the South African Revenue Service will benefit from higher levels of compliance by taxpayers.
South Africa’s tax legislation has become exceptionally complicated. Taxpayers who try to navigate it on their own do so at their peril, and even tax advisers struggle to interpret and understand how to apply the law.
We are seeing more and more individual and corporate taxpayers who have the best of intentions to pay their tax but get it wrong, with dire consequences for disclosing an incorrect tax position.
Besides being liable for the tax and interest on the amount owing to the South African Revenue Service, they face severe penalties that are imposed on a sliding scale, typically up to 50%, if Sars believes there are no reasonable grounds for the tax position taken.
Recently, an older taxpayer selling a property was advised that the transaction would be exempt from capital gains tax. That advice turned out to be incorrect and the taxpayer was landed with heavy penalties. Had she — and her adviser — understood the full extent of the law, she would not be in her current financial predicament.
If I had one sweeping tax wish for 2025, it would be to see comprehensive tax reform to simplify our tax legislation and make it easier for taxpayers to do the right thing.
But it is not a quick or simple matter to demystify legislation that has evolved over time to plug loopholes in the law.
Just one example of how tax law has gone from relatively simple beginnings to an ever-expanding, more convoluted state is the set of rules on the tax treatment of finance costs.
These particular rules have been expanding since 2013, with amendments being made almost every year from 2016 to 2024. The reason for this is that some companies had been known to take on debt to the point where they were paying very little tax and the government was losing out.
The flipside of these constant amendments is that they have resulted in the current state of affairs: the tax treatment of finance costs is not only tricky for sophisticated foreign investors to navigate, it is downright treacherous for the small business owner to manage. A well-intentioned, law-abiding taxpayer can easily get it wrong.
A promising start made in simplifying tax rules
Fortunately, the authorities are not oblivious to the struggles taxpayers and tax advisers face on a daily basis in various areas of our tax legislation and across a range of tax types, from income tax and capital gains tax to employees’ tax and VAT.
In the 2024 budget, it was encouraging to see several proposals made to revisit specific areas of the law where there is overreach or ambiguity. Here’s hoping that the pragmatic approach to last year’s tax proposals was not because 2024 was an election year, but is a trend that will continue.
Some of those 2024 budget proposals have since made their way into the amended tax Acts, giving taxpayers and their advisers clearer direction on how to apply the law. There were a few proposals made last year that are yet to be dealt with, hopefully in the 2025 tax amendments after further consultation.
South Africa does not have a large and sophisticated tax base. Despite that, there is a tendency in our country to look for solutions to some tax problems in the legislation of developed countries that have intricate tax laws but also more informed taxpayers and more resources at hand to enable them to comply with these intricate laws.
In South Africa, it would be easier for taxpayers to comply if we were to seek locally appropriate solutions and make a conscious effort to keep every amendment as simple as possible. The fiscus would also benefit because higher levels of compliance usually mean high levels of tax revenue.
Penalties can be ruinous
No one would dispute that taxpayers who disclose an incorrect tax position should pay Sars the tax that they owe, together with interest to compensate the revenue service for the period of time that the fiscus did not have the use of the cash. But the levying of penalties of up to 50% can be ruinous — as the older taxpayer mentioned earlier is finding.
It is unfortunate when harsh penalties are imposed on taxpayers who genuinely want to do the right thing but have misunderstood the law or taken what they thought was good advice. In such cases, it would seem fair to consider whether the sheer complexity of our legislation may have been a contributing factor in a taxpayer taking an incorrect tax position.
Although Sars and the treasury have many priorities on their hands, it is to be hoped that the small start made in simplifying and clarifying complicated areas of the country’s tax rules will gain momentum.
Until we have legislation that is written simply, concisely and accessibly, the best that taxpayers can do is to make certain that their advisers have the necessary skills and that the advice they receive is correct. This might cost them money but it would be better than paying crippling penalties.
Roné la Grange is a partner at Bowmans law firm.