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The small business tax amnesty

18 May 2006 Jackie Arendse

The small business tax amnesty was announced in the Minister of Finances 2006 Budget Speech and will be implemented from 1 August 2006. Although it was initially planned to extend the amnesty to taxi owners first, and then to other small businesses later in the year, the draft legislation which was recently released for public comment indicates that in fact, the amnesty will run from 1 August 2006 to 31 May 2007 for all qualifying small businesses.

Is it only those who have not registered for tax that may apply?

The amnesty provides relief for two types of small businesses:

Those not registered for tax (whether it be income tax, VAT, employees tax, skills development levies or unemployment insurance contributions); and those that are registered but have not made full disclosure of their tax affairs. For example, a business that has submitted tax returns but has not made full declaration of its income.

What is the benefit of applying for the amnesty?

Taxpayers that are granted amnesty will be relieved of any liability for income tax, VAT, employees tax, skills development levies, unemployment insurance contributions, secondary tax on companies and withholding tax on royalties as well any penalties, interest and additional tax related to these taxes for years of assessment, tax periods or dividend cycles ended before the commencement of the 2005 year of assessment. (The 2005 year of assessment means, in the case of companies and close corporations, financial years ended between 1 April 2004 and 31 March 2005 and in the case of individuals and trusts it is the year ended on 28 February 2005.) Furthermore, the applicant will absolve the taxpayer of criminal prosecution relating to the non-disclosure in respect of the above taxes.

Who may apply for the amnesty?

Any natural person (including deceased and insolvent estates), trust, unlisted company or close corporation (as long as the company or CC is 100% held directly by individuals on the last day of the 2005 year of assessment) with gross income from the carrying on of a business not exceeding R5million for the 2005 year of assessment may apply for the amnesty. Gross income means the taxpayers total income before taking into account any exemptions, deductions or allowances.

Amounts that are not covered by the amnesty

The amnesty will not be granted for taxes, levies, interest, penalties or additional tax paid before the applicant submits his amnesty application, or assessed on the basis of information provided to SARS before submission of the amnesty application. Therefore, if the taxpayer has already been charged penalties and/or interest before submitting his amnesty application, the amnesty will not reverse those amounts.

What does the amnesty applicant have to disclose to SARS?

A prerequisite for the amnesty is that the applicant must make a full declaration to SARS of all taxes (income tax, VAT, STC, employees tax, SDL, UIF and withholding tax on royalties) for the 2005 year of assessment. The tax returns for each of these types of tax must be submitted to SARS together with the amnesty application. The applicant is also required to submit a statement of assets and liabilities as at the end of the 2005 year of assessment.

If the taxpayer cannot produce accurate figures, SARS will allow the submission of reasonable estimates as long as the applicant discloses that estimates have been used.

What if I am already under investigation by SARS?

Taxpayers under investigation, audit or other enforcement action by SARS may not apply for the amnesty if SARS notifies them of such an action before they submit their amnesty application on or after 1 August 2006.

What will the amnesty cost the taxpayer?

The cost of coming clean is a levy equal to 10% of the taxpayers taxable income for the 2005 year of assessment, excluding any taxable income for that year that was declared to SARS before 15 February 2006.

The taxable income on which the amnesty levy is calculated excludes any assessed loss or capital loss that would otherwise have been carried forward from the previous year of assessment. Furthermore, once a taxpayer applies for amnesty, he forfeits the benefit of any previous assessed losses, capital losses, deductions or allowances for income tax, dividends accrued for STC credits and input tax credits for VAT as no carry-forward of these amounts is allowed.

It is noteworthy that the levy is based on taxable income only and not on any of the other taxes (such as VAT or STC) that are declared for the first time, which makes this a fairly small price to pay in relation to the potential benefit for most applicants.

The levy will have to be settled by no later than twelve months after approval of the amnesty application by SARS. Failure to pay the levy by the due date will result in the withdrawal of the amnesty.

What will my ongoing compliance obligations be?

Taxpayers making use of the amnesty will have to ensure that they keep their tax affairs in order after having benefited from the amnesty to avoid facing the same problems with SARS again. Those who choose not to take advantage of the amnesty should be aware that SARS has made it clear that they will show no mercy once this amnesty has run its course.

What are SAICAs comments on the amnesty?

In our comments to the Portfolio Committee on Finance on the 2006 Budget, SAICA noted the following concerns with regard to the amnesty:

1. The turnover cut-off is R5million. In our view, this threshold should have been coupled with an asset-based amount as some business are more turnover driven but with very low margins, that is, it is very easy for some business to reach a turnover of R5million but with little profit generation.

2. The exclusion of businesses that are under investigation is unnecessary. Perhaps a higher penalty for these businesses would have been more appropriate instead of outright exclusion.

3. The choice of basing the penalty on the 2005 income should be compared to charging a penalty based on the value of assets accumulated by the business, as was the case with the Exchange Control amnesty. Taking into account only the most recent years taxable income could be misleading in relation to the overall performance of the business in the previous years.

4. Another concern that must be addressed in the amnesty legislation is the implications in terms of the Financial Intelligence Centre Act (FICA). Since tax offences are reportable in terms of section 29(1)(b)(iv) of FICA, any client coming forward and disclosing any irregularities in the course of applying for amnesty will have to be reported. We suggest that a specific exemption from the FICA be granted.

The above concerns have not yet been addressed, but will be revisited in SAICAs submission on the draft legislation.

Jackie Arendse (PROJECT DIRECTOR: TAX The South African Institute of Chartered Accountants)

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