In the National Budget, presented on 27 February 2013, the Minister of Finance indicated that the rules regulating the
imposition of the understatement penalty in terms of the Tax Administration
Act, No 28 of 2011, would be amended to deal with those case where a taxpayer
made an inadvertent error in filing a tax return with the South African Revenue
Service.
This was on the basis that, without the amendment, a taxpayer could have faced a penalty of 25% or 50%, even though the taxpayer had made a genuine mistake such as a transposition error in filing their return.
This was on the basis that, without the amendment, a taxpayer could have faced a penalty of 25% or 50%, even though the taxpayer had made a genuine mistake such as a transposition error in filing their return.
Previously, under section 76 of the Income
Tax Act, No 58 of 1962, as amended (‘the Act’), the Commissioner was empowered
to levy additional tax of 200% of the tax which should have been paid by a
taxpayer.
The Commissioner was then conferred
a discretion to reduce the additional tax where there were extenuating
circumstances, and, furthermore, it was required that the taxpayer had the
intent to evade taxation for the additional tax to be imposed.
Thus, the provisions contained in section 76
of the Act were subject to the exercise of a discretion by the Commissioner,
and determined by taking account of subjective criteria.
With the introduction of the Tax
Administration Act, the penalty regime was revised to introduce objective
criteria such that the amount of penalty would be determined by the taxpayer’s
behaviour.
Currently, the understatement penalties
which may be levied by SARS under the Tax Administration Act are as follows:
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 221 defines a “substantial
understatement” as a case where the prejudice to SARS exceeds a rate of 5%
of the tax properly chargeable or refundable under a tax
act for the relevant tax period or the amount of R1 million.
Thus, where a taxpayer submits a tax return
which is subsequently audited by SARS and an adjustment is made thereto such
that the tax payable is increased by R1 million or 5% of the amount of tax
properly chargeable under a tax act, the penalty which may be levied may amount
to 25% for the first occasion of such an event or 50% where the taxpayer has
previously been subjected to an understatement penalty within the last five
years.
Thus, the quantum of the understatement
penalty which may be levied on a taxpayer will be determined by the taxpayer’s
behaviour and the level of penalty will increase depending on the nature of the
behaviour of the taxpayer.
On 4 July 2013, the National
Treasury released the draft Tax Administration Laws Amendment Bill 2013 for
comment. That Bill proposes various
changes to the imposition of the understatement penalty such that the level of
penalties is reduced in various cases.
Accordingly, the revised table will take effect on that date that the
Bill is promulgated.
The Bill therefore proposes that the
understatement penalty table be amended along the following lines:
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’
|
10%
|
20%
|
5%
|
0%
|
(ii)
|
Reasonable care not taken in completing
return
|
25%
|
50%
|
15%
|
0%
|
(iii)
|
No reasonable grounds for ‘tax position’
taken
|
50%
|
75%
|
25%
|
0%
|
(iv)
|
Gross negligence
|
100%
|
125%
|
50%
|
5%
|
(v)
|
Intentional tax evasion
|
150%
|
200%
|
75%
|
10%
|
The draft memorandum on the objects of the
Tax Administration Laws Amendment Bill 2013 indicates that the rationale for
amending section 223 is to align the percentage of the penalty with comparative
tax jurisdictions where largely similar penalty regimes apply.
The Bill reduces the level of understatement
penalty in respect of substantial understatement, reasonable care not taken in
completing a return and no reasonable grounds for tax position taken by the
taxpayer.
The version of the draft Bill released on 4 July 2013 indicated that the reduction in the level of understatement penalty
would take effect from 1 October 2012.
However, on 5 July 2013, the SARS website indicated that
the draft Tax Administration Laws Amendment Bill 2013 and its memorandum of
objects had been replaced with new versions.
From a review of the versions released on 5 July 2013, it
is apparent that it is now proposed that the effect date of the changes in the
level on understatement penalty will be the date on which the Tax
Administration Laws Amendment Bill 2013 is enacted.
Those taxpayers who have received assessments
from SARS and have been subjected to the understatement penalty will feel
aggrieved in that the level of understatement penalty imposed on them is
greater than what will be applied to taxpayers in future years, even though
SARS admits that the sanctions originally contained in section 223 of the Tax
Administration Bill were out of line with comparative tax jurisdictions where
similar penalty regimes are applied.
It must be remembered that SARS is
compelled to remit a penalty imposed for a substantial understatement in terms
of section 223(3) of the Tax Administration Act where the taxpayer made full
disclosure of the arrangement as defined in section 34 of the Tax
Administration Act that gave rise to the prejudice to SARS by no later than the
date that the relevant return was due to SARS and was in possession of an
opinion by a registered tax practitioner in the prescribed form.
The draft Tax Administration Laws Amendment
Bill 2013 proposes an amendment to section 223(3)(b) that the opinion must be
issued by an independent tax practitioner.
The draft memorandum on the Tax Administration Laws Amendment Bill 2013
indicates that the amendment requires that the opinion relied on by the
taxpayer must be given by a tax practitioner that is independent from the taxpayer.
The commentary on the draft Bill indicates
that opinions prepared by in-house tax practitioners, in, for example, a large
corporate group, will not qualify as a result of their potential vested
interests relating to such matters.
The Bill also proposes an amendment to
section 224 of the Tax Administration Act, stating unequivocally that a taxpayer
has the right to object and appeal against an understatement penalty. It is questionable whether this amendment is
necessary in light of the provisions contained in section 104 of the Tax
Administration Act, which confers the right to object against assessments
issued to taxpayers.
It is clear that the reduced level in the
quantum of the understatement penalties proposed in the draft Bill are not as
onerous as the level of penalties currently contained in the Tax Administration
Act. It is unfortunate that the
amendments will not benefit those taxpayers who have been subjected to
understatement penalties since 1 October 2012.
In practice, it would appear that SARS
takes the view that the understatement penalty should apply to all adjustments
made to tax returns submitted by taxpayers, even where those tax returns were
submitted prior to 1 October 2012, that is, the date on which the Tax
Administration Act took effect.
Based on
the rule of law and the principles relating to the interpretation of statutes,
it would appear that the provisions of section 270(6) of the Tax Administration
Act should require SARS to consider imposing additional tax, in the case of
income tax, under section 76 of the Act, or other equivalent provisions in
other tax acts, in respect of events which took place prior to 1 October 2012
and not to levy the prescriptive understatement penalty contained in section
223 of the Tax Administration Act.
No
doubt the interpretation of the application of the understatement penalty to
adjustments made after 1 October 2012 to tax assessments relating to years of
assessment prior to 1 October 2012 will, ultimately, be determined by the
courts.
■ Dr Beric Croome is a tax executive at ENS. This article first appeared in Business Day, Business Law and Tax Review, Aug 2013.