Previously,
the Commissioner: South African Revenue Service (SARS) could levy additional
tax of up to twice the tax which otherwise would have been payable in
accordance with section 76 of the Income Tax Act, No 58 of 1962.
Typically,
a taxpayer subjected to an audit would be invited by SARS to advance reasons
why additional tax should not be imposed in the particular case prior to the
issue of an additional assessment. The manner in which section 76 was drafted
meant that SARS was entitled to levy up to 200% additional tax where the
taxpayer made a default in rendering a return in respect of any year of
assessment, or omitted from his return any amount which ought to have been
included therein.
The
Commissioner was conferred a discretion to remit the additional tax where he
was of the opinion that there were extenuating circumstances, but was unable to
remit the tax where he was satisfied that any act or omission on the part of
the taxpayer was done with the intent to evade tax.
The
enactment of the Tax Administration Act has changed the old approach in that
the Tax Administration Act itself prescribes the quantum of the understatement
penalty to be imposed, which depends on the taxpayer’s conduct.
Item
|
Behaviour
|
Standard Case
|
If obstructive, or if it
is a ‘repeat case’
|
Voluntary disclosure
after notification of audit
|
Voluntary disclosure
before notification of audit
|
(i)
|
“Substantial understatement’
|
25%
|
50%
|
5%
|
0%
|
(ii)
|
Reasonable care not taken in completing
return
|
50%
|
75%
|
25%
|
0%
|
(iii)
|
No reasonable grounds for ‘tax position’
taken
|
75%
|
100%
|
35%
|
0%
|
(iv)
|
Gross negligence
|
100%
|
125%
|
50%
|
5%
|
(v)
|
Intentional tax evasion
|
150%
|
200%
|
75%
|
10%
|
Section 223
of the Tax Administration Act sets out a table (see above) which prescribes the
quantum of understatement penalties to be imposed depending on the taxpayer’s
conduct.
It is important to note the definitions contained in section 221, which
apply directly to the imposition of the understatement penalty. The Tax
Administration Act defines a “repeat case” as a second or further case of any
of the behaviours listed in the table which prescribes the understatement
penalty percentage to be imposed, within five years of the previous case.
A
“substantial understatement” means a case where the prejudice to SARS exceeds
the greater of 5% of the amount of tax properly chargeable or refundable under
a tax act for the relevant period, or R1m. A “tax position” means an assumption
underlying one or more aspects of a tax return, specifically whether or not an
amount, transaction, event or item, is taxable or is deductible, or may be set
off.
Where a
taxpayer chooses to make a voluntary disclosure before notification of an
audit, the understatement penalty is reduced to zero, in all cases except when
the taxpayer was grossly negligent or intentionally evaded tax.
In those
cases, where a taxpayer chooses to make a voluntary disclosure after SARS has
commenced an audit, the understatement penalty may range from 5% to 75%,
depending on the taxpayer’s specific behaviour.
Where SARS
takes the view that the taxpayer has been obstructive, or has previously been
subjected to the understatement penalty, the understatement penalty will range
from 50% to 200%, depending on the taxpayer’s behaviour.
In what is
referred to as a “standard case” in the table, the understatement penalty will
range from 25% to 150%, depending on the taxpayer’s specific conduct.
When
determining the amount of the understatement penalty to be levied, the
Commissioner is required to reach a conclusion as to the taxpayer’s behaviour
and, at the same time, to determine whether the taxpayer should be treated as a
standard case, or whether the taxpayer is a repeat offender — which would give
rise to a higher level of understatement penalty.
As a result
of the enactment of the table to be used by SARS in determining the
understatement penalty to be levied, the only occasion on which no
understatement penalty may be levied is where the taxpayer goes forward to SARS
prior to the notification of an audit. In all other cases, the taxpayer will
face an understatement penalty, which is more onerous than what was the case
under section 76 of the Income Tax Act.
If SARS
conducts an audit on a taxpayer’s affairs, and decides that certain deductions
claimed do not qualify as such under the provisions of the Income Tax Act, and
the adjustment is regarded a substantial understatement, the penalty could
amount to 25% or 50%, depending on the taxpayer’s specific behaviour.
In levying
the understatement penalty as a result of a substantial understatement, it is
not necessary that SARS takes account of the taxpayer’s intention which gave
rise to that adjustment. The only occasion on which the Commissioner must remit
a penalty imposed for a substantial understatement is if SARS is satisfied that
the taxpayer made full disclosure of the reportable arrangement which gave rise
to the prejudice to SARS as defined in section 34 of the Tax Administration Act no later than the
date that the relevant return was due, and was in possession of an opinion issued
by a registered tax practitioner as defined in section 239 of the Tax Administration Act The
obligation to disclose under section 34 of the Tax Administration Act relates
only to those arrangements regarded as reportable arrangements as defined in
the act.
Section
223(3) of the Tax Administration Act requires that the opinion was issued by no
later than the date on which the relevant return was due to the Commissioner,
took account of the specific facts and circumstances of the arrangement, and
confirmed that the taxpayer’s position is more likely than not to be upheld if
the matter proceeds to court.
It is
critical that, in future, taxpayers exercise reasonable care in completing
their returns, failing which the understatement penalty prescribed in the table
will be levied.
Where SARS
reaches the conclusion, based on the facts of the taxpayer’s case, that
reasonable care was not taken in completing their tax return, the
understatement penalty will be levied at the level of 50% or 75%, depending on
whether it is a standard or a repeat case. Clearly, where the taxpayer goes
forward under the voluntary disclosure programme, the understatement penalty
will be reduced.
"It has become almost impossible for taxpayers to satisfy the Commissioner that no understatement penalty should be levied."
"When determining the amount of understatement penalty to be levied, the Commissioner is required to reach a conclusion as to the taxpayer's behaviour."
Where SARS
takes the view that the taxpayer had no reasonable grounds for the tax position
taken, the understatement penalty is increased. Where, for example, a taxpayer
has sought an opinion on a particular aspect prior to the finalisation of their
tax return, it would be difficult for SARS to levy the understatement penalty
on the basis that the taxpayer had no reasonable grounds for the tax position
taken by the taxpayer.
Where the
Commissioner is satisfied that the taxpayer was grossly negligent, the
understatement penalty will be increased. Where a taxpayer, for example, fails
to make full and proper disclosure in their tax return, they would, in all
likelihood, be regarded as having been negligent, and thereby face a greater
understatement penalty.
The highest
level of understatement penalty is applicable in those cases where a taxpayer
has it intentionally evaded tax, and this would comprise those cases where a
taxpayer has deliberately understated income, falsified invoices to claim
deductions, etc. Besides facing the risk of enhanced understatement penalties,
taxpayers in such cases would face the risk of criminal prosecution as well.
The rules
regulating the levy of the understatement penalty should ensure greater
consistency in the manner in which penalties are levied on taxpayers. The
difficulty which the Commissioner faces will be to ascertain the taxpayer’s behaviour
in a particular case, and thereby ensure that the taxpayer is subjected to the
correct level of understatement penalty.
Previously,
under section 76, taxpayers were able to satisfy the Commissioner that
additional tax should not be levied because of the particular circumstances of
the case.
As a result
of the introduction of the penalty table set out in this article, it has become
almost impossible for taxpayers to satisfy the Commissioner that no
understatement penalty should be levied.
Based on the transitional rules in the Tax
Administration Act, it is questionable whether SARS may levy the understatement
penalty by using the penalty table on tax returns submitted before 1 October
2012 instead of the old additional tax rules.
Where a
taxpayer is subjected to an audit by SARS, and is subjected to the understatement
penalty, they are entitled to ask the Commissioner for reasons why the
particular amount of penalty was levied.
■ Dr Beric
Croome is a tax executive at ENS. This article first appeared in Business Day :Business Law & Tax Review (February 2013) Free Image via ClipArt.