Interest on late payment of tax is basically a form of a penalty that seeks to compel taxpayers to pay their obligations in time.
In this regard, it is critical for taxpayers to understand that tax laws require income tax to be paid in advance through what is technically referred to as quarterly estimated Self-Assessment Tax (SAT). Failure to do so attracts late payment interest of around 20 percent per annum. Since Capital Gains Tax (CGT) is also regarded as income tax, the same is also, by law, required to be paid in advance to avoid incurring late payment interest.
Keep on reading and allow us to help you understand why tax laws require CGT to be paid in advance and how interest on late payment of the same tax is a pain.
In this article, words importing the masculine shall be deemed to include the feminine.
Enter SAT
Firstly, let us have a brief understanding of what SATs are. The Income Tax Act requires that corporates estimate their annual tax obligations and pay it in four equal instalments to BURS, in advance. This technically means that within its 31st December 2023 year, an entity is required to pay SAT by 31st March 2023, 30 June 2023, 30 September 2023 and 31st December 2023. Accordingly, the entity will them submit its Income Tax return on 30 April 2024 based on the actual performance of the business.
The arising actual tax liability will be offset against the SATs paid in advance during the year and any SAT shortfalls are payable by the due date of submitting income tax returns, in this case 30 April 2023. However, where the SAT payments in each quarter are less than 20 percent of the ultimate annual tax liability, such a shortfall is subject to late payment interest of 1.5 percent compounded monthly. Now this is the part where it gets technical.
Enter CGT SAT
The painful part of SAT interest is that most businesses do not trade in either shares or immovable property that trigger CGT. In any case, the disposal of capital assets is not easy to predict. A good example is one where disposal of a capital asset is caused by an unexpected event in, say, the 3rd or 4th quarter such as a fall in share prices, war, or a financial squeeze, among others. This matter becomes very tricky if the disposal happens, say, in the 3rd or 4th quarter as BURS charges interest from the 1st and 2nd quarters as if the taxpayer knew in advance that they would sell a capital asset triggering CGT.
Now, assuming that a company sells its immovable property in its 4th SAT quarter to pay a bank loan when its business would have been depressed due to the ongoing European war, the law expects that SATs must have been paid in the 1st to the 3rd quarters. SAT interest is then charged on such instalment despite the fact that the company was forced by unforeseen events to dispose of the asset triggering CGT. That is the painful part, i.e. corporates don’t trade in capital assets, and in most cases it is impracticable to foretell when such a sale goes through. As a result, SAT interest on CGT becomes a pain businesses have to contend with.
Conclusion
As you can tell, SAT interest calculated on CGT may be astronomical and rather not ideal for reasons stated. Accordingly, businesses are encouraged to employ tax planning measures in instances where they anticipate disposing capital assets or shares in any tax year. Waivers of interest may also be requested from the Ministry of Finance and Economic Development.
Well, folks, we hope that was insightful. As we the two Yours Trulies say goodbye, remember to pay to Caesar what belongs to Caesar. If you want to consult, join our free Tax WhatsApp group or to know about our 9 tax e-books, send a text to +267 7181 5836 or email us on jhore@aupracontax.co.bw. You can read more tax articles on our website, www.aupracontax.co.bw under the ‘Tax articles’ tab.
