, or running your own business or property portfolio, you need to register for income tax and most probably for provisional tax. Read more: What is provisional tax?

Tax should be forefront of your mind when you work for yourself, Britz says. Take some time to talk to an adviser or learn about provisional tax and get the requirements and deadlines in order, he adds.

South Africans, working in advertising, copywriting and fintech industries, for example, who accept work from foreign companies that do not have an office in South Africa and will not therefore declare your earnings or pay tax on your behalf, must take care of their tax themselves.

You may initially not earn a lot, but as you gain new contracts your earnings may quickly reach the threshold (currently R87 300 per year for persons younger than 65 years) above which you are required to register for and pay provisional tax.

You can’t fly below the radar

Don’t think because it is a foreign employer that the South African Revenue Service can’t find out what you earn, Britz warns. SARS gets information from many sources now including your bank and can audit you if you were registered for tax and suddenly stop filing returns.

They are very good at detecting non-compliance, Britz says and in future they will more than likely also get information on cryptocurrency payments directly from cryptocurrency exchanges.  

Britz says South African entrepreneurs typically do register for provisional tax but they often get their provisional tax calculations wrong, or file late and pay late, which costs them in penalties.

Those entrepreneurs who do not, however, do get caught and often find themselves hit with massive penalties.

Britz says every year SARS is improving the measures it takes to ensure those who should, do in fact declare their income and pay what is due.  

New penalty for failing to file returns

One new measure the tax authority got late last year through an amendment to the Tax Administration Act, was the authority to penalise you if you fail to file just one tax return that is due.

The new rule comes into effect from this month, making provisional taxpayers who failed to file their income tax returns by the end of January the first targets of the new penalty.

The next deadline for provisional taxpayers is looming – provisional taxpayers must file an IRP6 return and pay tax for the year from March 2021 to February this year, by the 28^th of February.

Registering and paying provisional tax is your responsibility. Cecile Bothe, consultant to the South African Institute of Tax Practitioners’ Tax Academy, says. Although you must activate provisional tax on your eFiling profile in order to submit a provisional tax return – known as an IRP6 returns - there is no registration or deregistration process, she says.

Bothe says there are no penalties for failing to submit an IRP6 return – but there are penalties for failing to pay the right tax on time, which you cannot do without submitting the return.

Penalties and interest

Penalties and interest are applicable if you pay your provisional tax late or you underestimate your income beyond the allowable margin for error that is set out in the rules for provisional tax income estimates, she says.

SARS may also automatically register you on assessment of your annual income tax return, she says, but it may be too late to save you the penalties and interest on outstanding provisional tax.

Britz says you can be liable for administration fees for non-compliance with any tax laws – fines start at R250 a month and escalate to as much as R16 000.

If you pay provisional tax after the deadline, you could be liable for a penalty of 10 percent of what you owe, he says.

Underestimating your income and therefore the tax you owe, can result in a penalty of 20% of the difference between what you declared and what you should have declared, he says.

Big trouble if you are caught evading

These penalties pale in comparison to the big ones for “bad behaviour”, Britz says.

The more you repeat that bad behaviour, the tougher SARS will get - they can audit you for three to five years back and use your bank statements to estimate your income and decide how much tax you owe, he says.

If they believe you evaded tax intentionally, they can penalise you up to 150% of what you earned and that is when you can get into massive trouble, Britz says.

In addition, SARS can embark on a criminal investigation that can be referred to the National Prosecuting Authority and ultimately you can be jailed for failing to declare income, he says.

Last year we saw criminal summonses for failing to file returns, he adds.