SARS returns and penalties – serious business!!
Why must a public benefit organisation (“PBO”) approved for income tax exemption submit an annual income tax return (IT12EI) if it has no tax liability?
The SARS response to this question is that “[t]he income tax return enables the Commissioner to assess whether the organisation approved as a PBO is operating within the prescribed limits of the relevant approval granted and to determine whether the partial taxation principles must be applied to receipts and accruals derived from a trading activity or business undertaking which does not qualify for exemption” (www.sars.gov.za/FAQs/Pages/244.aspx).
What is an IT12EI?
An IT12EI is the annual income tax return that SARS requires tax exempt entities including approved PBO’s) to submit. It is a return that is sometimes overlooked because non-profit entities, and particularly PBO’s, often believe that, if they are not liable for income tax, no annual income tax return is required. Even those PBO’s that do realise the need to submit a return might imagine that the return requires the insertion of one big “0”; however, this is not the case and information such as the total annual receipts and expenditure, the taxable trading income and the number of, and total value included on, section 18A receipts issued during the year must be reported in the return. The IT12EI return is not always easy to complete, particularly if the organisation has taxable trading income.
Do non-profit entities that are not approved PBO’s have to submit annual income tax returns?
All legal entities are required to submit annual income returns, including all non-profit entities. For entities that have not been approved for tax exemption, the relevant return is the ITR14 – this return is longer, and more complicated to complete, than the IT12EI for tax exempt entities.
We often encounter organisations that have not applied to SARS for approval as a PBO or have delayed their application for various reasons. In such cases, it is important to note that, as soon as the entity has been established, it is immediately required to register with SARS as a taxpayer and an annual income tax return must then be completed, even if there is no tax payable.
Also, for the years before the date of approval as a PBO, ITR14 returns must be submitted. Failure to do so has potentially severe consequences for the organisation in terms of penalties and an inability to obtain tax clearance certificates.
Who is responsible for submitting the annual income tax returns?
The official representative taxpayer of the organisation is responsible for ensuring that the return is submitted each year, within 12 months of the organisation’s financial year end. The representative taxpayer is often the Executive Director (“ED”) so, if the ED changes, be sure to inform SARS of that change; if SARS has the incorrect representative taxpayer listed, it can be problematic. If the ED does not prepare the return her/himself, it is important that the organisation holds someone accountable for preparing and submitting the annual income tax returns. Often it is assumed that the auditors prepare and submit these returns, but, if this is what the organisation desires, the auditors must be officially appointed to do so in an engagement letter.
What are the consequences of not submitting annual income tax returns?
If tax returns are not submitted, there can be serious consequences, which include:
- no tax clearance certificate being available from SARS (a painful consequence when funding may be dependent on this!);
- penalties and interest being charged; and
- the organisation’s PBO approval being reviewed.
In recent months, we have found that SARS has begun to charge penalties for failure to submit annual income tax returns, under Chapter 15 of the Tax Administration Act, 2011. The minimum penalty is R250 per outstanding return and, once notification of the outstanding return has been issued by SARS, the outstanding returns must be submitted and penalties paid by the due date. Thereafter, a R250 penalty is charged in every month that a return is outstanding (on 1st of every month); this can become a substantial amount very quickly.
How can CMDS help?
Navigating the SARS minefield can be quite challenging. Please contact CMDS we can help you to complete the necessary returns and regularise your organisation’s tax affairs.