Did the punishment fit the crime? The Tax Court reduces an understatement penalty imposed by SARS

Did the punishment fit the crime? The Tax Court reduces an understatement penalty imposed by SARS

• 26 January 2018
• Tax Administration
• Louis Botha

Important:

This article is based on tax law for the tax year ending 28 February 2020.

Author: Louis Botha

The imposition of understatement penalties in terms of Chapter 16 of the Tax Administration Act, No 28 of 2011 (TA Act) and the factors to consider when imposing such a penalty: An issue that our courts have not dealt with much. In this regard, the judgment of the Tax Court in XYZ CC v The Commissioner for the South African Revenue Service (Case No. 14055) (as yet unreported), handed down on 20 November 2017, sets out some helpful principles.

Facts

• XYZ CC (Taxpayer), who is in the business of supplying “agricultural” inputs, such as lime and gypsum, to farmers, disputed being taxed on an additional amount of R2 million by the South African Revenue Service (SARS), in respect of the 2013 year of assessment.
• The Taxpayer initially claimed that the amount of R2 million constituted social development expenditure incurred in respect of Entity E, an entity that also operates in the agricultural sector, and therefore constituted a permissible deduction, in terms of s11(a) of the Income Tax Act No 58 of 1962 (IT Act).
• SARS disallowed the deduction and imposed a 100% understatement penalty. The Taxpayer objected against these decisions and then appealed when its objection was disallowed.
• While giving evidence before the Tax Court, however, the Taxpayer’s accountant testified that the R2 million was not part of the Taxpayer’s gross income, based on a credit note the Taxpayer issued to Entity E, which allegedly reflected an agreed price reduction. Therefore, it was unnecessary to prove that the requirements of s11(a) of the IT Act had been met.
• Mr B, the sole member of the Taxpayer, gave evidence that he wanted to make a donation to the V Trust. The V Trust served a community in Kwazulu-Natal of which Mr A, who worked for Entity E, was the leader.
• When Mr B found out that he could not make a deductible donation to the V Trust in terms of s18A of the IT Act, he suggested an alternative arrangement. In terms of the arrangement, the Taxpayer would credit Entity E’s account with R2 million. Entity E would then pass this gift to the community and the community would be told through the V Trust that the Taxpayer had made this donation.
• Mr B indicated that he wanted to get “some BEE points” out of this arrangement for the 2013 year. In order to prove that the money went to the community, Mr A’s accountant wrote a letter addressed to the Taxpayer in which the V Trust thanked the Taxpayer for the donation.

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This article first appeared on cliffedekkerhofmeyr.com.

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