Tax Penalties and Remission

Tax Penalties and Remission

• 17 May 2023
• Tax Administration
• Nico Theron

Understatement tax penalties are a way for the South African Revenue Service (SARS) to discourage taxpayers from under-reporting their income or over-claiming deductions. These penalties can be severe, which is why many taxpayers may consider requesting a remission. 

What are Understatement Tax Penalties?

Understatement tax penalties are imposed by SARS in cases where a taxpayer has understated their taxable income, over-claimed deductions, or failed to declare certain transactions for example. The penalty is effectively levied as a percentage of the amount of the tax due on the under-reported income.

The exact penalty rate varies depending on the severity of the understatement or omission, as well as whether the taxpayer was negligent, grossly negligent, or intentionally fraudulent etc in their actions. Penalties can range from 10% to 200% of the under-reported tax liability.

When Can You Request a Remission?

If you have been penalised for an understatement, you may be able to apply for a remission of the penalty. However, unlike the other percentage-based penalties for which a remission may be possible on what may be called “compassionate or equitable grounds”, the grounds for remission of understatement penalties are much more limited. It is therefore crucially important to understand on what grounds the penalty may be imposed and to also consider whether there is ground for a challenge of the penalty based on its incorrect imposition. Remission requests in relation to an understatement penalty can technically only be entertained for a 10% and 20% understatement penalties and only under limited circumstances.  

How to Apply for a Remission

If you want to request a remission, you must submit a written application to SARS via designated channels together the prescribed form. Where remission is not possible, taxpayers should consider following the route of objection and appeal which also requires the submission of a written request submitted via prescribed channels and by using the prescribed form. Both remission requests and objection and appeals are tightly regulated by time periods and rules which must be followed to prevent unsatisfactory outcome. 

Conclusion

Understatement tax penalties can be costly and should be avoided. However, if you have been penalised, you may, fact dependent, be able to get some reprieve therefrom by following the correct procedures. It is important to seek professional advice from a tax professional to ensure that you have the best chance of success in your application.

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