Your dormant company: a tax penalty landmine

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[LISTEN] Whether the company has had income or not is irrelevant. What is relevant is that it is not tax compliant: Hobbs Sinclair's Neill Hobbs. For more advice for SMEs to avoid an unpleasant run-in with Sars, download the podcast

AKHONA MATSHOBA: Remember that company you started a few years ago to formalise your side gig that you had great ambitions for, but that you eventually ran out of fuel to sustain and forgot about – until this very moment at least? Or that time you signed on as a director of a company your friend or a family member started, to help them fulfil registration requirements, but which is no longer really active...

So you give an instruction to your accountants and they form a company and the company is then registered for tax. The project never comes off, you forget about it, or it runs out of steam at some point in time, and it kind of drops off your radar that you formed this company in 2014 and you haven’t really thought about it since then.

NEILL HOBBS: A ‘dormant company’ is really a kind of generic phrase we use. It’s not something that’s defined as such. So it’s a company that you’re not paying attention to, and that generally is not trading. But what they’ve said [is that] from December 1, 2022, guys, this is in the law and we will be applying it from December 1, 2022 onwards. So not a new law, and it’s revenue practice now to apply this law that’s been there for some time.

Let’s assume I have a company that might have been trading for the last 10 years, but I just haven’t bothered to put in the tax returns, and every now and then I get a reminder from Sars and I ignore it. What’s been happening is that Sars is becoming much more insistent that you put these returns in.

NEILL HOBBS: The penalties appear to be deceptively small, but they accumulate on top of each other. So they do aggregate and that is really where the danger lies. The smallest penalty is R250 per month that a tax return is outstanding. So R250 by itself doesn’t sound a lot. Of those I would say something in the region of 25%. So sort of 80 or 90 of those companies would fall into the definition of ‘dormant companies’, not really trading or not trading on an ongoing basis. So if we put that fraction onto this, it could be a lot of money for Sars, and it’s money that’s not budgeted to be collected.

The maximum penalty in fact is R16 000 per month, and that is for a company that had an above R15 million taxable income. AKHONA MATSHOBA: So, for those directors – like I mentioned in the intro, someone might join a company because they were just asked to, and they’re not really involved in the workings of that company – are they also liable, or is the owner? How does Sars determine who is going to pay that outstanding amount?

Sars wants to know the ID, they want a picture of the person with their ID so they know directly who the individual is who’s responsible for the tax non-compliance. But technically any director of the company is responsible by definition in the Companies Act for overseeing the affairs of the company. If they haven’t put in the tax returns, they’re personally liable. I’m talking to a company and all principals.

Then, how do you engage with Sars? Sars always welcomes an approach rather than having to chase you down. So I would then engage with Sars and say, look, this is a dormant company and hasn’t traded for the last five years. I’ve attended to the outstanding returns, and I know that you can charge penalties. This is the first offence that I’ve handled that the company has had, and I apply for remittance of the penalties.

They might reduce it down to a simple penalty of R500 or R1 000. That’s a lot better than the kind of R30 000 that might otherwise be the case. NEIL HOBBS: The consequences are a hardening attitude from Sars. Sars does have the ability. Let’s say I’m the sole director of a company and I’ve ignored that company’s affairs for the last 10 years, and Sars sends me a final demand for submission of returns and I ignore it. Sars sends me a final reminder or further demand and I ignore it.

 

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