Flat Preloader Icon We are getting there...

Your inactive business: a minefield of tax penalties

Reference: Published by Akhona Matshoba on Moneyweb, 23 March 2023

AKHONA MATSHOBA: Remember that business you launched a few years ago to formalize your side work and had high hopes for, but finally ran out of steam and abandoned—at least until this very second? Or that time you agreed to serve as a director of a business that a friend or relative had founded in order to assist them in meeting registration requirements, but that is no longer actually operational?

Well, if the correct deregistration or liquidation procedures were not followed to complete the business’s economic inactivity, that registered company—which still exists and is on Sars’s radar but not yours—could get you in trouble with the taxman.

Neill Hobbs, a tax expert and the CEO of the financial services company Hobbs Sinclair with offices in Cape Town, will help to clarify why you should be concerned about this. Neill, welcome to the pod.

NEILL HOBBS: Thanks very much.

AKHONA MATSHOBA: First things first, then. Could you help define a dormant company and outline the requirements that must be met in order for a corporation to fall under this category?

NEILL HOBBS: Okay. You did a good job of explaining it in your introduction. It usually involves having a wonderful concept or getting together with some friends and saying, “We have this great idea.” We’re going to start a business and sell supplements to a gym, or we’re going to buy some land and do some development, or whatever the plan is.

Thus, after giving your accountants instructions, they create a corporation and register it with the IRS. You started this firm in 2014, but you haven’t given it much attention since then since the concept never materializes, you forget about it, or it eventually runs out of steam.

Although your accountants may have been handling certain annual filings, you haven’t fulfilled your obligations as a public officer of that corporation by filing tax returns. So that business is now inactive.

The company was established with a certain goal in mind, but since that goal is no longer there, it essentially sits on the shelf.

AKHONA MATSHOBA: Please elaborate, Neill. Does a corporation have to be inactive for a certain amount of time before it is considered to be dormant, or have I just forgotten about it and moved on?

NEILL HOBBS: The term “dormant corporation” is actually more of a generalization. That is not something that has that definition. As a result, it’s a business that you’re not paying attention to and that typically doesn’t trade.

AKHONA MATSHOBA: Thus, towards the end of 2022, Sars made some adjustments to the administrative penalty laws that will affect these businesses. Tell us more about these modifications and the effects they will have on directors and business owners.

NEILL HOBBS:

Okay. The first point I want to make is that this has actually been a part of tax law since 2012. So, the law has existed for a very long time. What has transpired is that Sars informed us in 2022 that they would be implementing this as of December 1, 2022.

Hence, the Income Tax Act has essentially been a landmine that Sars hasn’t been using or putting into practice.

But they claimed that as of December 1, 2022, “guys,” this is the law and it will be implemented as of that date. Thus it’s not a brand-new law, and applying this long-standing rule is now revenue practice.

AKHONA MATSHOBA: It was intriguing how they described it as a “landmine.” Why did Sars set off the landmine now as opposed to earlier?

NEILL HOBBS: If we examine what has been going on at Sars, especially since the appointment of [Sars Commissioner] Mr. [Edward] Kieswetter, who has been an extremely, extremely good tax administrator, we can see that Sars has been tightening up all the loose nuts and bolts in the tax system.

One of them is that many taxpayers may be three, four, or five – and in some cases, up to ten – years late with their tax returns because people have been ignoring taxes for years and years and years.

Let’s say I have a business that may have been in operation for the past ten years, but I just haven’t bothered to file the tax forms. I also disregard Sars’ periodic reminders. What has been happening is that Sars is putting more and more pressure on you to submit these returns.

And I believe that was the turning point that caused Sars to announce: “We’re going to implement these fines starting on December 1, 2022.” Although you [the taxpayer] may be relieved that you have not submitted tax returns for the past ten years, we are not. If you don’t do it, it will cost you.

So, I believe that compliance needs to be tightened. Additionally, since there are still 10 years’ worth of unfiled tax returns, there may be a significant amount of money in the Sars’ coffers that has not yet been accounted for. Hence, simply by enforcing compliance, we have observed that Sars is successfully collecting a sizable sum of money that has in fact been owed to it for a number of years but has not yet been reported to Treasury. That’s one of the reasons the current fiscal year is expected to end with such a huge surplus.

AKHONA MATSHOBA: Cost was just mentioned by you. How much may this cost these businesses? This has been in effect for a time, as you said. It’s been there for quite some time, but nothing has been done with it. What are the financial repercussions for the owners or directors of these inactive companies? What do the punishments look like?

NEILL HOBBS: Although the penalties seem insignificant at first, they add up with time. As a result, they aggregate, and that’s really where the risk is. The smallest fine is R250 for each unfiled tax return that is overdue. R250 doesn’t sound particularly loud by itself.

Suddenly, I’m looking at paying R3 000 per year for the first year, R6 000 for the first and second years, and then R9 000 for the third year if I have a company for which I haven’t filed a tax return in 36 months.

If we add that up, the total amount of the penalty I have to pay for my three unfiled tax returns comes to R18,000. Hence, if the business does nothing, there will be a lot of money due.

AKHONA MATSHOBA: How much is Sars likely to earn from these collections, commencing, I suppose, with the upcoming tax season, in terms of possible revenue, Neill?

NEILL HOBBS:

Sadly, I don’t really have any knowledge about it, however I can tell you that there are probably 400 companies here. We run a relatively small office. We have around 400 businesses.

I estimate that somewhere in the neighborhood of 25% of those. Hence, 80 or 90 of those businesses would be considered “dormant companies” since they weren’t actively trading or weren’t actively dealing on a regular basis. Hence, if we apply that proportion to this, Sars might potentially get a sizable sum of unallocated funds.

Although it represents a small percentage of [AngloGold Ashantioverall ]’s gross income, it will nonetheless represent a sizeable sum of money. I’m not sure how much it is in billions, but the possible fine would undoubtedly be in the billions.

AKHONA MATSHOBA: Well, it is quite helpful. Is the fact that someone hasn’t had any income inflows in the past year or two, as in the case of the person listening now, a consideration in determining whether or not they will be subject to penalties?

NEIL HOBBS: Not at all, no. The tax return’s failure to file will result in the penalty being assessed. I described the outstanding penalty as being R250 per month. Depending on how profitable the company has previously been, that amount rises.

The maximum fine is actually R16 000 per month, and that applies to businesses with taxable incomes greater than R15 million.

If we use an example that is a little more reasonable, say a business that had taxable income of R1 million three years ago, the penalty is R1 000 per month, and it increases for every month that it is unpaid.

So, it makes no difference if the company has made money or not. The fact that it isn’t tax compliant is important.

Therefore, even if you are a director of a company and the public officer of one that isn’t doing much, you still have a responsibility to file your tax returns so that Sars can determine whether or not there is tax owed. Thus, it is a punishment for non-compliance.

AKHONA MATSHOBA: Are those directors also liable or is the owner, as I indicated in the introduction, when someone joins a company just because they are requested to and are not actively participating in its operations? How does Sars decide who will cover the unpaid balance?

NEIL HOBBS: First and foremost, it is the business itself. You have the responsibility of governance over this firm, and there will be a public officer, Sars would tell the company’s directors if it had no resources.

Also, the public officer is a quite fascinating concept. A public officer has always been designated in the Tax Act as the person responsible to Sars for submitting tax returns.

Who the public officer is is something that Sars is tightening up on right now because the discipline surrounding that has gotten a little out of hand.

In order to identify the person directly responsible for the tax non-compliance, Sars wants to see the ID and a picture of the person holding it. Nonetheless, the Companies Act defines any director of the business as having oversight responsibility for the firm’s affairs. They are personally responsible if the tax returns have not been filed. I’m speaking with a business and all of the owners.

Another obstacle Sars will have to overcome is getting a judgment against that person.

AKHONA MATSHOBA: How do stakeholders of inactive companies go about attempting to resolve the problem after it has been identified, before the taxman shows up?

NEILL HOBBS: So, the first step is unquestionably to take initiative. For instance, I went to CIPC [the Companies and Intellectual Property Commission], the office that registers companies, and I created what they refer to as a “spider report” of every firm in which [I am] a director. You can simply do this as well.

That was a rather stunning occurrence in my case. There were a few hundred businesses. Then I went through each of those businesses and looked at how compliant they were with tax laws. Happily, all of them were tax compliant; I only had to make a few of them so.

So, the easiest way to find out what you might be liable for is to go through CIPC and make a list of the firms on which you serve as a director.

How then do you interact with Sars? Sars will never hunt you down; he prefers to be approached. I would next speak with Sars and explain that the company was dormant and hadn’t traded in five years. I took care of the unfiled returns, and I am aware that fines are an option. I request repayment of the fines because this is the first offense the company has experienced that I have dealt with.

So, despite the fact that Sars can apply the discriminatory sanctions retroactively to the current date—roughly from December 1 until now—they often do so with a smaller penalty. So, they might only impose an R2,000 or R500 fine for what they deem to be a late submission.

Thus, based on my view, which may not be accurate given what is happening within Sars, I believe that they are not currently implementing the fines with the strict rigor that the Tax Administration Act requires them to.

Hence, it would be polite and honest to approach Sars and apologize for not realizing that I was a director of the company. The returns are here, there is no tax due, and I need you to send in the fines.

They might lower it to a straightforward fine of R500 or R1000. Compared to the type of R30,000 that might otherwise be the case, that is a lot better.

Thus, sympathy is not lacking. It’s similar to when the referee in a rugby match says, “Alright guys, no more with this foul play, or I’m going to start doing yellow cards,” while you are watching. We’ve reached that point where, as they say, “Behave yourself.” We don’t want to treat you harshly, but we do want to see that you are making progress toward compliance. But as time goes on, that kind of tolerance will disappear.

AKHONA MATSHOBA: Hence, if you collaborate with the tax collector, he will generally be kind.

NEILL HOBBS: In general. By demonizing the taxman, we do ourselves a favor. Yet, revenue officers are real people with real jobs. According to my experience, if you act civilly, politely, and modestly—especially when you are at fault—the person on the [other] side will probably be receptive and accommodating.

If I may make a brief digression, I have experience dealing with tax authorities in other nations. Being able to engage with people that want to collaborate with us is something that Sars takes great pride in, and at this point, keeping tax compliance current is unquestionably one of the organization’s top priorities.

AKHONA MATSHOBA: I hope people pay attention to and heed your advise. What repercussions might those who reject the counsel and say “no” experience if they don’t act quickly to correct the situation?

NEIL HOBBS: The result is a hardening of Sars’ mentality. Sars is capable of doing it. Consider a scenario in which I am the only director of a firm and have neglected its operations for the past ten years. When Sars sends me a final demand for the submission of returns, I choose to disregard it. Sars gives me one last reminder or further demand, which I disregard.

Sars is capable of going to the magistrate’s office and having a judgment entered against my name. It is not required that a magistrate hear it. Sars merely files a statement claiming that I’m accountable for this company’s default and that they may file a judgment against me.

Because it has happened to me in a situation that I was utterly unprepared for, I am aware that it can happen. That happened because the demands had been sent to a different address and my address was out of date. Nearly the best-case situation for you is that.

After Sars has obtained a judgment against you, whether it be against the business or against you personally, it has the authority to access your bank account and withdraw funds, or to give the bank instructions to do so and transfer the funds to Sars.

Sars has the authority to enter the company and direct customers who owe the company money to send payments to Sars directly. I’ve seen it take place.

You should avoid being hard with Sars since he has a larger chance of being rough with you.

Therefore, the message is actually rather straightforward: We want you to uphold the law. Speaking for Sars is me. We want law-abiding taxpayers, so if you won’t help us out, we’ll have to be harsher in how we treat you as a non-compliant, uncooperative taxpayer.

AKHONA MATSHOBA: There was Neill Hobbs, the CEO of Hobbs Sinclair and a tax expert. Neill, I appreciate your insight.