When I joined SARS in 1985, formal correspondence was typed on electric typewriters and circulated in the office in a brown folder with a circulation list on the cover. Much of this correspondence came from the Accounts Department and was pretty mundane but occasionally something interesting would catch my eye. The Receiver would make comments on bad grammar and other issues with a red pen. On one occasion he wrote 'slang' next to a sentence informing the State Attorney that the taxpayer 'was a guest of the state', meaning the taxpayer was in prison. A regular sentence used to state that 'interest is a statutory charge and cannot be waived'. This reason was no doubt intended to deter taxpayers, and is still being used by SARS today. But is it actually true?
The Tax Administration Act 28 of 2011 (TAA) contains the following sections in Chapter 12 dealing with interest:
- 187 General interest rules
- 188 Period over which interest accrues
- 189 Rate at which interest is charged
Section 272 of the TAA deals with short title and commencement and provides that the TAA comes into operation on a date to be determined by the President in the
Gazette. This is proclamation 51 in Government Gazette 35687 of 14 September 2012.
Section 272(2) provides that The President may determine different dates for different provisions of the TAA to come into operation and for the purposes of Chapter 12 and the provisions relating to interest in Schedule 1, the Minister may determine by public notice the date on which they come into operation in respect of a tax type.
SARS Interpretation Note 68 (Issue 3) dated 8 December 2020 sets out the interest provisions that have come into operation and those which are still governed by specified tax acts.
In general, the interest provisions in the various tax acts continue to apply except for understatement penalties, refunds not properly payable under s 190(5) of the TAA, and jeopardy assessments. These are dealt within the TAA as they are not dealt within any of the tax acts.
SARS states that the reason for not migrating all the interest provisions to the TAA is because its systems need to first undergo substantial changes. Given that the TAA came into operation on 1 October 2012, some 12 years ago, it seems SARS is in no hurry to upgrade its systems pertaining to interest.
The provisions relating to the payment of interest in the Income Tax Act 58 of 1962 (ITA) are thus still set out in ss 89, 89bis and 89quat. Section 89quin contains provisions relating to changes in rate and authorises the Commissioner to introduce compound interest calculated monthly by notice in the
Gazette, which thankfully has not yet happened.
Section 89(2)
Section 89(2) imposes interest at the prescribed rate[1] on any taxes not paid during the period for payment specified in a notice of assessment or within the period prescribed by the Act. Income tax assessments contain two dates: a payment date (usually the first day of a month) and an interest-free period (usually ending on the last day of the same month).
Under s 60, donations tax is payable by the end of the month following the month during which a donation takes effect or such longer period as the Commissioner may allow from the date upon which the donation in question takes effect.
Under s 64K, dividends tax is payable by the last day of the month following the month during which the dividend is paid.
The withholding taxes on foreign entertainers and sportspersons, royalties and interest are also payable by the end of the month following the month in which the amounts are received or accrued, and royalty or interest is paid (ss 47E, 49F and 50F).
The withholding tax on payments to non-resident sellers of immovable property in South Africa is payable by resident purchasers within 14 days of the date on which the tax is withheld, and by non-resident purchasers within 28 days of the same date (s 35A(4)).
Section 89(2) states that the interest is payable
'unless the Commissioner having regard to the circumstances of the case grants an extension of such period and otherwise directs'.
So, while interest may be a statutory charge, it is simply not correct to state that it can never be waived. Section 89(2) does not state under what circumstances the Commissioner will extend the due date for payment and on the face of it, the discretion is unlimited. But in practice, SARS will consider such a request only when the reason for the failure to make payment is outside the taxpayer's control. SARS's reasoning is that the taxpayer had the use of the money while SARS was correspondingly deprived of it. It is of course interesting that the circumstances prescribed in s 187(6) of the TAA (not yet in force) are limited to those beyond the taxpayer's control, and under s 187(7) comprise only three situations:
- a natural or human-made disaster;
- a civil disturbance or disruption in services; or
- a serious illness or accident.
But s 89(2) does not limit the circumstances in which the Commissioner can extend the date of payment.
In the days before eFiling, when assessments used to be sent by post, if an assessment was sent to the incorrect address and taxpayers had informed SARS of their correct address, SARS would extend the due date. I also recall a case in which an accountant had passed away and not attended to his clients' assessments which were found in his desk drawer by his partners. SARS extended the due date on those assessments.
Interest is payable for each completed month from the date of payment. Failure to pay the tax within the interest-free period will result in interest being calculated from payment date. But it also means that no interest will be charged for a period of less than a month, thus effectively creating a further interest-free period as long as the tax is paid before the end of the month.
Under s 7D, the common law
in duplum rule under which the amount of unpaid interest may not exceed the capital does not apply to unpaid taxes under the ITA.
Section 89bis(2)
Section 89bis(2) contains the rules for unpaid employees' tax, provisional tax and the first two payments required under the turnover tax.[2] Interest is calculated from the date for payment specified in the Fourth Schedule at the prescribed rate
'unless the Commissioner having regard to the circumstances of the case otherwise directs'.
As with the date extension power conferred on the Commissioner under s 89(2), no guidance is offered on what would constitute appropriate circumstances. Again, it would be difficult to persuade SARS to waive s 89bis interest unless the circumstances were outside the taxpayer's control.
An issue that frequently arises is whether a taxpayer should make a further second provisional tax payment if it is discovered that their second period estimate of taxable income was understated because of an oversight, such as a capital gain becoming apparent after the payment was made. Clearly, such a further second payment would be late and hence attract interest under s 89bis(2)and a 10% penalty under para 27(1) of the Fourth Schedule. At the same time, the taxpayer with a taxable income of more than R1 million[3] may face an under-estimation penalty under para 20(1)(a) of 20% on the difference between the tax finally determined on 80% of taxable income and the taxes paid by way of provisional tax and employees' tax
by the end of the year of assessment. Such a late payment will thus not avoid the para 20 understatement penalty and it may be preferable to request remission of the penalty under para 20(2) by showing that the estimate was seriously calculated and not deliberately or negligently understated.
Another alternative is to approach SARS to require the taxpayer to increase the estimate under para 19(3). Under para 19(5) such an adjustment is deemed to take effect during the period during which the taxpayer was required to make the payment, thus avoiding penalties and interest.
Section 89quat(3)
Section 89quat imposes interest when a provisional taxpayer has not discharged the full tax liability by the effective date. For persons with a February year end, this is 30 September, and for companies with a different year end, it is six months after the year end.
Section 89quat(3) provides that when the Commissioner, having regard to the circumstances of the case, is satisfied that the interest payable under s 89quat(2) is a result of circumstances beyond the control of the taxpayer, the Commissioner may direct that interest shall not be paid in whole or in part by the taxpayer.
For years of assessment ending before 1 November 2010, s 89quat(3) enabled interest to be waived if the taxpayer could show that there were reasonable grounds for the income not having been declared as taxable or deductions having been wrongly claimed. The
Memorandum on the Objects of the Voluntary Disclosure Programme and Taxation Laws Second Amendment Act 8 of 2010 stated the following reason for the change:
'The proposed amendment narrows SARS's discretion in terms of section 89quat(3) of the Act to waive interest charged on unpaid provisional tax. SARS is currently permitted to waive this interest if a taxpayer had reasonable grounds for taking the position that led to the underpayment. The question of whether a taxpayer had reasonable grounds for the position taken is a relevant factor in determining whether and what additional tax or penalties are due. Whether the taxpayer had reasonable grounds for the position taken or not, the fact remains that the taxpayer had the use of money due to the
fiscus. Hence, the discretion to waive this interest is now narrowed to only cater for circumstances outside the taxpayer's control, similar to the provisions of the Value-Added Tax Act, 1991.'
In ITC 1958[4] the taxpayer had claimed deductions for leave and bonus pay , notice pay and severance pay under s 11(a), relying for advice on its auditor . However, under s 7B the leave and bonus pay comprised variable remuneration and was deemed to be incurred when paid. The notice and severance pay did not qualify under s 11(a) or s 24C and hence fell to be disallowed. Given that SARS had not previously challenged the taxpayer's reasons for claiming the amounts and because the taxpayer had relied on its auditor, the court referred the matter back to the Commissioner for reconsideration as it appeared that the interest was incurred for reasons outside the taxpayer's control.
The decision to refer the matter back to SARS is interesting, particularly given what was stated in the Memorandum that supported the amendment introducing the 'beyond the taxpayer's control' test for remission. It raises the question whether reliance on the opinion of a tax practitioner is something outside the taxpayer's control. If such an argument were to succeed, we would effectively be back to the pre-2010 position. It is unlikely to be accepted by SARS.
The Value-Added Tax Act
Section 39(7)(a) of The Value-Added Tax Act 89 of 1991 permits the Commissioner to remit interest when the failure to make payment within the period for payment
'was due to circumstances beyond the control of the said person'.
In
Pricewaterhousecoopers Inc and another v Minister of Finance[5] The appellant sought to challenge the constitutionality of s 39(7)(a) on the basis of rationality. The appellant argued that the purpose of interest was to compensate the
fiscus for loss of interest and not to act as a deterrent. The court found, based on the
Metcash case[6] that[7]
'interest was one of the means of establishing a compliant tax system and beyond serving a compensatory function was also part of the package available to SARS to deter errant tax conduct and to incentivise taxpayers to act in accordance with what the law expects of them'.
In the result, the court held that s 39(7) was rational and found in favour of SARS.
In
C: SARS v Medtronic International Trading Sarl[8] the taxpayer had entered into a voluntary disclosure agreement with SARS as a result of its accountant having embezzled R537 million by submitting false VAT 201 returns . Under the agreement SARS waived all penalties but not the capital and interest. After signing the agreement, the taxpayer approached SARS to have the interest waived under s 39(7)(a) on the basis that the embezzlement was outside its control. SARS refused to consider the request. The SCA held that the matter should be remitted to SARS so that it could consider the request on its merits. SARS has lodged appeal to the Constitutional Court.
Conclusion
Interest imposed under the ITA may be a statutory charge but it can be waived in appropriate circumstances. Exactly what those circumstances are remains somewhat uncertain with SARS anecdotally resisting requests to waive interest unless the circumstances are outside the taxpayer's control. Even if it is accepted that SARS is constrained to such circumstances, there is still uncertainty as to what that means.
This uncertainty will be removed if and when s 187(7) of the TAA becomes effective.
