Concourt on Bona Fide Inadvertent Error and USP's

Concourt on Bona Fide Inadvertent Error and USP's

• 07 October 2024
• Compliance
• Nico Theron

The eagerly anticipated Constitutional Court judgment in Thistle case¹ has been delivered. Unfortunately, though, the court did not consider the meaning of the words “bona fide inadvertent error” because the court did not grant SARS leave to cross-appeal the judgment of the SCA insofar as USP’s are concerned. The question then is, where does that leave us on the meaning of the words “bona fide inadvertent error”? But first, let’s consider the basis for the court’s decision not to entertain SARS’ appeal on the USP because therein lies quite a few important principles for taxpayers.

SARS’ Leave to Appeal Dismissed

The reasoning provided by the court for dismissing SARS’ leave to appeal was that it would not be in the interest of justice for the Constitutional Court to have the first and last say on the meaning of the words “bona fide inadvertent error”. That this would be the case follows from the fact that the tax court in the Thistle matter did not have to decide on the USP issue because it upheld the taxpayer’s appeal and the SCA understood the case on USP’s to be conceded to by SARS.

But further still, the court held, SARS’ case on USP’s is in any event weak because SARS has no reasonable prospect of discharging their onus of proving that:

• Thistle did not take reasonable care (as was advanced by SARS as basis for the imposition of the USP); and
• Thistle did not take reasonable care in completing its return (as was advanced by SARS in the alternative on USP’s).

The reason for this was that the taxpayer relied on professional advice and acted in line with the advice received. That Thistle’s reliance on the advice was reasonable is further supported by the fact that the Tax Court upheld the taxpayer’s case.

SARS alternative argument (i.e. that the taxpayer did not take reasonable care in completing its return) was premised on the fact that the taxpayer’s advice highlighted that SARS holds a view different from those expressed by the advisor. According to SARS, a taxpayer who takes reasonable care in completing a return will rather complete the return in line with the views of SARS and ignore those of the advisor².

The court dismissed that argument for SARS swiftly as follows³:

“This argument is based on the proposition that no taxpayer can act reasonably on advice that differs from SARS’ statements of its interpretation of tax legislation. The argument would elevate SARS to the status of an authority that can decree the only reasonable interpretations of tax legislation. It is an untenable argument.” (My underlining).

I am sure there are a few people, especially perhaps in SARS, who may be surprised to learn that SARS’ views are not the be all and end all.

What is important to take away from this is that SARS, in my experience seems to make behaviour classifications for the purposes of understatement penalties simply on the basis of the taxpayer’s position differing from that which SARS believes is correct. This practice probably stems from the old draconian “additional tax” provisions (such as, for example, those contained in the now repealed section 76 of the Income Tax Act) which forced SARS to impose a penalty of 200% simply if the taxpayer made an “understatement”, regardless of the circumstances surrounding that “understatement”. The TAA (which has been in force for the last 12 years) does not allow that.

For the last 12 years, SARS must, in addition to subjectively believing the taxpayer’s position is wrong⁴, also prove that the taxpayer is guilty of one of the behaviours in the Understatement Penalty table and arguments like: “the taxpayer did something we disagree with therefore the taxpayer is guilty of one of the behaviours” often falls well short of discharging the onus⁵. 

Unfortunately, though, few taxpayers know this and even fewer still have the means to launch the appropriate challenge⁶.

What Now on Bona Fide Inadvertent Error?

The highest authority on the meaning of these words arguably remains the SCA judgment in the Coronation case⁷ – as to which, click here to see. In summary, my view on the judgment is that the court in the Coronation case appears to side with the judgment in ITC1890⁸ where the tax court held that bona fide inadvertent error means:

“an innocent misstatement by a taxpayer on his or her return, resulting in an understatement, while acting in good faith and without the intention to deceive”⁹

However, it could equally be argued that the SCA judgment in the Coronation case was formulated on the back of the SCA judgment in the Thistle case which in turn was formulated on the back of an incorrect understanding that SARS had conceded its case. ¹⁰On this argument, the SCA has not actually pronounced on the meaning of the words “bona fide inadvertent error” at all.

It seems then that we are neither further nor closer to a final pronouncement on the meaning of the words “bona fide inadvertent error” as we were before the SCA and Constitutional Court judgements in Coronation and Thistle.  

One thing is sure though, there are two opposing views on the meaning of the words bona fide inadvertent error:  SARS’ and those expressed by the tax court ITC1890 and SARS has made it abundantly clear that they disagree with the Tax Court¹¹.

But regardless of the differing views on the meaning of these words, the Constitutional Court in the Thistle matter nevertheless held that the taxpayer having relied on professional advice, would not be guilty of the punishable behaviours argued for by SARS. So then, even though we don’t have anything “more” on bona fide inadvertent error than before the Thistle judgment, we at least have the Constitutional Court’s confirmation that reliance on professional advice is something that could make a taxpayer escape liability for understatement penalties in the right circumstances.

In-text number Referencing

1. The Thistle Trust v Commissioner for the South African Revenue Service [2024] ZACC 19

2. LOL.

3. Majority judgment at paragraph 89.

4. I.e. the requirement to make an additional assessment under section 92 of the TAA which, in turn will illustrate the “understatement”. As to SARS’ subjective satisfaction and section 92, click here to see our previous article.

5. An “honourable mention” is the very memorable case of Lance Dickson Construction CC v Commissioner for the South African Revenue Service (A211/2021) [2023] ZAWCHC 12; 84 SATC 209 (31 January 2023) where SARS also failed to discharge their onus of proof – click here to see our article.

6. As to challenging SARS’ assessments, see Theron, N and Louw, C. 2024. Practical Guide to Handling Tax Disputes, Lexis Nexis, Durban. Click here to view online.

7. Commissioner for the South African Revenue Service v Coronation Investment Management SA (Pty) Ltd (1269/2021) [2023] ZASCA 10 (07 February 2023).

8. 79 SATC 62.

9. SARS’ cross appeal to the Constitutional court in the Coronation matter ( Coronation Investment Management SA (Pty) Limited v Commissioner for the South African Revenue Service (CCT 47/23) [2024] ZACC 11; 2024 (9) BCLR 1128 (CC) (21 June 2024)) on the issue of understatement penalties was not heard as the taxpayer succeeded with its appeal to the Constitutional Court on the merits. 

10. See the Constitutional Court judgment in Thistle, at paragraph 85 of the Majority where the court holds that: “The Supreme Court of Appeal did not reach the issue of penalties, because SARS did not argue the issue and was understood to have conceded the issue.”

11. As stated, in so many words, by SARS in their guide to Understatement Penalties (see footnote 70 of that guide) and as evident from their submissions in their cross appeals to the Constitutional Court in Thistle and Coronation.

SOURCE: Unicus

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