Amendments to the Transitional Rules dealing with Penalties in the Tax Administration Act

Introduction

The Tax Administration Laws Amendment Bill, No. 40 of 2013 was introduced in Parliament on 24 October 2013.  The President of the Republic of South Africa must still  assent to the Bill and it must then be published in the Government Gazette before it becomes an Act.

The Tax Administration Laws Amendment Bill (“TALAB”) contains various amendments of an administrative nature to various tax Acts administered by the Commissioner: South African Revenue Service.  In this article it is not possible to deal with all of the amendments contained in the bill and only those amendments dealing with the transitional rules in the Tax Administration Act, No. 28 of 2011 regulating the imposition of penalties are dealt with.

Juta's 2010 edition of "Tax Administration" by Beric Croome and Lynette Olivier.
Currently being updated by Beric Croome for publication later in 2014.

Transitional Provisions

Significant amendments are being made to the transitional provisions contained in section 270 of the TAA to deal largely with the imposition of the understatement penalty as opposed to the additional tax which may have been leviable under another tax Act.  

It is indicated in the explanatory memorandum on the TALAB that during the drafting of the Tax Administration Bill that SARS consulted with international experts from the International Monetary Fund and that the constitutionality of the bill was reviewed by both expert constitutional counsel and the state law advisors who certified the bill as constitutional.  

The memorandum states that during the Parliamentary process, whereby the TAA was enacted, the general transitional approach in drafting the Tax Administration Bill was that the new Act will apply to an act, admission or proceeding taken, occurring on or instituted before the commencement date.  It was intended that this applied also to the imposition of the understatement penalty such that that penalty would apply from the outset. 

It is apparent from the commentary on the TALAB that to have continued these actions or proceedings under the previous legislation would have required different processes and systems within SARS into the indefinite future which would have increased the cost of the tax administration.  

The view is expressed that the general transitional approach contained in section 270(6) of the TAA was enacted to permit the imposition of additional tax, as opposed to the understatement penalty, if the verification, audit and investigation had been completed before the TAA commenced but the amended assessment had not yet been issued.  

The section previously required that the additional tax must have been “capable of” being imposed, meaning that all other requirements for the intended imposition of the additional tax must have been met before the TAA commenced but was not yet imposed.  

The commentary on the TALAB indicates that uncertainty has arisen in practice whether section 270(6) of the TAA means that additional tax must be imposed in respect of all returns containing understatements submitted before the commencement date of the TAA. 

As a result of the abovementioned uncertainty amendments are being made to section 270(6) to clarify that if an understatement penalty cannot be imposed, additional tax may be imposed.  

In principle the previous regime whereby additional tax was imposed contained a discretion whereby the Commissioner could levy a penalty ranging from 0 to 200%. In those cases, where it could be shown that there was no intention to evade tax and there were extenuating circumstances, SARS generally levied a nominal penalty ranging from 5 to 10%.  Where, however, the taxpayer had intended to evade tax the penalty levied would amount to anything from 100 to 200%.

As a result of the uncertainties relating to the imposition of the understatement penalty various new subsections are introduced to section 270(6) of the TAA.  The new section 270(6A) of the TAA seeks to clarify that the purpose of 270(6) was that additional tax may be imposed if capable of being imposed which would only be the case where the verification or audit necessary to determine the additional tax, penalty interest had been completed before the commencement date of the TAA, namely, 1 October 2012.

The new section 270(6B) of the TAA seeks to address those cases where a taxpayer was not in a position to comply with the tax opinion requirement contained in section 223 of the TAA by virtue of the fact that the tax return, for example, a 2010 tax return was filed prior to the enactment of the TAA.  

Under section 223 no penalty may be imposed where the taxpayer obtains an opinion in the prescribed manner before the filing of the tax return in question.  This requirement is done away with in respect of tax returns filed before 1 October 2012.  Thus, where the taxpayer obtains an opinion after the return was filed that will assist in mitigating the penalty.

Section 270(6C) of the TAA will provide that where taxpayers made a voluntary disclosure before 1 October 2012 they may qualify for relief from an understatement penalty if the audit of their tax affairs was concluded after 1 October 2012.

In addition, a new section 270(6D)(a) is being introduced to allow a senior SARS official who considers an objection by the taxpayer against an understatement penalty imposed as a result of an understatement made in a return submitted before 1 October 2012 to reduce that penalty if he is satisfied that there were extenuating circumstances.  To some extent this reintroduces the discretion which was available to SARS in section 76 of the Act. 

Finally, section 270(6D)(b) of the TAA deals with additional tax imposed under the Value-Added Tax Act which could only be imposed if there was an intent to evade tax.  Under the new understatement penalty regime a penalty may be levied if reasonable care was not taken, no reasonable tax position existed or gross negligence existed.  

Thus, the TAA removes the intent requirement as the basis for levying additional tax under the VAT Act.  The explanatory memorandum recognises that it may be difficult for vendors to argue that they had known about the application of the understatement penalty regime to VAT returns submitted before 1 October 2012.  

The amendment provides that a senior SARS official who considers an objection lodged by a taxpayer against an understatement penalty as a result of an understatement made in a VAT return filed before 1 October 2012 must be reduce the penalty in full where there was no intent to evade tax. 

Conclusion

The amendments to the transitional rules regulating the imposition of penalties may alleviate a number of the concerns raised regarding the imposition of understatement penalties in respect of tax returns filed by taxpayers before 1 October 2012.

This article first appeared in ENSafrica's monthly tax newsletter taxENSight (December 2013)