Legal Advice

Cost of Compliance Versus Cost of Non-Compliance for Businesses

Business compliance is a crucial tool for businesses not only to be successful, but also to be competitive. It is important to note that non-compliance with the legal framework regulating commercial activities results in businesses facing legal and financial penalties. It is essential for businesses to be cognisant of the advantages and disadvantages of complying with legislation and policies. The purpose of these laws is to ensure that commercial entities act in a reasonable and responsible manner.
1. For any business, the starting point to consider for compliance is the Companies Act 71 of 2008.
  • For any business to trade legally and be afforded legal protection in South Africa, it should be registered with the Companies and Intellectual Property Commission (CIPC) and complies with this Act.
  • The Companies Act deals with issues ranging from ownership, registration, management, and dissolution of companies. 
  • Chapter 2 of this Act further requires businesses to be transparent, accountable, and of high integrity.
  • The Companies Act also regulates the duties of directors, shareholders, company secretaries, and the roles of auditors to give effect to the notion of transparency. 
  • Furthermore, Chapter 6 of the Act provides procedures for businesses to comply with when conducting business rescue plans when a company is in financial distress, and where there is a possibility that such a company can be rehabilitated. Companies undergoing a business rescue plan are also obligated to comply with the Act. 
  • Chapter 7 outlines the specific remedies that can be afforded to businesses. Non-compliance with the Act may result in punitive fines, criminal proceedings (imprisonment), and suspension or termination of the business. These penalties may damage the reputation of the company, and action may be instituted against the directors of the company for failing to fulfil their fiduciary duties.
2. The second piece of legislation that companies need to comply with is the Income Tax Act 58 of 1962.
  • Every business that operates in South Africa is liable to taxation under this Act, which is known as the Corporate Income Tax (CIT). Additionally, it is not considered whether the business derives its income from within the Republic or outside.
  • The Income Tax Act provides, for example, deductions permissible, income taxable, rate of tax, determination of tax payable for companies that operate outside South Africa, and compels businesses to submit annual returns.
  • When a company fails to comply with the Income Tax Act, the South African Revenue Service (SARS) is authorised to impose penalties in the form of fixed amount penalties and percentage-based penalties.
  • Payment of these penalties and fines could have a catastrophic impact on the company’s revenue. 
  • Non-compliance with tax regulations engrained in the Tax Act may also result in the deregistration and closure of the business. The legal effect of the deregistration process is that the juristic personality of the company can be withdrawn, and the company ceases to exist.
3. Companies are also compelled to comply with the Consumer Protection Act (CPA) 68 of 2008. 
  • The CPA provisions are applicable to all industries except those explicitly exempted by the Act, such as banking institutions and insurance companies.
  • The CPA is mandatory for businesses offering goods and services to consumers within the Republic.
  • The CPA mandates companies that offer goods and services to provide consumers with a warranty for defective goods and prohibits them from misinforming consumers about products and engaging in unfair marketing practices.
  • The Act also mandates businesses that supply services and goods to consumers to disclose prices and relevant information about the products.
  • Due to the modern use of technology, these obligations are also extended to suppliers who sell goods and services online.
  • Businesses that comply with the CPA are afforded protection under the CPA. Non-compliance with the CPA results in penalties, including a fine of up to a maximum of 10% of the supplier’s annual turnover for breaches.
  • While this sanction is probably reserved for more severe contraventions, the reputational damage flowing from a lesser sanction outweighs the cost of ensuring compliance from the onset.
4. In addition, the right to fair labour practices is a legal right entrenched in the Constitution. The Labour Act 66 of 1995, Basic Conditions of Employment Act 75 of 1997 (BCEA) and the Employment Equity Act (EEA) 55 of 1988 are aimed at giving effect to this right, providing protection to employees.
  • In terms of the Labour Act, companies should respect employees right to freedom of association, and give recognition to trade unions, bargaining councils, and strikes.
  • On the other hand, the BCEA requires companies to comply with the minimum wage, working hours, leave days of employees, prohibition of children and forced labour, and termination of employees’ services.
  • Non-compliance with the provisions in the BCEA may result in penalties ranging from a fine to imprisonment for a period not exceeding three years.
  • The EEA compels businesses to provide employment equity. Companies are prohibited from engaging in unfair discrimination and are thus, compelled to adopt an employment equity plan that gives effect to this.
  • Employers therefore need to be attentive when it comes to complying with their employment equity plans.
  • Recently, a major airline was fined R900,000 for failing to comply with the Employment Equity Act (EEA). The EEA sets out applicable fines depending on whether the company has had previous contraventions. The fines applicable range from 2% to 6% of the company’s turnover or an amount not exceeding of R2 700 000.
Furthermore, it is also significant for businesses to note that they do not only need to comply with these legislations, but it is also essential for businesses to comply with the legislative framework that applies to their sector.
For example, the mining corporations would need to ensure that their business activities comply with the Mineral and Petroleum Resources Development Act 28 of 2002. Similarly, banking institutions are mandated to comply with the Banks Act 94 of 1990; insurance practices are governed by the Insurance Act 17 of 2018. 
Non-compliance may even have an impact on a business’ access to investment. This flows from the fact that compliance is used as a yardstick for measuring a company’s values and code of conduct.
Similarly, conducting business activities outside the ambit of laws may result in a company’s shares being suspended on the Stock Market Exchange. This can be illustrated by Tongaat Hullett’s case. Due to Tongaat Hullett’s dubious practices, the company’s shares were suspended on the Johannesburg Stock Exchange (JSE) and in London.
Thus, as a rule, business entities of any nature are mandated to comply with these Acts until dissolved. Non-compliance has a potential negative impact on the company’s financial arm and reputation. 

PAIA- Section 83(4) Report due 30 June 2023

A recent notice published by the Information Regulator to 7 May 2023 relates to section 83(4) of the Promotion of Access to Information Act (PAIA). This notice requests, for the first time ever, that heads of private bodies submit a section 83(4) report in terms of PAIA by 30 June 2023.

Although the notice “invites” private bodies to submit a report, the Information Regulator has indicated that submission is compulsory. Failure to comply with the notice may result in an investigation of your compliance with PAIA by the Information Regulator in terms of section 77H(1) of PAIA.

Application of Section 83(4)
Section 83(4) of PAIA allows the Information Regulator power to request that heads of private bodies submit reports about requests received for access to records held by the private body. The Information Regulator can then use these reports to prepare an annual report to be presented before the National Assembly.

If you or your business fits into the definition of a private body in PAIA, section 83(4) and the Information regulator’s notice applies to you. A “Private Body” is defined by PAIA as:
- A natural person carrying on any trade, business, or profession, but only in such capacity;
- a partnership which carries, or has carried on, any trade, business, or profession; or
- any former or existing juristic person,
but excludes a public body.

How do you submit the Report?
Your report must be submitted at the Information Regulator’s portal. To submit your report, you must be registered on the portal.
Ensure that you fill in the details requested completely. Once registered, there will be a button referring to “PAIA Annual Reporting”. Select this and provide the necessary responses in the form provided. Make sure that your responses are detailed and correct to avoid follow-ups from the Information regulator.

Remember to submit your report by 30 June 2023.