On 18 November 2014 Wepener J delivered judgment in the case
of Mr Z v The Commissioner for South
African Revenue Service, case number 13472 in the Tax Court Johannesburg
(as yet unreported), which dealt with how amounts paid by the taxpayer to an
erstwhile shareholder of a company in which the taxpayer had invested should be
dealt with for capital gains tax purposes, as well as the imposition of the
understatement penalty and interest imposed on the underpayment of provisional
tax.
The judgment indicated that during November 2003, A
Investments Ltd (“A”) disposed of its shareholding in B (Pty) Ltd. During August 2007 Mr Z, together with
another shareholder, Mr X, disposed of 600 000 ordinary shares in B (Pty) Ltd
to F. The shares represented 30% of the total issued share capital of B (Pty)
Ltd with the taxpayer holding 27,005% and Mr X holding the balance.
Mr Z disposed of his shares for R841,655,833. A Investments
Ltd informed the taxpayer that it had discovered that Mr Z had withheld
material information from it when he represented A during its transaction with
F. As a result, A instituted action against Mr Z on the basis of the 2003
transaction and in particular Appellant’s failure, as A’s agent to inform A
that F would be prepared to extend minority protections to A.
The dissatisfied
shareholder claimed an amount of R925,000,000 from Mr Z on the basis that that
was the value of the shares and claims it would have held and which it lost by
virtue of having disposed of its shares and claims in B (Pty) Ltd. Mr Z
concluded a settlement agreement with A to pay it an amount of R694,888,271 in
full and final settlement of its claim. Mr Z reflected the net amount derived
by him as proceeds for capital gains tax purposes and SARS subsequently
increased the proceeds of R216,218,233 originally disclosed by the taxpayer by
an amount of R625,437,601 to an amount of R841,655,833.
The Tax Court reached
the conclusion that SARS was correct in disregarding the amount paid by the
taxpayer to A of R625,437,601 and thus effectively taxed the taxpayer on an
amount he never retained. The court reached the view that the Eighth Schedule
to the Income Tax Act No. 58 of 1962, as amended (“the Act”) afforded no relief
to the taxpayer in the particular circumstances. This aspect is not discussed
further in this article.
SARS imposed an understatement penalty of R46,907,820 on the
amount paid by Mr Z to A. In addition, SARS imposed interest on the alleged
underpayment of provisional tax in terms of section 89quat of the Act.
The Commissioner adjusted the taxpayer’s taxable income for
the 2008 year of assessment and applied the provisions regulating the understatement
penalty in terms of section 221 of the Tax Administration Act No. 28 of 2011
(“TAA”).
The Commissioner reached the conclusion that the taxpayer
had not taken reasonable care in submitting the tax return to SARS or
alternatively that there were no reasonable grounds for the tax position taken.
The Commissioner applied the understatement penalty table with the result that
the penalty was imposed at a level of 75%, which was the rate of penalty
applicable at that time.
Mr Y gave evidence on behalf of SARS and indicated that the
75% penalty was determined by taking account of the fact that there were no
reasonable grounds for the tax position taken by the taxpayer.
Most of the provisions of the TAA took effect on 1 October
2012 and at the time of its commencement, the level of penalty imposed on the
basis of no reasonable grounds for tax position taken amounted to 75%. That was
subsequently reduced to an amount of 50% by way of the Tax Administration Laws
Amendment Act No. 39 of 2013 with effect from 16 January 2014. However, the
court indicated that should the court decide that Mr Z had no reasonable
grounds for the tax position taken the penalty provided for is 50%.
The court indicated that Mr Z’s unchallenged evidence was
that the tax position he took was based on his belief that his calculation of
capital gains tax was correct and that there was no intention to evade or delay
the payment of tax. The taxpayer sought professional advice regarding the
completion of his tax returns and denied being negligent in the returns
submitted to SARS. Wepener J accepted that the taxpayer obtained professional
advice regarding the submission of his tax returns to SARS and the deduction
which was the subject of dispute in the case.
The court concluded that the provisions of section 270(6D)
of the TAA applied and that the taxpayer had reasonable grounds for the tax
position taken by him. The court reached the conclusion that there was a
substantial understatement with the result that that triggered the payment of a
10% understatement penalty. The court decided that there were no extenuating
circumstances as envisaged in section 270(6D) of the TAA.
In the result the
court decided that the understatement penalty should be reduced to an amount of
10%, taking account of the fact that the taxpayer had relied on advice received
from his accountant and others.
The court then considered the imposition of interest under
section 89quat of the Act and by
virtue of the fact that the dispute related to the 2008 year of assessment, the
basis on which the court had to decide whether to remit the interest, was
whether the taxpayer had acted on reasonable grounds.
The Court made the point that when the court is required to
establish the correctness of the exercise of a discretionary decision, which is
subject to objection and appeal, the matter must be reheard by the Tax Court.
The court referred to Juta’s Income Tax where the following is stated:
“The test as to whether the
grounds are reasonable, is objective, in relation to actions of the taxpayer. A
mere subjective belief by the taxpayer that a deduction should be allowed,
without taking advice on the matter, is unlikely to be reasonable. On the other
hand, the reliance by the taxpayer on expert advice, even if this is wrong, will
in most cases constitute reasonable grounds for the action taken.”
The court
came to the conclusion that the taxpayer’s reliance on the advice received was
reasonable and therefore directed that the Commissioner should waive the
section 89quat interest in full.
Unfortunately,
the discretion conferred on SARS to waive interest on the underpayment of
provisional tax has been significantly narrowed, such that SARS may only take
account of circumstances beyond the control of the taxpayer in respect of years
of assessment ending on or after 1 November 2010. For individual taxpayers, the
restricted discretion applies with effect from years of assessment ending on or
after 28 February 2011.
SARS relied
on an internal template setting out the basis on which it determined the
understatement penalty applicable to the taxpayer in this case. SARS led
evidence relating to the template and the reasons contained thereon, which sets
out the process SARS adopted in reaching the conclusion that the taxpayer in
this particular case had no reasonable grounds for the tax position taken by
him. Taxpayers who are subjected to understatement penalties should therefore
request reasons from SARS regarding the imposition of the understatement
penalty and must remember that where the understatement penalty is challenged,
the onus to satisfy the court as to the penalty imposed lies upon SARS in terms
of section 102(2) of the TAA.
It is
essential that taxpayers exercise caution in submitting their tax returns to
SARS and seek professional advice from a registered tax practitioner which may
assist in reducing the exposure to the imposition of the understatement penalty
where SARS takes a different view regarding the tax treatment of an amount
received or a deduction claimed.
Remember, too, that where a taxpayer
has obtained an opinion from a registered tax practitioner in the manner
prescribed under section 223 of the TAA, SARS is compelled to waive the penalty
which would otherwise have been imposed. This was not the issue before the
court, as the taxpayer did not hold a written opinion for the 2008 year of
assessment, as that return was filed long before the TAA took effect.
The fact
that the taxpayer took advice at the time of completing his returns was
sufficient for the court to show that the taxpayer had acted reasonably and
therefore the level of penalty to be imposed was 10%, which under the penalty
table is the lowest possible level of penalty which can be imposed.
Dr Beric
Croome, Tax
Executive: ENSafrica Inc. This article frist appeared in Business Day, Business Law and Tax Review, February 2015. Image purchased from iStock.
