Danger of SARS Administrative Penalties for Dormant Companies
In South Africa, managing the compliance of a dormant company is critical, particularly with regard to filing tax returns. Many directors of dormant companies might not be aware, but failing to submit these returns can trigger severe administrative penalties. This article delves into the consequences of non-compliance with tax obligations for dormant companies in South Africa, emphasizing the administrative penalties involved, how they can accumulate over time, and how this situation can be responsibly resolved.
The Reality of Administrative Penalties
The South African Revenue Service (SARS) mandates that all registered companies, active or dormant, must file annual tax returns. A dormant company is classified as one that has had no business activity or significant accounting transactions during a financial year. Neglecting this duty results in administrative penalties that are not merely nominal, but can become significantly burdensome over time.
The scale of administrative penalties can vary greatly. For companies, it starts at R250 per month for each month that the return is late. This penalty can escalate up to R16,000 per month if the non-compliance continues. The criteria for these penalties include factors like the taxable income of the company from the last assessed year.
How Quickly Do Administrative Penalties Accumulate?
The accumulation of administrative penalties is alarmingly swift. They are imposed monthly from the date of the non-compliance detection and continue until all outstanding returns are filed. To illustrate, a dormant company neglecting to file tax returns for three years, at a maximum penalty rate of R16,000 per month, could face a cumulative penalty of up to R576,000, excluding any potential interest on these late payments.
Proactive Steps to Avoid Administrative Penalties
Given the rapid accumulation and high scale of administrative penalties, company directors should take proactive measures:
Regular Compliance Checks: Ensure that even dormant companies comply with all filing requirements annually.
Consultation with Tax Professionals: Engaging with tax professionals can help ensure that all tax obligations are understood and met, avoiding penalties.
Ending a Dormant Company to Avoid Penalties
For those holding dormant companies, considering closure can be a practical decision to prevent the accrual of administrative penalties. In South Africa, there are two main routes to close a company:
Liquidation: This process involves the formal dissolution of a company, where assets are liquidated and liabilities are settled. This is suitable for companies that have outstanding debts.
Deregistration: For companies without debts and significant assets, deregistration is a simpler option. It is vital to ensure that all tax returns are filed and any due penalties are cleared before applying for deregistration to avoid objections from SARS.
Conclusion
Failing to file tax returns for a dormant company in South Africa can lead to substantial administrative penalties. These penalties serve as a compliance mechanism for SARS and can rapidly grow to large sums if ignored. Directors of dormant companies should prioritize compliance to avoid these fines and consider closing the company if it is no longer needed. Properly managing the closure process, through liquidation or deregistration, is essential to stop the accrual of administrative penalties and secure compliance with South African tax laws.
If you need assitance to deregister a company or get tax returns up to date please contact us.
