In duplum rule does not apply to tax debt

In this series of articles, Cameron Kotze – the Tax Partner at Ernst and Young – discusses some topical tax issues for our readers.

SECTION 79(2) of the Income Tax Act provides for an interest rate of 20 per cent calculated daily and compounded monthly if you pay your tax debt after the due date. This is a very high interest rate compared to the prime overdraft rate of recent times.In addition, this interest is calculated on the compound basis and there is no limit to the amount of interest that can be raised as prescribed by the in duplum rule.The Receiver of Revenue has no power whatsoever to write off any interest that has accumulated as a result of non-payment of tax debt.The final nail in the coffin is that fact that a taxpayer is not entitled to deduct the interest paid on outstanding tax debt to determine the taxable income for the tax period.This ends up being a double whammy and very expensive for the taxpayer.If you put these facts together and you should be coming to the conclusion that you better pay your tax debts when they are due.The maximum interest rate which parties may fix has from earliest times been regulated by the law.Common-law usury has dictated that interest rates in excess of 12 per cent were condemned.Currently the Usury Act regulates the rate of interest that is chargeable by lenders of money.So what does it mean when the interest is calculated daily and compounded monthly? Compounded interest means interest is calculated on interest.This basis of interest was not allowed by Roman-Dutch law, which forms the basis of our law.The interest is calculated for one month at the 20 per cent rate and added to the tax amount owing.The interest is then calculated for the second month on the original amount owing plus the interest calculated for the first month.This calculation method is repeated for each month during which the tax amount and interest remains unpaid.Effectively the current rate of interest on outstanding income tax debt is approximately 22 per cent per year.This means that the accumulated arrears interest will exceed the outstanding tax debt within four and half years from the date the debt arose.The in duplum rule essentially limits arrears interest to the original capital amount owing to the lender.The interest ceases to run when it reaches the amount of the loan and the lender cannot demand an interest amount that is greater than the capital amount of the loan.The Receiver of Revenue is in the enviable position that the interest chargeable on outstanding income tax debt never stops running.Although it sounds beyond belief it is therefore possible to owe the Receiver of Revenue N$400 000 which comprises of N$50 000 income tax and the balance of N$350 000 represents the interest payable on the unpaid income tax.The interest on outstanding value-added tax debt was also calculated on the same basis and the same rate until October 2004 when it was replaced by the simple basis calculation method.The interest rate of 20 per cent per year was however maintained.This type of legislation does not do the morale of taxpayers any good.It has the potential to close down your business for good or cause individuals to act irresponsibly.The perception that this type of legislation is not fair is only one of the many factors that have contributed to the decline in taxpayer morale in recent times.I say there is a perception that the legislation is not fair in this regard – bear in mind that you don’t earn any interest on an over-payment of income tax.There is an urgent call from taxpayers to even up the playing field insofar as it concerns interest on outstanding tax is concerned.The in duplum principle should be reinstated without further delay so that the accumulated interest is limited to the amount of tax owing and taxpayers should earn some compensation if they have overpaid their income tax.* Should readers have queries, they are invited to send them to cameron.kotze@za.ey.comThis is a very high interest rate compared to the prime overdraft rate of recent times.In addition, this interest is calculated on the compound basis and there is no limit to the amount of interest that can be raised as prescribed by the in duplum rule. The Receiver of Revenue has no power whatsoever to write off any interest that has accumulated as a result of non-payment of tax debt.The final nail in the coffin is that fact that a taxpayer is not entitled to deduct the interest paid on outstanding tax debt to determine the taxable income for the tax period.This ends up being a double whammy and very expensive for the taxpayer. If you put these facts together and you should be coming to the conclusion that you better pay your tax debts when they are due.The maximum interest rate which parties may fix has from earliest times been regulated by the law.Common-law usury has dictated that interest rates in excess of 12 per cent were condemned.Currently the Usury Act regulates the rate of interest that is chargeable by lenders of money.So what does it mean when the interest is calculated daily and compounded monthly? Compounded interest means interest is calculated on interest.This basis of interest was not allowed by Roman-Dutch law, which forms the basis of our law.The interest is calculated for one month at the 20 per cent rate and added to the tax amount owing.The interest is then calculated for the second month on the original amount owing plus the interest calculated for the first month. This calculation method is repeated for each month during which the tax amount and interest remains unpaid.Effectively the current rate of interest on outstanding income tax debt is approximately 22 per cent per year.This means that the accumulated arrears interest will exceed the outstanding tax debt within four and half years from the date the debt arose.The in duplum rule essentially limits arrears interest to the original capital amount owing to the lender.The interest ceases to run when it reaches the amount of the loan and the lender cannot demand an interest amount that is greater than the capital amount of the loan.The Receiver of Revenue is in the enviable position that the interest chargeable on outstanding income tax debt never stops running.Although it sounds beyond belief it is therefore possible to owe the Receiver of Revenue N$400 000 which comprises of N$50 000 income tax and the balance of N$350 000 represents the interest payable on the unpaid income tax.The interest on outstanding value-added tax debt was also calculated on the same basis and the same rate until October 2004 when it was replaced by the simple basis calculation method.The interest rate of 20 per cent per year was however maintained.This type of legislation does not do the morale of taxpayers any good.It has the potential to close down your business for good or cause individuals to act irresponsibly.The perception that this type of legislation is not fair is only one of the many factors that have contributed to the decline in taxpayer morale in recent times.I say there is a perception that the legislation is not fair in this regard – bear in mind that you don’t earn any interest on an over-payment of income tax.There is an urgent call from taxpayers to even up the playing field insofar as it concerns interest on outstanding tax is concerned.The in duplum principle should be reinstated without further delay so that the accumulated interest is limited to the amount of tax owing and taxpayers should earn some compensation if they have overpaid their income tax.* Should readers have queries, they are invited to send them to cameron.kotze@za.ey.com