SARS issues new guide to understatement penalties - a march toward further certainty?

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SARS issues new guide to understatement penalties - a march toward further certainty?

• 09 April 2018
• Tax Administration
• Jerome Brink

Important:

This article is based on tax law for the tax year ending 28 February 2019.

Author: Jerome Brink
 

The Tax Administration Act, No 28 of 2011 (TAA) was promulgated with effect from 1 October 2012. The rationale behind the introduction of the TAA was that it would streamline, modernise and align the previous tax administration provisions to ultimately lower the cost and burden of tax administration in South Africa. One of the key changes to the tax administration regime in South Africa pursuant to the promulgation of the TAA was the conversion from the imposition of “additional tax” by SARS to the understatement penalty regime.

In terms of the now-repealed s76 of the Income Tax Act, No 58 of 1962 (Act), SARS could previously impose additional tax up to 200% in the event of a default or omission by the taxpayer. Several issues were encountered in respect of the erstwhile additional tax regime including the fact that there was a lack of certainty, uniformity and transparency in SARS’s application of the relevant provisions. For instance, it was often difficult to ensure that taxpayers in comparable circumstances were treated consistently. Furthermore, the way the provision was constructed had the effect that SARS would often commence imposing the maximum additional tax of 200% and only to the extent that the taxpayer could prove extenuating circumstances, would SARS consider reducing the penalty.

The Memorandum on the Objects of the Tax Administration Bill, 2011 expanded upon the rationale for the relinquishment of the additional tax regime for two further reasons:

• It would remove any uncertainty as to whether additional tax was a tax that may only be imposed under a money bill as contemplated in s77 of the Constitution; and
• South African courts have held on more than one occasion that additional tax was a penalty, and not a tax on, for example, income as the name suggested.

The new understatement penalty regime was thus introduced with effect from 1 October 2012. Without undertaking a detailed analysis of how the provisions work, it is nevertheless worth noting that it is now based on certain objective categories of behaviour. In other words, the understatement penalty percentage imposed is dependent on the behaviour of the taxpayer, which categories include the following:

• substantial understatement;
• reasonable care not taken in completing the return;
• no reasonable grounds for tax position taken;
• impermissible avoidance arrangement;
• gross negligence;
• intentional tax evasion.

Importantly, the onus to prove the grounds for imposition of an understatement penalty and the applicable percentage is on SARS.

Please click here to read more.

This article first appeared on cliffedekkerhofmeyr.com.

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